This week, we’ll be looking at how to read a contract. Most of us are faced with contracts every day–when we buy software for our computer, when we download music off the internet, when we use a site that has “Terms and Conditions,” etc. Likewise, business people are faced with contracts on a regular basis. Yet few truly understand how to read a contract. So, this week we’ll look at the basics for how to read a contract and make sure you are not getting yourself into a big mess.
Lesson #1: What is NOT in the contract can sometimes be just as important as what IS in the contract
Many people fail to realize that contracts are written by fallible people who forget to add important elements into the contract. Even good lawyers may forget to add something important in to the contract at times.
Thus, when reviewing a contract, I always try to draw out a flowchart of how the transaction will occur–when it starts, when it ends, who pays whom (and how), what each party must do to perform its side of the bargain, etc. By drawing it out on paper, you start to see holes in the contract immediately. For instance, many contracts fail to state what will happen if one party does NOT perform correctly–maybe they don’t pay what they are supposed to pay, or don’t provide the service they are supposed to provide. In either case, the contract should state what happens in such an instance. By drawing out the timeline/flowchart of the contract, you’ll start to see what is missing from the contract. When drawing out the transaction, try to visually walk through in your mind what will happen so that you don’t miss any details. Thus, if the contract covers an event, visually walk through what will happen minute by minute at the event to determine what sorts of things the contract should cover. By doing this exercise and drawing it out on paper, you will be surprised at how much the contract may NOT mention that is really vital to the functionality of the contract.
So that’s our first lesson for reviewing contracts. Tomorrow, we’ll look at Lesson #2: Always think about what could go wrong first and move backwards from there…