How to Review a Contract

Reading contracts isn’t like reading a novel or a newspaper article. It’s more akin to reading a technical manual. The problem is, where do you start? What should you look for in a draft contract?

Preliminaries: Avoiding Common Mistakes

Misunderstandings when reading contracts can lead to significant errors. Here are some crucial points about contract clauses explained:

1. Express Terms

   The starting point is that the contract means what it says. These are the express terms. Legal interpretation comes later.

2. Unstated Legal Obligations

   If something isn’t mentioned in the contract, it doesn’t need to be done. There’s a possibility that the draft agreement will have implied terms. It’s a fundamental principle that implied terms can’t be inconsistent with the express terms of the contract. However, this shouldn’t stop you from ensuring that the contract explicitly states what each party is meant to do as a starting point.

3. Capitalisation of Contract Terms

   Contracts often have a definitions section. Defined terms are usually (and should be) capitalised throughout the contract. Capitalised terms take their capitalised meaning. When a defined term is used multiple times, it has the same meaning (strictly speaking, this is only a presumption of contractual interpretation).

For example, if the contract says: “The products delivered shall be White”, and there’s a definition that says, “White means red”, the products delivered might need to be red. Or it could be a typographical error. The point is this: definitions set the meaning of contractual terms. It doesn’t then matter what the term might mean in the real world, what the term is generally understood to mean in the industry, or any special knowledge that you might have to attribute a meaning to them. It’s because the parties have made their own dictionary for the meaning of terms in the contract. Those definitions could mean something unexpected.

1. Headings

   Clause headings, such as “Warranties”, “Confidential Information”, “Intellectual Property”, “Limitations of Liability”, and others, are usually used like a street map around a contract when the contract is prepared properly. Contractual warranties are typically placed under the heading for warranties clauses. Clauses dealing with intellectual property are under the “Intellectual Property” heading. However, just because a clause has a title, don’t assume that that’s all it deals with. For example, many confidentiality clauses also address other issues. You need to read the entire contract closely.

2. Long Paragraphs and Sentences

   There’s rarely a good reason for long paragraphs, although in some countries, it’s customary. These are the ones that stretch into upwards of, say, five lines in a single sentence. Lots of things can be buried in those sentences, making it easy to miss something important. When editing, you can break the paragraph up into shorter paragraphs and maybe shorter sentences, making it easier to understand. It’s not a matter of style when it comes to your legal obligations; it’s a matter of understanding the contract. The words used in the contract should convey the intention clearly. This will also make editing easier. The wording of the contract needs to be clear.

3. Incorporation of Terms

   Watch out for references to documents which aren’t sent with a draft contract. You need to read these too before you sign. If they’re not provided, ask for a copy. This includes schedules, annexures, policy documents, and anything else. They’ll likely form part of the contract and affect the legal obligations.

4. Boilerplate Clauses

   Boilerplate clauses are usually dismissed as standard clauses that do little or aren’t worth much attention. However, they are not minor or trivial. They affect how the document is interpreted, how legal rights are applied, and alter how the general law applies to the contract. Don’t think that all boilerplate clauses that look the same are the same. They’re usually carefully worded, and their legal effect depends upon the precise wording used.

5. Rights of Suspension

   There’s no right to suspend performance of a contract unless the contract says so expressly. For instance, if you don’t get paid and decide to stop providing services or shipping goods, you’ll probably be in breach of contract unless you have an express right to suspend work in the agreement. Similarly, if you don’t cooperate with a supplier under a contract, you may find yourself in repudiatory breach of contract of an implied term. There is no common law right to suspend your own performance; it needs to be an express term in the contract.

6. Agreements to Agree / Contracts to Agree

   Watch out for clauses that say or have the effect of agreeing to agree on something in the future, like: “The charges payable by the customer for services shall be mutually agreed” or “The parties shall agree the service levels to apply to the contract.” They’re not legally binding unless a dispute resolution clause or arbitration clause exists in the contract. The dispute arising from the absence of agreement is resolved through the process set out in those clauses, or in exceptional circumstances. To avoid agreements to agree, the wording should be changed so that whatever is to be agreed is agreed upon in the contract itself, not after it is signed.

7. Overlooking Clauses & Ambiguity

   Every clause in a contract will be given legal effect where possible. Courts work hard to prevent one clause from “cancelling out” another clause. The starting point is that all clauses were included in the contract for a reason and have their own distinct purpose. So you can’t simply ignore the legal effect of any particular clause within the contract, especially when different clauses conflict with one another. They can say the same thing differently or say the complete opposite. Leaving such ambiguity in a contract is asking for trouble and will hurt you when you need to rely on the contract most. Edit out the ambiguity or inconsistency.

By adhering to these guidelines, you can better navigate the complexities of contract agreements, ensuring a clearer understanding and stronger legal footing.

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