Contracts are an integral part of any business, but they are full of costly risks. That's why companies need to check documents carefully before signing.
In this article, we will provide a checklist of eight essential steps that lawyers should follow when reviewing contracts to identify potential issues. From identifying contracting parties and obligations to checking penalties and appendices, we will cover everything lawyers need to know to ensure a smooth and successful contractual relationship.
Why Is It Important to Check Contracts?
- Large companies conclude up to 350 contracts per week, for amounts up to tens of thousands of pounds.
- Errors can cause significant financial losses and lead to unwanted and lengthy litigation.
- There are many details in contracts that are easily overlooked by the human eye.
- An important part of contracting is identifying parts that are sensitive to changes and checking whether any factors can affect the ability to meet obligations.
How to Check the Contract? Step-By-Step Instructions
If you're a lawyer working on the agreement, here are some details that you should pay attention to:
1. Contracting parties
Avoid dubious business connections. Make sure your company's signatories are authorised to sign documents. Run a quick search for beneficial owners and official records. Make sure the registration details are up-to-date and consistent. Finally, look for any risk factors for cooperation, such as bankruptcy, lawsuits, etc.
2. Obligations and payments
Hidden obligations are the main financial risk in contracting. So be careful with numbers and your responsibilities — and make sure everything is written as agreed.
Check the fines and penalties provided for in the contract. Do they correspond to the parties' interests? Penalties should be specific, fair and proportional to the gravity of the violation.
4. Dates and deadlines
Ensure that the dates and deadlines indicated in your document are accurate. This way, you'll complete all tasks and objectives within the expected timeline. In contrast, mistakes can lead to delays, confusion, and discrepancies.
5. Laws and regulations
Legislation changes every day. Check whether your agreement is based on current state rules and case law. Plus, it may be beneficial to keep track of expert opinions and analytics.
6. Contract type and structure
Make sure the document includes all necessary sections and terms. Each contract type has a special structure. In addition, at the request of the parties, they can include non-typical clauses.
7. Insignificant words and numbering
Avoid vague formulations, because parties can interpret them differently. Make sure that there are no references to non-existent points in the text due to numbering errors.
In some cases, an agreement may not include all of the conditions in great detail. Appendices are typically used to clarify any ambiguities or to provide more detail about certain conditions that are not included in the main document. To avoid unexpected obligations along the way, you should pay attention to all the additions to the main document before signing.
The Bottom Line
To avoid costly mistakes and potential legal disputes for their company, lawyers check contracts thoroughly before signing.
Paying attention to contracting parties, obligations, penalties, dates, regulations, contract structure, wording, and appendices can help you identify potential issues. This way you'll ensure that the contract is fair and legally binding.