Know Before You Sign: Tricks and Traps of Contracts

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As a business, it is important to review any contract thoroughly before signing. Contracts are legally binding agreements and you want to make sure you are protecting your company properly. Any time you or your company agree to take some action or make a payment in exchange for anything of value, a legal contract has been created, even if the agreement does not seem like a formal contract. This article focuses on some of the common provisions in vendor contracts, what you need to be aware of, and why these clauses matter.

1. Parties, Dates, and Term – The contract must identify the parties who are involved – namely your company and the vendor. For example, if your company’s legal name is Wood is Good, Inc., the contract should include that full name. The contract also should specify the term – typically having both a start date and end date. However, some contracts may not include an end date, and instead continue on until terminated by one of the parties. All deadlines and delivery dates should be included here as well.

2. Scope of Work – The scope of the work or the nature of the relationship should be stated clearly in the contract. This means a thorough description of the goods or services that the vendor is going to supply to your company. Keep in mind that this is the description on which it will be based as to whether the vendor is or is not doing the work on which the compensation is based, so being specific is important.

3. Total Price – The contract should specify the specific dollar figure that will be due and when. This could include the total cost for the services rendered, the price for the goods purchased, or any other monetary information relevant to the specific  interaction. Make sure you are aware of when payments are due and of any late fees and penalties that may apply. Ideally, the payment schedule should correlate to the deadlines and delivery dates.

4. Termination – Ensure that there are contract provisions that address when your company and when the vendor can end the contract. The contract should give the details of what qualifies as a reason for contract termination. These reasons usually are broken down into “for cause” clauses and “for convenience” clauses. Both types of provisions are important for your business.

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Termination for cause clauses allow parties to terminate a contract due to the other party’s inaction or actions or a breach of contract. In most cases, one party must submit written notice to the other party to terminate the contract. There may be other steps involved in the case of a breach of contract, such as a cure period for the breaching party to cure the issue that has arisen. So, if a delivery was to be made by a certain date and it has not yet been made, the notice would remind the other party of the due date and give them an opportunity to “cure” the issue by delivering the product, and if they fail to do so thereafter, the contract may be terminated.

Termination for convenience clauses allow your company to terminate a contract for any reason even when a breach has not occurred. A termination for convenience clause is included in contracts since it allows for parties to end their responsibilities in a way that typically does not lead to litigation or harm to either party. This provision should state what notice is required and whether the vendor can charge any payments for completed work, as well as if your company will be given a refund of payments for work not yet  completed by the vendor.

5. Auto-Renewals – In some contracts, there is a provision that the term will renew automatically unless certain conditions occur or if the contract is not canceled. If the termination provision allows either party to terminate the contract for convenience, then the auto-renewal provision has very little impact as even if the term renews, there is a right to terminate for convenience. However, if the contract does not allow termination for convenience and instead only allows termination for cause upon a breach of the other party, then the renewal of the term will have a significant impact. Therefore, if the auto-renewal does not provide any substantive benefit, it may be worth it to remove the auto-renewal provision from the contract and to do business on an order-by-order basis.

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6. Governing Law – Governing law is a contractual provision that determines which law will apply in the event of a dispute. Most types of contracts fall under the common federal and state laws. Contracts for the sale of goods fall under the Uniform Commercial Code, a standardized collection of guidelines governing the law of commerce. The parties can negotiate the choice of governing law depending on where they reside, where the contract transaction will take place, or whether the law of one jurisdiction is more advantageous than another. Once the governing law is chosen, the selected law becomes the law of the contract and generally will be upheld by courts.

7. Signatures – Before you sign a contract, be sure that you fully understand the terms of the document and that all mutually agreed revisions have been made. Also, make sure that any commitments made during discussions or negotiations are reflected, as once the contract is signed, those commitments will not be legally binding unless they are in the contract. Each party should obtain an original signed copy of the contract for their files. Electronic signatures to contracts are widely permitted and enforceable with a few exceptions, so utilize appropriate  technology/services to verify and secure the electronic signing process.

When you receive a contract, review it carefully as each contract may be different even if it is a contract from the same vendor. If you have questions, ask for more information or clarification because ambiguity or unclear language can cost your company time and money. If you do not understand a contract, or make a bad deal, you may end up having to face legal consequences, so it can be helpful to hire a trained legal professional to review contracts and to guide your company on best practices.

Iqra Mushtaq is an associate attorney at Barnes & Thornburg, LLP in Chicago, Illinois. With a unique background in law, policy, and business, Mushtaq provides her clients with dedicated preparation, outside-of-the-box thinking, and a dynamic approach to problem solving. She can be reached at iqra.mushtaq@btlaw.com.

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