The Significance of Contract Review Explained
A lawyer can spot issues that you may have never anticipated, much less be able to avoid. It is not prudent to assume that all issues will be clearly identified in the contract. Some issues will arise and your lawyer will be able to steer you around them. In many ways it is like an insurance policy against a problem with potential for loss. Even if a problem has not arisen, your lawyer will still be able to counsel you during the process and help you avoid disputes altogether.
Working with a lawyer who is experienced in reviewing contracts is imperative. In the event your contract is not properly reviewed and you later find yourself in dispute, no amount of back and forth between the parties and their respective lawyers will fix an improperly drafted contract. Not only does a lawyer spot potential problems, he or she can make suggestions that can directly save you money.
While there is no single solution or formula when drafting contracts , there are basic contract formation principles that can reduce cost over the life of a contract. For example, is there an arbitration clause? Is it governed by the law of a specific state and do you want litigation to be there? If you do not select the appropriate law your costs could be exorbitant later on in litigation because of the differences in the requirements to file a claim in each state. For each situation, the lawyer will have to make decisions about which state may be most beneficial to your position and your case financially.
Contract review is a process that helps identify irregularities that need to be corrected or modified before they become issues. A good lawyer will also help you understand the range of issues so that you can take them into consideration and, if necessary, reevaluate your business preferences.
Common Issues to Watch Out For in Contracts
Common contract pitfalls often lurk in the fine print. Without the knowledge of what to look for, the average consumer may not be able to spot ambiguous terms that can have very expensive ramifications. Many issues can crop up as unintended ambiguities when a contract is written. For example, in some contracts, the word "you" refers to the company you are contracting with, while in other contracts "you" may refer to you, the consumer. If your contract has been poorly written, they may define "you" as you and the company, or even leave it out altogether which can create an issue when you need legal recourse for a breach of contract. It may be unclear whether you are entitled to the full amount of damages or just a portion of the damages if the contract terms are breached. Will the breaching party be liable for attorney fees and/or costs? You may not know whether you are allowed to seek attorney fees unless you look closer at the contract, which is difficult without a set of legal eyes. Some terms of the contract may not be less than vague and more counter-intuitive. Depending upon how a contract is written; optional services may be defined as mandatory, or mandatory services may be classified elsewhere in the document as optional. It may be unclear who is liable for services performed improperly or who bears responsibility for correcting the errors. Because operations manuals are often considered part of the contract, it can be very confusing as to what the actual terms of the contract are. Expertise from a skilled contract lawyer is essential to spotting these issues before they become costly problems.
Advantages of Consulting a Lawyer
Ensuring Clarity of Language: A lawyer will review the contract and revise or redraft as necessary to avoid confusion. A well-written contract is much less likely to lead to disputes. Lawyers are very skilled in spotting ambiguity, which anyone entering into a contract should want to avoid.
Making Sure it’s Legal: It’s always a good idea to have an attorney review any contract before you sign it to ensure that it complies with federal and state law. A contract not in compliance is simply not enforceable so it’s best to leave the review to a professional. In the event enforcement is necessary, a good attorney should be able to work with you and the other party to ensure compliance. It is important to keep in mind, however, that a lawyer cannot cure the other party’s breach. Going through the legal process is sometimes the only option.
Ensuring Enforceability: Contracts must meet certain requirements under state law to be enforceable. Even if you and the other party intend for a contract to be enforceable, an unenforceable contract isn’t worth the paper it’s written on.
Understanding How the Contract Review Works
The typical contract review process starts with a conversation with the client. A primary goal is to understand the substance of the transaction for which the contract is being drafted. This helps the attorney understand the potential risk and how to carefully consider different provisions of the contract based on those risks.
Next, a lawyer will typically read through the contract with a highlighter and read closely as they go. Because the devil is in the details, it is important not to miss anything. A focus is placed on any areas that might be problematic for the client or that do not clearly reflect the intention of the parties involved. Depending on the contract, a lawyer may also focus on boilerplate provisions like jurisdiction, severability, and choice of law , among others.
A lawyer will focus on terminology that may be more favorable or less favorable towards each party. There are likely certain terms that you will want to be well-defined. For example, the definition of payment term, purchase price, liabilities, associated taxes, indemnity, confidentiality, termination, default, remedies and others might be scrutinized closely.
With most contracts, there is some level of concern about possible liability. At the same time, any unique liability provisions relating to specific business risks may be included. For this reason, an attorney can identify whether some terms may lay undue blame on your business. Clients may want limits on their liability or ways to provide notice of breaches. An attorney will work with a client to ensure that their interests are protected.
Tips for Selecting a Lawyer to Review a Contract
In addition to experience, consider whether the lawyer practices primarily in contracts / contract review matters. While a strong generalist may be able to access the necessary skills and resources when necessary, a lawyer who works primarily in contracts / contract review matters will have greater exposure to the typical pitfalls and common approaches to successful negotiations.
If your matter is really a transaction, you want to work with someone who has a lot of practical experience negotiating agreements and moving them towards final execution. Ask the potential lawyers to provide you with their recollections of similar deals they have closed. If the lawyer cannot recall similar deals (or describes only one or two), then it likely means that contracts / contract review work is not a primary focus for them. In such a case, ask them if they work side by side with other attorneys within their firm who do primarily contracts / contract review work.
Examples of Contract Review Success
Let’s look at a couple examples of when contract reviews saved the day:
1. Employee Contracts for Key Employees
A company recently contacted us to draft an employee contract for their general manager and co-founder. In looking at the agreement, we quickly realized that there were provisions related to vesting of stock that should be updated – but more importantly, the employee contract didn’t actually cover most of his role with the company.
This client came to us just in time, as the general manager was preparing to leave the company to care for his ailing mother. If the timing had been even a week different, it’s possible that the general manager would have had valid legal claims against the employer that could have exposed them to significant damages.
2. Operating Agreements for Sister Companies
We’ve had several clients come to us to look at operating agreements for new LLCs that will be owned by two sisters . It’s undoubtedly common for siblings to start businesses together, and sometimes this can be very messy after the fact. There are a lot of issues that can be contentious between siblings (money being first and foremost) and without a well-drafted contract in place, it is very easy for relationships to sour.
These contracts covered things like who had authority to make decisions, how profits were going to be distributed, procedures for transferring and selling interests in the company (notably, what happens if one of the sisters was unhappy with the partnership and wanted to leave), and more. Although the conversation was really uncomfortable for the sisters, once the contract was finalized they went back to being able to run a business together, without losing sight of the relationships they’ve built over the last 30 years by running this business together.