Six traps to avoid before signing a contract

By Melissa Sinopoli

Given the costs associated with working with lawyers, more and more businesses are doing what they can to save on legal fees. This generally means reviewing their own contracts or only asking their lawyer to help with any key terms that they do not understand.

Unfortunately this can lead to issues being missed, which ultimately costs the business more than what the initial legal fees would have been.

Here are the top traps to look out for when reviewing contracts you intend to sign in order to minimise the risks.

1. Exclusivity

A contract may be subject to you not using a similar service offered by another provider if providing your services to another party during the term of the agreement.

In the event the contract is subject to exclusive dealings, consider the effect this may have on your business in the future and whether the benefits under the contract justify the exclusivity granted.

2. Assignment rights

Terms giving a party the ability to assign or transfer their interest in the contract to someone else are often overlooked when a contract is being negotiated. Being able to assign a contract without the consent of the other party can be beneficial in the event you transfer or sell your business.

Another option, if the consent of the other party is required, is to ensure the consent must not be “unreasonably withheld”.

3. Termination rights and penalties

Review the termination rights under the contract and consider the effect of any notice periods or penalties that may exist in respect of early termination and whether you can negotiate better terms.

4. What constitutes a breach?

In certain contracts a failure by a party to comply with a material/significant term of the contract will constitute a breach of the contract, whereas a failure to comply with other less important terms of the contract may not constitute a breach unless the party fails to comply with the term on a certain number of occasions. In other contracts a failure to comply with any term of the contract will amount to a breach.

It is important to know exactly what actions may put you in breach of the contract and what the consequences of being in breach are.

5. Automatic extension

Check whether the contract contains any provisions that will automatically extend the contract at the end of its term in the event neither party gives notice that the contract is terminated.

It is especially important to note whether the fees payable under the contract will automatically increase on the commencement of the extended term.

6. Security (guarantees)

Be sure to check whether the contract gives the other party a right to take security over any of the business’s assets or your personal assets and whether you are required to provide personal guarantees.

Also consider what, if any, security you could take under the contract against the other party in order to better secure their performance of the contract. For example, in the event the other party is a company, you may wish to obtain personal guarantees by its directors that the company will perform its obligations.

Unsure of anything?

If after reviewing the contract you are unsure of what something means or how the contract could be better drafted to protect your interests, you should seek legal advice.

Melissa Sinopoli is the founder and chief executive of LawyerQuote, a legal comparison website for businesses to search for and select lawyers.