So these last two days, we have been looking at how to read a contract. Lesson #1 taught us that what is NOT in the contract can many times be as important as what IS in the contract. Thus, as we discussed, it is important to draw out a timeline or flowchart of the transaction so that you can visually see the holes in the contract.
Lesson #2 taught us that it is vital to think through the worst scenarios first and move backwards from there. Thus, it is important to ask yourself the hard question of: “What happens if things go terribly wrong.” If you contract answers those questions adequately, it is sure to answer the questions: “What happens if things go right.”
Today, we’ll look at Lesson #3: There are certain key terms that should be in every contract
The first key term to consider is: Who are the Parties? This may sound trivial, but in many cases, it is not. For instance, I was reviewing a contract last week which listed the parties as follows: “John Doe, President of ABC Corporation and The Best Business, LLC.” In this case, I knew what the parties meant to say: they wanted the contract to be between the two companies (ABC Corporation and The Best Business, LLC). But the way they worded their transaction, the contract was ACTUALLY between John Doe and The Best Business, LLC. So, make sure you adequately list the parties in their proper capacities.
The second key element to consider is the term of the contract (i.e. how long the contract will last). Will it last for a set amount of time, or will the term be linked to another standard (e.g. “the parties will work together until the last widget is sold.”)? Likewise, how will the term be renewed? Will it automatically renew if the parties don’t do anything? Will the contract simply end with no further fanfare? Make sure you contract states what will happen at the end of the term and how the parties can terminate the contract.
The third key element to consider is payment/performance. In other words, how will each party perform its side of the bargain. If one party is going to pay the other, how will they pay? Will it be paid out over time? If so, will the other party charge interest? Do the payments need to be made in cash, by check, by money order, or some other means? If one party is providing a service as their part of the bargain, how will the quality of that service be measured? What happens if the other party isn’t happy with the quality of service? How does the contract define when the service will end?
The fourth key element to consider is what happens if one party defaults (i.e. doesn’t perform its side of the bargain)? In such an instance, how will the other party notify the default party of their mistake? Will they have to give that party a chance to cure the mistake? What happens if they don’t cure? Will the other party be able to sue? Will the other party receive liquidated damages (i.e. damages that are meant to provide an estimate for the damages one party would incur if the other party defaulted)? What other remedies would be available to the party who was the victim in this scenario?
So, as you can see, there’s a lot to think about when reading a contract. And these are only the most basic contract terms! But, if you have these terms squared away, the skeleton of your contract will be solid.
Tomorrow, we’ll finish out our series on how to read a contract. We’ll look at Lesson #4: Boilerplate IS Important.