Most business people
enter into contracts on a regular basis. Some of those
contracts are simple, straight forward and easily
understandable documents while others are all but
incomprehensible. In its most basic form, a contract
is merely an agreement between two or more people to
do or not do a particular thing. That sounds simple
enough but when those obligations are buried in the
fine print on page 17 it may not be so easy to
understand exactly what the parties are agreeing to do
or not do. It is not uncommon for otherwise very
careful people to glance over a contract and just sign
it without really knowing what it obligates them or
the other party to do. The question sooner or later
becomes "Can they do that?" People who contract should
carefully review each contract before signing it. It
is also good practice to periodically review existing
contracts such as insurance policies, leases and
banking documents to determine whether they still meet
your needs. So, what should you look for when
reviewing a contract? Here are a few suggestions:
1. Correctly identify the parties. Use the complete
name of the business to avoid confusion and identify
corporate officers as such. Determine the marital
status of individuals if spouses will be required to
join in execution of the document.
2. Complete all blanks on any preprinted form and be
sure all changes or deletions are initialed.
3. Double check the business terms of the contract
(price, amount, duration, square footage, etc.) to
determine whether it accurately reflects the agreement
of the parties.
4. Know all of your rights and responsibilities under
the contract. Carefully read the entire contract
because rights and responsibilities are typically
scattered throughout the agreement.
5. When another document is incorporated by reference
always read the incorporated document. Don't assume
you know what it contains.
6. Determine how risk is to be allocated. Risk is
typically borne by the party in the best position to
prevent loss. However, there may be reasons for a
different allocation. Check insurance requirements and
7. Review and understand warranties and
representations given by you and the other party.
Don't give any representation if you do not actually
know that the representation is true or if the other
party is in a better position to know the facts being
represented. If you must give warranties, try to limit
them as much as possible. Remember that the other
party is trying to do the same, so watch for
8. Determine what acts constitute events of default
and whether you are able to enter into and perform
under the contract without causing a default. Also
consider what should be included as events of default
by the other party.
9. Review remedies provisions. Determine the worst
that can happen to you if you default. Explore ways to
limit your liability. Also determine what types of
remedies you need in the event of default by the other
10. Review causes of termination. Determine whether
either party should have an option to renew, and if
so, the terms of renewal. Consider ways to terminate
the contract if it is not working to your benefit.
11. Check dates and deadlines. Always keep a calendar
of dates and deadlines for important events and any
affirmative act required to be done by you or the
12. Determine how you want to deal with resolution of
disputes. An arbitration or mediation requirement
could ultimately save you time and money.
The foregoing is a limited list of general provisions
to consider when entering into a contract. The type of
transaction which is the basis of the contract, as
well as the relative bargaining positions of the
parties will dictate the actual terms of the
agreement. Business people who take the time to
thoroughly review and negotiate the terms of their
contracts before signing them should find, in the long
run, that it is time well spent.
This article is an
adaptation of an article written by Joanne M. Cassidy
which originally appeared in the August 1995 edition
of DBA Houston magazine