The speedy contract review checklist

Posted by / September 29th, 2014 / 2 Responses

Last week we blogged about the importance of properly understanding any contractual terms you are signing up to, and ensuring that you are protecting your own business with well thought out and clearly drafted standard terms and conditions.

I was talking with a client this week about my blog post, who admitted that budget doesn’t allow for commercial advice to be engaged every time a contract is being signed. So I thought it would be helpful to blog a quick checklist of key areas to check in a contract, where you are not planning to engage a professional commercial advisor to check it over for you.

Obviously there are many different types of contracts, and the type of transaction and the bargaining powers of the parties will dictate the actual terms. So this list is intentionally generic and not intended to be exhaustive – but it should give you a good starting point of the key areas you must check.

1. Correct party names and details (e.g. registered company numbers and addresses), and correct signatories with authority to sign.

2. Are there any blank areas or drafting notes left in the contract which need completing.

3. Check the basic terms e.g. duration, clear definition of products or services, the all-important price and payment clauses. Will the delivery and payment cycle work for the cash flow of your business? Is it a fixed price, or flexible price, or is there a right to vary price or re-negotiate price or re-negotiate if costs change? What is the method and timing of payment? Is there interest on late payments? What about right of set-off? Above all – does it accord with your understanding of what has been agreed and what your business needs?

4. What are the timings for performance by each party (and are they realistic and achievable?) What are the penalties or triggers within the contract for non-performance (and what risks are attached?) Check carefully what rights arise in respect of defective goods or services, and how they will be dealt with. Are there any rights to suspend supply or performance in the event of non-payment?

5. Identify any guarantees or indemnities within the contract. Ensure that you understand what you are agreeing to. You should try to limit any indemnities (e.g. where you are agreeing to protect the other party from liability or loss). Watch out for “hold harmless” clauses.

6. Locate and check any warranties and representations. You should carefully check the wording, and attempt to limit liability wherever possible, and watch out for any disclaimers or limitations from the other party.

7. Limitations and exclusions of liability – liability to another party can be limited to a specified amount (such as the price paid under the contract). Are these suitable for your business and compatible with your internal policies such as insurance?

8. Check whether the contract makes reference out to any other documents (“Incorporated documents”) because you need to get hold of a copy of them as they will form part of the overall agreement.

9. What are the remedies provisions and work out “what is the worst that will happen if we default on this contract”? Look for ways you can limit your exposure here.

10. What are the rights of termination for each party? How can you exit the contract if you need? What notice will the other party give you if it needs to exit, and what costs will be involved?

11. Check that all dates and deadlines generally within the contract are clear and as agreed

12. Requirements to maintain insurance policies. What is the framework for governance generally, e.g. reporting and compliance activities. There are often hidden costs here and the level of information sharing must be proportionate.

13. If it is a contract for goods – check for transfer of risk (when supplying goods, the risk of loss or damage can be transferred to the other party on delivery so that even if they are destroyed that party must pay for them) and retention of title until such time as payment for goods has been made (it is possible to retain ownership, even if they have been delivered, allowing recovery of them if the other party fails to pay.)

14.What happens in insolvency? – if the other party becomes insolvent, future goods or services may be cancelled without incurring any liability and provide that all outstanding sums fall due immediately.

15. Dispute resolution – what does the contract say about methods of dispute resolution and try and keep this flexible. Consider alternate dispute resolution (ADR) to avoid expense of court based dispute resolution as a first option.

16. Jurisdiction and governing law that will apply to disputes – ideally the laws and courts of England and Wales will apply so you are familiar with the system that will govern disputes and avoid the cost and inconvenience of fighting in foreign courts. If another law is stated you will need to understand more about the risks of agreeing to this.

17. Have fun and don’t forget to use a brightly coloured highlighter pen!