HOW TO READ A CONTRACT
-Swapna Sundar, IP Dome
A contract is a legal document. If you have signed it, you will be bound by the terms and conditions spelt out in the document. It is therefore necessary to read carefully and understand the contract fully before you sign it. Ask for and retain a copy of the contract signed by you and the other party to the contract.
1. Read the contract first by yourself peacefully, quietly and carefully. Keep marking pencils or highlighters in different colours with you and mark all the words, terms, definitions and clauses that you don’t understand in one colour, keywords in another colour and terms that seem unfair or ambiguous to you in yet another colour. Be prepared to spend several hours doing this the first few times. As you get more proficient, it will get significantly easier.
2. Be clear about the parties to the contract. The party who is negotiating with you may not be authorised to sign the contract. Parties may also include successors and assignees. If the parties are designated:“Thiru S., residing at ….CEO of XYZ corporation and PQR consultants pvt. Ltd.”, it would imply that the contract is between Thiru S. and PQRrather than XYZ corporation and PQR. It is better to say “XYZ corporation represented by its CEO, Thiru S.”. Check if you and the person signing for the other side are legally allowed to sign contracts of this nature.
3. Identify the meanings of the terms and definitions used in the contract. Some contracts provide a ‘glossary’ or a ‘definitions’ clause; others may not, in which case it may be essential for you to understand the terms using an external reference. You can also suggest inclusion of a definition clause.
4. Understand how long the contract will last –the ‘term of the contract’, and in what circumstances it can be extended and for how long. Is it automatically renewed unless the parties decide otherwise?
5. Also understand fully how the contract can be terminated before the term of the contract should beincluded. Normally a notice period is also specified. The contract should specify what each party should do and not do after the termination of the contract. For instance, where confidential information is involved, employees may be contractually bound not to take up employment in the same industry in the same post for a limited period.
6. Understand the list of duties and responsibilities to be fulfilled by each party including the modes of payment and schedules of payment.
7. Understand what would happen if either party ‘defaults’ or fails to fulfil their duties either on time, or in the manner in which the performance should have happened. Can the mistakes be cured? If so, how? Understand how to recognise a ‘force majeure’, or a situation beyond the control of either party that makes a service under the contract impossible to perform, such as war between the countries to which the parties belong.
8. Ensure that the subject of the contract – a piece of land, or a portion of your business – is clearly identified in the ‘Schedule’ at the end of the contract. Go over the schedule carefully – twice. ‘Lane’ instead of ‘street’ could make a big difference in the enforcement of the contract.
9. Identify the issues that could go wrong in the new partnership and check to see if those circumstances are covered. Eg. If the ship carrying fresh food does not reach the port within 3 weeks, what is to be done under the contract.
10. Seek an appointment to go over the contract with the other party. Don’t feel hesitant to go over the contract line-by-line with them. Better and longer relationships are founded on good contracts. Ensure that any changes are incorporated in the contract in writing.
11. The negotiator may say some clauses are ‘usual’ or ‘normal’ in their contracts and may ask you to move to other clauses. Don’t take his word for it. Go through these ‘Boilerplate clauses’ carefully. Terms that are normally covered in boilerplate clauses are:
a. Governing law and courts of jurisdiction: if your business partner is American, the contract may say the governing law is of a US State and that the venue of the court is New York. It would bankrupt a small Indian company if they were to fight a case in the US. In such cases, negotiate for shifting the venue to India, or a mutually acceptable venue such as Singapore.
b. Entire agreement clauses: read to see if your contract encompasses all previous agreements between you and the other party.
c. Modifications: Ensure that any modification must be carried out by both parties in writing.
d. Alternate dispute resolution: check whether your contract contains an arbitration or mediation clause and if it does not, then ask for it to be included.
e. Correspondence and notices: ensure that you read and understand who in the other party must receive notices and communication from you.
12. If the contract could make or break your business or endanger your savings, have the contract vetted by and read and explained to you by your lawyer.