Right, this goes against my lawyer instincts because in my opinion you should always read everything you sign, in as much detail as possible. However, if you genuinely do not have the time and it is a considerably low risk document (so not worth a million pounds/dollars), then here are three things to do before you sign which will alert you of any potential risks and give you some protection going forwards.
- Exclusion and limitation clauses – Look for these types of clauses or ask outright if there is such a clause in what you are signing (get them to refer you to it so you can check their honesty). This will list or summarise everything that the contract/document does not include and what the other party is not liable for. The best example of a document riddled with such clauses, is an insurance policy. When you sign an insurance policy, it is important that it covers what you want and one of the quickest ways to confirm this, is to take a quick look at what is excluded. For example Billy asks Janet for an insurance policy for his car. Janet gives him an insurance policy for his car. Billy is in a hurry for a meeting and trusts that he has been given a policy to insure his car, HOWEVER he flicks to the exclusion clause and sees that the policy does not cover RED cars. Billy’s car is maroon, so, arguably red. Billy takes this up with Janet. Janet amends the policy for Billy so that the operative clause clearly states that Billy’s maroon (and therefore not red) car is covered. Always check what a contract expressly excludes. If it excludes accidental damage and you need it to cover all damage then obviously you are not signing. Another example would be a limitation of liability clause, often found in services contracts. Say for example you hire a professional polisher to polish your silver worth £3,000 but the contract of hire states that liability for any damage arising out of the contract at the fault of the professional polisher, is limited to £500 only. Obviously, you are not going to sign. Who’s going to pay for the remaining £2,500 worth of damage? Always check how liability of the other party is limited. If you sign a contract with a rubbish liability clause, that’s your fault.
- Payment provisions – Always check that the numbers are what you agreed. An extra zero here, a missing discount there is BAD for business. If you have agreed a specific discount just take that second to double check that it is expressly in the contract. DO NOT worry if the other party finds it offensive that you are checking, they will respect you for it. Even if my best friend gave me a contract to sign, I would check it right before their very eyes! Also, what happens if you pay late or you have a dispute with a charge? What does the contract say about that? Checking this clause or asking directly about this clause (then getting them to refer you to it specifically) will ensure that the most important thing of all, money, is properly accounted for!
- Termination – Imagine your face when you try to switch suppliers and you find that you have signed an indefinite contract! That’s a worst case, silly scenario but hopefully it highlights how important it is to know how to get out of a contract before you sign it (I’ve said this before). Business is unpredictable and you may need to get out of a contract really fast – knowing the termination provisions at the outset can help you to consider all possible scenarios in which you may want to terminate the contract early and therefore judge whether the contract in question is one you want to sign or amend.
I have to also add the obvious cautions, check who you are contracting with. If you are doing business with Joe Blogs Plc make sure it says Joe Bloggs Plc and not Joe Bloggs Ltd. Also, don’t forget the dates, it will take no time at all to make sure the document is dated correctly. Again, these are just TIPS for those of you ALREADY signing standard contracts without checking ANYTHING. If you are one of these people, at least check the above three things or else suffer the consequences. Once you sign a commercial contract, there is very little anyone can do for you if it turns out to be a bad deal. The Courts have no sympathy for business to business contracts because both parties are considered sophisticated.
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In continuation of the “Before you sign” series, I present the third potentially deadly clause for your review…TERMINATION. A termination clause is effectively your get out of jail FREE card in any contract so long as you DRAFT it that way. This is why you need to understand your contract so that you know a) what you want (life is good and business continues as normal) and b) what you do not want (often that the deal has soured and you need to end it). Termination clauses set out WHEN either party can LAWFULLY terminate the contract. The consequence of UNLAWFULLY (so not complying with the termination clause) terminating the contract is that you are most likely sued by the other party/parties to the contract for damages (compensation).
