How can I understand a legal contract and what are the risks if I don't?
Even though contracts can be long and difficult to understand, it is critical that you read them, and sometimes multiple times. It can be helpful to make an outline, summary, diagram, chart, or flowchart to illustrate your understanding of a contract. Lawyers frequently outline or summarize contracts for easy reference, and find these can also be helpful as a negotiation tool.
When making a contract, you may want to define specific or important words and phrases so that they cannot be misconstrued. If there are words that you do not understand, take the time to look them up, or try to negotiate changing the language so that it is understood by everyone involved. Lawyers frequently start from form or sample business contracts, then change the terms and update the language so that their clients will understand and be able to follow their agreements.
Ambiguity or unclear language in a contract can cost you time and money, and damage your business. If you do not understand a contract, or make a bad deal, you may end up having to face the legal consequences, which typically involves paying whomever you contracted with for the value of the contract, their lost opportunity, or an amount predetermined by the contract.
What language do I want in every contract?
Nearly every contract will identify who is making and signing the contract, what the contract is for, and who is paying how much and when. Apart from the basic who, what, when, and how much, the rest depends on the deal you are making, and how much legal protection you want.
Generally speaking, avoid vague language, language you do not understand, and be as specific as possible. Some common contract terms you may want to consider include:
- Payment schedules: This can help make how much and when exceedingly clear.
- Timetables: Provide clear expectations for delivery of goods or services.
- Automatic or optional renewal: Makes renewing agreements easy, often with pre-negotiated updates.
- Ongoing arrangements: Formalizing ongoing agreements to buy, sell, or perform services can keep everyone on the same page.
- Dispute resolution: Requiring mediation, or having a predetermined dispute resolution process can reduce the costs of fighting over legal disputes.
- Liquidated damages: When a contract violation or breach is clear, liquidated damages create a financial penalty for those breaches.
- Confidentiality: To keep some contracts, or information, out of the public eye, or your competitors hands, you may want to insist on confidentiality, or nondisclosure.
- Attorney fees and legal costs: To disincentivize questionable legal disputes from being pursued, terms requiring the loser of a court battle to pay the winners attorney fees and legal costs can be rather effective. These can also make enforcing agreements much easier as well, as the financial penalty for breaching, or violating, a contract can increase drastically.
- Choice of law or venue: This explains which state's laws will be followed, and which state or federal court will hear legal disputes, if a court action is required.
Most states require certain types of contracts to be in writing. These generally include:
- The sale of land or a home.
- Goods or services for $500 or more.
- Agreements that may last for more than one year.
- Agreements to take on another person's debt.
- Agreements from an estate executor to personally cover a debt of the deceased.
If you are considering entering into a contract without anything in writing, reach out to a Rocket Legal Pro™ for affordable legal advice.
How do I determine if a contract is unfair?
Some contracts may contain terms that are unfair, but unless a person is taken advantage of, or lied to, those unfair terms may be enforced by a court. This means that before you sign a contract, reviewing it and researching the terms is a critical step.
For many types of contracts, you may determine whether it is fair based on the price, timing, and goods or services being provided in the market or industry. If the prices or timing are better than expected, you may want to confirm that you are on the same page in terms of details, such as materials or quality.
For example, if you are negotiating a contract from a disadvantaged position, such as not being allowed to make a counteroffer when signing up for a new mobile phone plan, then you may need to walk away from the deal if it is not acceptable.
Knowing whether a contract is unfair takes industry research or industry experience, or both. Asking a lawyer to explain what various parts or terms of a contract mean can help you learn how to evaluate those same parts in the future.
How do I prepare for a contract negotiation?
It may take a few rounds of negotiations to reach a final agreement. In order to prepare for a contract negotiation, understand that an offer you make can prompt a counteroffer, which can prompt another round of offers, and so on. In other words, in some contracts, any term in the agreement may be subject to negotiation. Only you know what you will accept in a contract, so it may be smart to keep your bottom line to yourself.
To get ready for a contract negotiation, legal experts suggest preparing:
- A firm bottom line so you know when to walk away from the negotiation.
- The ideal terms that you will agree to right away, such as a price.
- Strategic and flexible terms, such as timing.
- Anything that can be used for leverage, such as competing offers.
- A summary of the other side's take on all of the above, to the extent you know.
When preparing your leverage and terms, it can be beneficial to use data to support your terms. If you get push back, you can use that data to support your terms, such as current labor or materials costs. With the right preparation, you can confidently negotiate the best contracts for your business.
If you have more questions about, or want help reviewing and negotiating contract terms, reach out to a Rocket Legal Pro™ for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
