Simple Contract Review Steps

Posted on February 2, 2012

0


Article Highlights:

  • In contract review, try to create a positive communication back and forth and allow changes that get to a better compromise. When a form is put together, even if you are trying to be even-handed, the drafter’s preferences inevitably creep in.
  • Contract negotiation, if done rationally, can be a good way to get to know a business partner. As you work together, you can better understand your customer.
  • Business terms are going to be governed by the contract, so listen to the words on the paper, not the words from your sales person.
  • If two people truly want to do business together, competent and capable lawyers can construct a contract that works for both parties.

Contract review typically happens in one of two ways:

A. Review of Your Contract

In the first context, your business sends out a contract, your customer reviews the contract and your customer sends it back with questions, concerns, or comments. Unless your contract is extremely standardized and accepted within the industry, this review will inevitably happen. So what do you do with those questions, concerns, and comments?

You can, of course, tell your client that the contract is a take it or leave it. This answer is the easiest contract review plan to implement, and if you have the negotiating position and power, then I cannot quibble with this approach. That said, not everyone has that market power, particularly in this day and age.

For everyone else, my recommendation is to rationally respond, try to create a positive communication back and forth, and allow changes that get to a better compromise. When a form is put together, even if you are trying to be even-handed, the drafter’s preferences inevitably creep in. For instance, I would prefer that an action be heard in Jefferson County, Alabama and include such a provision in all of my contracts for Jefferson County clients. However, if someone is in Oregon, they will want the provision to be modified so that they do not only have to come to Birmingham to defend the action.

Contract negotiation, if done rationally, can be a good way to get to know a business partner. I learn a lot about companies in negotiations. I learn about the depth of the company when it comes to their lawyers. Business people will often hide behind their lawyers – “I would be fine with doing it this way, but legal tells me I can’t.” Business people who do not know how to engage their lawyers also reveal something about themselves.

As you work together, you can better understand your customer. If you look at some of the advice from below, you can also avoid large troubles.

B. Review of another’s contract

The second context when a business must review it contract is where you get a contract — someone else’s form.

First, make sure you understand the business terms. Do they contradict one another? If the financial terms do not compute to what you understood the businesses to be then you need to understand them in the context of the contract and make sure they are acceptable. The business terms are going to be governed by the contract, so listen to the words on the paper, not the words from your sales person.

Second, look at the way you can get out of the relationship if it goes south. What clauses prevent you from cancelling? Is there an early termination fee? Do payments continue and for how long? How do you give notice of termination – at will, 30 days, a narrow window not more than 45 days but not less than 30 days? Beyond just the mechanics of termination, relationships that are terminable at will have obviously less legal exposure than long term relationships.

Third, is there really anything non-standard about the contract? This may be a little bit of trick question for the lay person, but even non lawyers who are used to looking at contracts can find provisions in agreements that are onerous, out of place, or overly complicated. As discussed in last week’s article,contracts are drafted as a result of previous negative outcomes. As a consequence, protective provisions creep in. The question for you is whether they are overly protective.

Fourth, here is my quick checklist for contracts (modified, of course, for each client’s individual situation):

  • Mutual cost of enforcement (i.e. attorney fees for breach).
  • Limitation of damages — cap at fees; no consequential damages.
  • Indemnification only for gross negligence/intentional acts.
  • Mutual clauses, particularly indemnification and confidentiality.
  • Make sure notice is in writing.
  • Assignment should be allowed in cases of a larger merger.
  • Jurisdiction should not be exclusive.

I have argued these provisions in a variety of different ways, and context requires a change in several situations. (I had corporate counsel recently tell me that he would need board approval to change a jurisdictional provision, so I know you can’t get everything.) That said, I firmly believe that if two people truly want to do business together, competent and capable lawyers can construct a contract that works for both parties.

Mike Goodrich
Goodrich Law Firm, LLC

Advertisements