Companies enter into a huge range of different types of contracts every day. These can range from short documents used on a day-to-day basis, to uniquely negotiated and bespoke arrangements.
When reviewing any type of contract, it’s useful to keep by your side a checklist of the possible key issues. Reading the entire contract is difficult, and there are lots of additional distractions and annoyances to deal with. But your review needs a structure. Otherwise, you can end up skipping about within the document, almost at random. A checklist helps to make sure your analysis of the document doesn’t miss any of the key terms.
Obviously, the types of clauses you will see will depend on the type of contract. There will be a significant difference between, for example, a merger or a joint venture agreement, a software license or an employment agreement. But in every type of contract, there are some key issues that keep on cropping up and which you will want to look out for.
Our checklist picks up on the most important themes to consider, and for each theme, the main questions to ask, and items to check. If you’d like to go further and organize your contract review in an even smarter way, we suggest trying out Loio.
Before looking at the contract
- Is there already a contract in place between the parties? If so, could this new business arrangement be dealt with as a variation to the existing contract, rather than as a new contract?
- Are there already any arrangements with third parties (such as an exclusivity or non-compete commitment) that might prevent the parties from going ahead with this contract?
- Are there any conditions, licences or permits that need to be satisfied or obtained before a party can go ahead with the contract?
Get the party details right
- Confirm who will be the parties to the contract and that they are correctly described.
- Are the parties contracting as companies, as a sole trader, or as a partnership?
- For companies, identify the entity’s corporate name, its registered office address and its company number. It’s usually best to check these against publicly available
What will be the term of the contract?
- Is the contract for a fixed term, or a recurring month-to-month type arrangement?
- Does either, or both, of the parties have an option to extend the term? Check the mechanics for when any option notice must be served on the other party.
- Check that the term is correctly defined, and consistent with the other provisions of the contract.
- What are the termination provisions? Can a party terminate any time they want (for convenience)? Are there other defined circumstances in which a party can terminate, such as for breach of the contract, insolvency or a change of control?
Description of the goods or services
- Check that the goods or services that are being supplied under the contract are clearly defined.
- For services, consider describing what is included and what is out of scope.
- If services are being provided, will service levels apply? If so, consider what will be measured, by whom and when.
- For goods, will a simple product description be sufficient, or is a more detailed product specification required?
Variation or change control
- Is there a mechanism to vary the contract during its term?
- Which party can request or make changes?
Delivery or acceptance
- When supplying goods, at what point will delivery occur? Will title and risk transfer at the same time as delivery, or is there a “retention of title” clause?
- Does the customer have a right to inspect or test the goods? Does the contract define any “acceptance criteria” or limit the customer’s ability to reject or return defective goods?
- For services, are there any milestones or deliverables that have to be completed?
Price, fees and payment
- Are the prices or fees clearly set out (or it is made clear how prices will be calculated)?
- Does the price already include the amount of any sales tax? Are there other costs to be added (such as insurance, freight or other expenses incurred by the supplier)?
- How does the contract deal with price reviews and changes during the term? Is the supplier allowed to raise prices to reflect inflation, or if a key input cost changes? Or is there a “meet-the-market” type benchmarking clause?
- Are the payment terms clearly set out? Issues to consider include how much time the customer has to pay after being invoiced, and whether interest applies to late payment.
- Check any provisions that attempt to exclude or cap liability. Are these reasonable (especially when compared to the type of goods or services being supplied, and the price being paid)?
- Are there any indemnity provisions that could affect a party’s liability?
Force majeure events
- Are the parties excused from performing their contractual obligations if they are impacted by events or circumstances beyond their control (that is, a force majeure event)?
- Does the contract allow a party to terminate the contract if the
- Does the contract specify a dispute resolution process instead of litigation (such as internal escalation, mediation or arbitration)?
- If so, is the process suitable for the type of contract?
Data security and privacy
- Will the contract involve the transfer of confidential or personal information?
- If so, does the contract specify adequate data security measures?
- Are the obligations sufficient to comply with privacy laws in the contract jurisdiction?
- Are there obligations on the other party to investigate, report and assist with the notification process in the event of a data breach?
- Are there any other requirements to consider that are intended to ensure the other party performs its obligations? Examples might include personal or bank guarantees, performance bonds, security deposits or escrow arrangements.
Confidentiality and other general terms
- Does the contract contain adequate confidentiality obligations?
- Check that the contract contains all the other usual types of “boilerplate clause” such as governing law, how notices are served, assignment and any limits on subcontracting.
Contract administration – some common types of errors
- Check that all legal writing is clear and precise, and that there aren’t any formatting or other types of error (ideally using contract review software to identify errors that might otherwise be missed).
- Check all defined terms are used correctly.
- Check cross-references have been properly updated and are pointing to the right clause.
- Check names, places, dates and amounts are all correctly set out (whether in words or in figures).
- Who will sign the contract and in what capacity?
- Do the signatories have the authority to sign this contract?
- Are there any local legal requirements to ensure are complied with so that the contract will be valid and binding?
You might have to tailor this checklist to suit your jurisdiction or to cover the types of issues your organization regularly confronts. There is no doubt, though, that having a checklist like this will help make sure you don’t miss any contract terms that could otherwise affect your company.
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