TOP TEN THINGS TO LOOK OUT FOR WHEN ENTERING INTO A CONTRACT
In our line of work, we see lots of problems arising from people signing up to contracts they don’t really understand, haven’t really read or didn’t think through properly.
Our advice before entering into any kind of supplier or client agreement is that you ask a lawyer to review it. The cost of a lawyer at the outset will be much less than resolving a dispute later on.
But if you don’t have a lawyer, here are our top ten areas to look out for before you sign on the dotted line:
1. DUE DILIGENCE — do you know who you’re contracting with?
First of all, Google them, thoroughly. Search for their company on Companies House here: https://beta.companieshouse.gov.uk/ and make sure they are in good-standing. Check that everything seems in order and that the company is who they say they are. If you are entering into a particularly high-risk contract with a party you haven’t done business with before, you may want to consider hiring a due diligence company to do your research for you, such as Due Dil for example.
2. READ IT CAREFULLY — do you understand everything it says?
Read and review each and every clause in the contract. If you don’t understand it, don’t be afraid to ask what it means! Lots of people feel intimidated by legal language and may feel silly asking for an explanation or for the language to be simplified. Remember that the contract is written for you so if anyone should understand exactly what it says, it’s you.
3. IS THE CONTENT NEW TO YOU? – is this the first time you’re seeing this?
This is extremely common and something to watch out for. If the obligations or scope that are set out in the agreement are new to you, then the contract has arrived prematurely. You should already have discussed and agreed on the terms of your engagement before the contract is drafted, otherwise you risk shifting the focus of the engagement onto the contract itself and not what you are actually doing in practice. I always tell my clients that the contract should be the last bit of the puzzle, after they have already spent time defining the scope of what they are receiving / delivering and agreed the commercial and financial parts. The contract is used as a means to create clarity, certainty, formality and security for both parties rather than as an instrument to provoke discussion on the actual terms of the engagement. If you are seeing terms for the first time when you receive the contract, it’s a sign that you need to back to the drawing board and discuss what you will be doing in reality.
4. LOOK OUT FOR HARSH OR UNREASONABLE TERMS – do you feel that some of the terms are unfair?
Is the contract too one-sided in favour of the other party? If you feel that you’re not getting a fair deal or that most of the obligations are placed on you but not equally onto the other party as well, then remember that you are free to negotiate new terms and amendments to the clauses. The content of an agreement is not set in stone until you sign.
5. CLARIFY OBLIGATIONS - are the obligations on each party clear and reasonable?
The contract should clearly state the agreed obligations of both parties. Some contracts clearly cover the obligations of one party but remain vague or even silent on the obligations of the other. Even if the other party is a client, they still have an obligation to make payment, provide clear instructions and meet their dependencies. If obligations are unclear, ask for them to be clarified.
Aside from clarity, you should also make sure the obligations are realistic. Avoid clauses that make your obligations too hard to meet (e.g. an obligation to respond to issues within a very short time frame where this is not achievable) or too restrictive (e.g. an obligation not to work for any competitor for the duration of the contract as well as for a long period after the contract is terminated).
6. WHO IS PAYING WHAT AND WHEN? – make sure you are specific about the commercials
The financial and other benefits due to you through the terms of the contract should be stated clearly. Figures may be attached as a separate schedule forming part of the main contract. Clarify when payment is going to be requested, how it is going to be requested, how payment is going to be made and when payment is due. If you are delivering against milestones, are your milestones associated with payments? If so, are you clear on what achieving a milestone means? And have you clarified whether there are any client dependencies that might influence the achievement of the milestone? Clarity around this point is key as this is one of the highest risk areas in a contract that leads to a high percentage of disputes.
7. CONFIDENTIALITY – does it make sense?
Most contracts contain a confidentiality clause which is fair but you should ensure that such a clause does not put you in risk of breaching any other professional contracts or obligations, such as other employment or services contracts or other client relationships. For instance, would the confidentiality clause prevent you from disclosing a conflict of interest etc? If you are uncomfortable, don’t agree to it and ask for more clarity.
8. TERMINATION – what happens if either party wants out?
In order to avoid being locked into a contract indefinitely, you should ask for a right to be included which will allow you to terminate the contract for any reason whatsoever, subject to the provision of a reasonably short notice period. Equally, if you wish to lock the other party into the contract for a longer period of time consider lengthening any notice period to be provided by the other party, in the written contract. In any case, there should always be a termination clause in an agreement, that clarifies when the agreement will come to an end naturally, how either party may terminate the agreement under specific circumstances (e.g. for breach or for no reason at all) and what happens after termination (e.g. all documents held by either party about the other party’s business must be returned or destroyed).
9. LIMITS ON LIABILITY – are you limiting your risk proportionately?
Consider limiting your total liability (for any damage or loss caused by negligence, breach of contract or otherwise) to a reasonable amount (insofar as permitted by law). It may also be prudent to ask for a total exclusion of your liability for any consequential losses (direct or indirect), e.g. loss of profits or business.
10. UNDERSTAND YOUR EXPOSURE - if you’re a business, the law expects more of you.
If you are acting as a business and not as a consumer, the law presumes that you have read and understood the legal documents you have signed even if these turn out to be unfair or overly onerous. If in doubt, consult independent legal advice.