Mentor Article

What to Look For in the Next Contract That You Sign

Bob Halagan, Halagan Law Firm, LTD.

Ok, so you are about to sign a contract with a new customer and they send you a ten-page contract to sign before you can start work; what do you look for in that contract?  While it’s a good idea to have complex contracts reviewed by an experienced attorney, there are some basics you can look for to see if your new customer is offering a deal you really want to take.

  1. Term of the contract. In most contracts there is a “term” or period of time for which the contract will be in effective.  If you are investing a significant amount of resources in development for a new client, you don’t want a short-term contract that they can quickly cancel without you recovering your costs.  The term should be consistent with what makes good business sense for you.  You should also look for language that tells you how the parties can end the contract.   A one-year contract that either party can cancel with thirty days notice is just a thirty-day contract.   If you decide the client’s not right for you, how and when can you get out?
  2. Getting paid. Payment terms are obviously critical but it’s not only the amount that matters. How long does the other party have to “cure” a delinquent payment?  If you are not paid, can you cancel the contract immediately or do you need to continue providing goods or services while the dispute gets resolved?  If the client is unhappy, can they withhold payment until you fix whatever they don’t like.  Most importantly, if they don’t pay, can you sue them in your “home” court or do you need to travel to another state to chase them.
  3. What are the deliverables? One area that is often under-defined is what exactly is being bought and sold.  In any dispute, you want to be able to point clearly to what it is that were supposed to do and prove that you did it.  A poorly defined statement of deliverables can lead to misunderstandings or claims that you were supposed to deliver something you had no expectation of delivering.  I often recommend that a contract of any significance have a Statement of Work as an attachment that is clearly defined and detailed with a specific procedure for modification that needs to be followed for other or additional work.
  4. Warranties and Indemnification. One of the areas most non-lawyers find most confusing are the issues of warranties and indemnification.  Warranties are your guarantee of how you goods or services will perform and for how long.  It is critical to understand what you are guaranteeing and what you need to do if something fails.  This is an area where legal counsel on limiting potential liability is critical.  Indemnification is your promise to take on any liabilities from a third party if something goes wrong; in other words if someone sues, you are guaranteeing that you and not your client will pay for any damages and costs including usually attorney’s fees.  In my experience even most attorneys don’t always understand the full scope of most indemnification terms so a basic concept is that this provision should be mutual.  That means if it’s your fault you indemnify them; if it’s their fault, they indemnify you.

If you have a contract that needs reviewing or if you want to see if your own agreements protect you sufficiently, please contact me for a free initial consultation.

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