Need to review a contract? Top ten tips from a local business lawyer

Read this in conjunction with Need to draft a contract: Top ten tips from James O’Connell a local business lawyer, because contract review is the mirror of drafting a contract.

You’re not a lawyer, but you’ve been handed a contract to review. These are the top ten things to look at first.

1. What does the tone tell you?

People are often on best behaviour when they want you to sign their contract. It can go downhill once they’ve gotten what they want. So if they’ve provided you with a brutal one-sided kind of contract, well “by their actions shall ye know them”.

Similarly, if the contract is a thrown together piece of junk, alarm bells should be ringing too.

2. Does the contract match the deal?

Disputes arise when the contract’s wording doesn’t reflect what was actually agreed, or what is going to happen in real life.

Never agree to such a contract, as you are then in breach of it from day one and they have you over a barrel.

3. Deconstruct the contract

List as bullet points every obligation you are being asked to shoulder. List every cost or charge that you are responsible for. List every way that you could be held in breach of the contract. List what you are on the hook for if anything goes wrong. Then do the same lists for the other side. Does it look okay to you?

Creating those lists will also help you identify what you don’t understand. Don’t sign anything you don’t understand.

The big commitments are obvious, but contracts can scatter smaller obligations everywhere — reporting, monitoring, confirming compliance, keeping logs, etc. Individually they’re fine; but cumulatively they may be an expensive and heavy burden.

Crucially, each one is still a contractual promise that puts you in breach of the contract if you fail to comply. If you cannot realistically comply with all of them you will be in breach and so on the back foot in any dispute. Only promise what you know you can deliver.

4. Payment: the agreed fee is often only the start

Check invoice timing, payment triggers, allowable deductions, and extras such as expenses or uplifts. Payment terms can quietly shift the commercial balance. Cashflow-related problems almost always arise from this part of the contract.

Payment is often split between fees and costs/expenses. The latter is usually insufficiently detailed. What costs exactly are allowed? When and how are they paid (potentially huge cash flow implications). What happens if disputed? Finally, in an inflationary world, how does the fixed cost contract deal with unavoidable mid-term cost hikes?

5. Know the contract duration (term)

Understand how the contract can end. Watch out for any stinger clause (usually hidden towards the end in the “boilerplate” clauses) that gives the other party the right to terminate the agreement without reason. Surprisingly common, and basically guts whatever protection against early termination is written elsewhere.

Does your contract renew/rollover/extend automatically unless notice is given to end it? Are fees and costs updated or frozen?

Understand what happens on termination. Things are rarely clean cut. You are ending a relationship, make sure all issues are covered.

6. Don’t trust people who justify bad contracts by claiming it’s standard practice

The proverbial “If I had a penny for every…” applies. Many try and justify aggressive one-sided contracts as standard industry wording. Be skeptical.

Sometimes it’s true, e.g. franchise agreements tend to be remarkably lop-sided (perhaps, sadly, reflecting that so many would-be franchisees don’t know any better). Other contracts can be that way because the power balance between the two parties is such that one party can offer take-it-or-leave-it terms, otherwise though…..

7. Liability

Absolutely crucial this but, too often ignored. Liability clauses decide who pays if something goes wrong.

What if you supply a £100 component? It fails, causing the other party to breach a £1 million contract it has with a third party. Being on the hook for that £1 million when the sale was only for £100 is madness. You want your liability clearly limited.

8. Who owns what

If supplying something of value that you need to reuse for other customers (e.g. expertise, or a particular design process) then make sure that you are not selling that knowledge/process such that you can’t use it for anyone else. Same with any deliverables. Distinguish between selling the deliverable and selling all the innate skill and knowledge or expertise that you needed to create the deliverable.

9. Watch out for strange expressions

If you come across a strange expression like “time is of the essence”, or “indemnifies” then google it. Strange expressions are often used because they have a special legal meaning whose implications are not usually obvious just from the words alone.

10. Extension by stealth

If the contract refers to another document (e.g. company policies) then these usually become part of the contract. This can be exceptionally bad news. Don’t agree to anything you haven’t read.

James O'Connell is a Partner at Mayo Wynne Baxter. Find out more on their website here.

This is part of a new series we’re running with Chamber members, picking out different experts working in the areas of business you most frequently ask us for advice or expertise on. Keep your eyes peeled for more installments on finance, marketing, sales, productivity and more.

If you want to contribute to the Chamber blog, contact us on hannah@brightonchamber.co.uk