Key Business Terms in a Contract
Read the Termination ClauseThis is often overlooked. But, the first thing you need to understand is how and under what circumstances you can get out of a contract if your business relationship goes awry. You also need to understand how the other party can get out of the contract with you.
These are usually negotiable terms.
Some key things to look for are:
Is there an end date? In other words, are you signing up for a period of time and after that time passes the contract expires. Or, is there something in the agreement that automatically renews the term unless you take some action (such as providing written notice).
Is there a provision that allows you to terminate the contract if the other party doesn't fulfill their obligations? Alternatively, can the other party terminate if you don't fulfill yours? What are these obligations, and would it make sense to spell them out more specifically?
Read the Warranty ClauseMany times, a person will skim over this provision because it is in ALL CAPS and it looks very "legal." Don't make this mistake!
A warranty is a guarantee. If you agree to warrant something, you are signing up for more legal liability than simply breaching a contract. So, you better know and understand what you are agreeing to.
The warranty clause goes hand-in-hand with at least two other provisions of the contract, the indemnity section and the disclaimer of warranty section.
The key thing to remember when reading a warranty clause is that if you cannot guarantee something, do not agree to "warrant" it. So, for instance, if you cannot guarantee that you will run 1 mile every morning, do not agree to a contract where you "represent and warrant that I will run 1 mile every morning."
Just be sure you can abide by each warranty you make.
Read the Indemnity ClauseThe indemnity clause is the single most important fiscal provision in the agreement. This is the clause where you agree to protect the other party from various types of legal action if certain events transpire.
The buzzwords are "indemnify" and/or "hold harmless" from (LIST OF THINGS). This list can include specific events or occurances or for breaching the agreement or for breaching your warranty, among other things.
Analyze the indemnity clause and assess what type of risks you are taking. If you are required to indemnify a party from certain events, you can and will incur legal costs.
You won't likely be able to remove an indemnity clause altogether, but it is very important to understand what you are signing up for.
Read the Payment TermsBe aware of all the payment terms in the agreement. Depending on the level of complexity of the agreement, there is no other clause that will likely trigger a disagreement than a breach of payment terms.
Sometimes defining what, who and how payment is allocated can be tricky. Depending on the industry, payment terms have evolved to range from the very simple - a lease agreement (X pays Y $$ on the 1st of the month) - to the very complicated (net revenue, gross revenue, adjusted gross revenue, adjusted net revenue, profit share, revenue share, etc.). You can get even more complicated by adding in refunds and chargebacks, etc. etc.
It is never a bad idea to have your CFO, accountant or CPA look over and bless the payment terms of your agreement.
Review the Agreement in its EntiretyWhile the other 4 steps are probably the most important clauses in an agreement, it is very important that you take the time to read an agreement all the way through and make sure you understand it.
You need to understand how the clauses interplay with each other. You need to understand the process of negotiation - and knowing the agreement well is crucial because the sum is greater than its parts.
Devoting some time and energy to reading your agreement thoroughly, making notes and asking questions, and trusting your instinct when something doesn't quite sit right with you will pay off. The more agreements you read, the better you'll become at not only understanding your own business, but understanding just how significant your agreement is (or isnt).