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Writing a Business Contract? Check It Over Before Anyone Signs

23rd May 2017

Entering into contracts is common for most small business owners. You may sign contracts when you lease office equipment, conduct business banking, lease vehicles or for many other purposes. Some small business owners make the mistake of making oral contracts or using form contracts that have boiler-plate language. You should avoid doing this because it can set you up for potential problems later. Here are some things that you should do when you are preparing to enter into a contract.

Negotiate the important terms

When someone presents you with a contract, you should recognize that it is a starting point. You are able to negotiate the terms of almost all agreements. You'll want to review the proposed contract carefully, highlighting provisions that appear to place you at a disadvantage. You should ask for what you want, recognizing that the other party wants to do business with you. At worst, the person might tell you no.

Make sure that the parties to the contract are correctly identified

The parties to the contract should be correctly identified in it. The business's complete name should be used, and any corporate officers of the business should be identified. You'll want to determine what the marital statuses are of people if their spouses are required to also execute the contract.

Don't leave anything blank

Never leave anything blank on a preprinted contract. If you do, someone else can go back and fill in information later. If there are any deletions or changes that are made, make certain that both you and the other party initial them.

Double-check all of the terms of the contract

Make sure to review the terms that are used in the contract to make certain that they accurately reflect the agreement between you and the other party.

Allocation of risk

It is important to figure out how risk should be allocated and to include that information in the contract. In general, the contracting party who is in the best position to prevent losses under it will bear the risk. You'll want to determine whether or not you will need to get insurance to protect you as well as the costs of it.

Automatic renewal provisions

It is important for you to look for automatic renewal provisions that might be included in the contract. You'll want to see if you are required to give notice if you do not wish to renew the contract and if any penalties will be assessed if notice is not given in a timely manner.

Incorporation by reference

If there is language in a contract that states another document is incorporated into it by reference, you need to get a copy of the other document and review it. You should never assume you know what it contains.

Figure out how defaults will be handled

You'll want to include the types of acts that will constitute defaults of the contractual duties and how they will be handled. This may include a mandatory arbitration provision that mandates handling disputes through arbitration rather than in a lawsuit. You may also want to consider including remedies provisions in the event that the worst-case scenario happens.

Hold harmless and indemnification provisions

You should take care to look for provisions that state that you will hold the other contracting party harmless or that you will indemnify them. If you hold a party harmless, you are agreeing that you will not hold him or her liable for issues that might arise from the transaction. If you indemnify the other party, you are agreeing to protect him or her from losses that might be incurred. Try to keep any indemnification you see as limited as possible.

Reasons to terminate the contract

You'll want to see what causes are listed for terminating the contract, and you may want to include ways to do so if the contract isn't helping you.

Check deadlines and dates

Make certain that all of the relevant deadlines and dates are clearly listed. Make certain to calendar all of them so that you know what the deadlines are for certain actions for both you and the other party.

Review warranties and representations

Make certain that you understand all of the warranties and representations that are being made by both you and the other party. Do not make a representation unless you know that it is true or if the other party is better positioned to know the facts. Try to limit any warranties that you give as much as you can.

It is important to understand everything that is in a contract and to negotiate terms that are not favorable to you before you sign. By reviewing everything, you may enjoy a smoother contractual relationship that is beneficial to you.

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