There are different circumstances in which you may want to terminate a contract. You may just want to try out a business relationship and give yourself the option to walk away if you don’t think there is a future in it. In this instance your termination clause should specifically enable you to end the contract on a short period of notice, for example 3 months after a fixed initial period of 6 months – this is termination for convenience or “without cause”. Either party can walk away after a set period of time simply because you have given each other the opportunity to do so. Of course it is also possible for a contract to just end naturally for example by effluxion of time (the contract runs its term), or by both parties performing their obligations under the contract. For example A contracts with B for delivery of 70 tennis balls on X date in return for A paying B a fee, once B delivers the 70 tennis balls in accordance with the contract and A pays B, the contract is over.
HOWEVER more likely than not you will want to make sure that you can terminate the contract when the other party BREACHES (messes up) the contract. Here are some examples of when that might be:
- The other party has committed a MATERIAL breach of the contract that CANNOT be remedied – so this is when you receive something SUBSTANTIALLY DIFFERENT from what the contract specified, for example, if the contract specifies the sale of a box of tennis balls and you as the buyer receive a box of footballs. Or you hire an artist to perform the piano at your event but they turn up with a guitar. Such a fundamental breach should entitle you to terminate the contract immediately without notice to the other party.
- The other party has committed a MATERIAL/SUBSTANTIAL breach of the contract that is capable of being remedied but has failed to remedy that breach within a set period of time – so this is when the other party has breached the contract AND the breach is fixable HOWEVER the other party has failed to fix it within the set period of time. In such circumstances you will want the right to terminate the contract. For example you order pink balloons and the other party delivers blue balloons. You still have balloons but they’re not the right colour, you will notify the other party giving them a chance to send you the correct colour balloons by a certain time in accordance with the contract (say 7 days). The other party fails to send the correct balloons by your deadline OR sends white balloons. You will want to terminate the contract and sue for damages. Please also note that even where a failing party manages to remedy its material breach within a set period of time, the innocent party could still seek damages for any loss caused by the breach. For example You have a restaurant that requires 100 burgers and 100 hot dogs but you only receive a delivery of 70 burgers and 70 hot dogs from your supplier. By the time your supplier has delivered the remaining 30 burgers and 30 hot dogs, you’ve missed out on business or you’ve had to buy more expensive burgers and hot dogs at short notice from another supplier to meet the demand of your customers. You will want to sue for the loss you suffered during this time even if you continue the contract with your original supplier.
- The other party persistently breaches the contract in MINOR ways which altogether have a negative impact on the performance of the contract E.G continuously delivering goods late, being late with services without a reasonable excuse, persistently making late payments (this can affect cash flow) or continuously failing to meet sales targets or sales quotas within a period of time. You will want the right to pull the plug on the contract after a while. It will be up to you to determine, in your contract, when enough is enough in respect of these minor breaches. For example you would not want to terminate the contract for one late payment but you might want to terminate it for three consecutive late payments.
- The other party has become insolvent or bankrupt or is in the process of becoming so – the other party has gone bust or is clearly in financial trouble. You will really want to get out of the contract in this situation so you must make sure that your contract allows you to do so.
- You anticipate that the other party is about to breach the contract (an anticipatory breach) – so this is where the other party has made it known that they will not be carrying out the agreed work or they effectively stop acting in accordance with the contract, leading the other party to believe that they have no intention of fulfilling their part of the agreement. For example the other party persistently fails to produce an ordered item or refuses to accept payment. You will want to end the contract and sue for damages WITHOUT WAITING for the actual breach to occur.
Termination clauses are complex and this is where you really need a lawyer’s help. If you do not expressly make provisions in your contract for the different scenarios in which you want to terminate the contract, your contract will be subject to common law (this is the case in the UK but check the consequence in your country). Common law is law developed by judges through decisions of courts and similar tribunals that decide individual cases. If you leave your contract to the mercy of common law you could end up spending heaps of money paying lawyers to work out which case law applies to your particular contract’s circumstances and then even more money when the other side says your application of the common law is wrong and takes you to court!
Basically, ALWAYS make express provision in your contract as to when it can be terminated.
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