How To Read Contracts: Everything You Need to Know
Small business owners will often operate without formally documenting terms and understandings.3 min read
If you are unsure how to read contracts, it is imperative that you ask for clarification. Understanding what you are reading is critical when signing any agreement. Due diligence at this point can reduce your risk of future complications. Whether you are entering a business deal or signing a mortgage document, make sure you understand all of the written terms and conditions.
How and When to Write Business Contracts
Small business owners will often operate without formally documenting terms and understandings. In contrast, when writing a contract, the parties have an opportunity to:
- Clearly define their obligations and expectations
- Reduce overall liability
- Present desired payment terms
- Divide associated business risks
- Ensure that each party understands their personal responsibilities
Before you create a contract, the first step will be to create a contract that ensures both parties are talking about the same terms or "deal." That way, when each party goes to sign the contract itself, they are confident that they are in agreement.
Have Some Quality Alone Time with Your Contract
When reading your contract, it is recommended that you do so alone. When you do not take the time to fully review your contract, you may miss something important. If you're alone, you will not feel rushed and will be less likely to make mistakes. This is particularly the case when you are making a large purchase.
For example, when signing mortgage paperwork, you should request a copy in the mail before your signing date. If you do not, you can expect to be in your mortgage broker's office for several hours. When buying a car, you may be required to sign on the spot. Always request some time to read the contract without any distractions.
Always remember, you are the one spending the money. Do not allow anyone to pressure you and always ensure you know exactly what you're signing. Go through your contract line by line and if you have any questions, write them down so that you can address them fully.
Agree on Definitions
All terms in your agreement must be clearly defined. When it comes to difficulty in contracts, issues generally arise from missing or incomplete definitions. There has been a case where an unclear definition of "overhead" resulted in a lawsuit over payment terms. If you have any doubts and your questions are not answered, be prepared to walk away.
Don't Assume — Ask for Clarification
When it comes to contracts, assumptions are the most challenging component. Even if you think you know what you are reading, always ask for clarification. Do not ever worry about appearing difficult or unintelligent. It is always better to clarify then and there instead of having to deal with potentially severe consequences in the future.
If the contract states something that could potentially contradict what the other party is saying, then you should ask questions. After all, the whole point of a written contract is to ensure that there are no verbal misunderstandings. If you find that the contract is far too complex, request a contract that is stated in simpler language.
Ask "What is Missing?"
Although it is important to focus on what is potentially missing — this can be rather tricky. After all, how do you know what should be in a contract but is not currently included? A great example is employment contracts. In this case, there should be a clear section stating possible termination guidelines. If you do not see any terms related to when and how an employee can be terminated, it's important to ask.
Regardless of the type of contract you're dealing with, it's best to think of it like this. Simply imagine all of the things that could go wrong. Now, draft up a contract that will prevent future conflict. Proposed methods should also be outlined in case conflict occurs.
So remember, whenever you are signing an important document, always take your time and ask the right questions. When you take a proactive approach, you can avoid being reactive in the future. To avoid any conflict, be sure you understand everything that is written and if you do not, never hesitate to ask for clarification.
If you need help understanding how to read contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.