5 critical elements to consider before signing a business contract

I have drafted, reviewed and analyzed hundreds of business contracts through working as an attorney with small business clients. Below are some of critical points which emerge time and again in my work.

I have drafted, reviewed and analyzed hundreds of business contracts through working as an attorney with small business clients. Below are some of critical points which emerge time and again in my work.

1.  Is the compensation clearly defined? Not surprisingly, this is often the key element in a business contract.  Whether it is an employment agreement, creative design agreement or for shared services, each party is critically concerned about how it will be compensated.  A fuzzy definition or incomplete description of the compensation structure often leaps up to cause problem during the agreement.

2. How could this contract affect me or my business after it is over? Although the end may be far off, it will likely come at some point sooner or later. When it does, your business will need to continue to operate without the agreement in place and without the assistance of the party to the agreement. Clauses in a business contract that restrict the use of the  not sure of this word?, who you can contact, or that require your business to come up with a large sum of money at the end of the contract are often onerous. I have found it very valuable to run contract provisions through the filter of “how would this affect my business if I had to live with it for five years?” Will any fee be required from either party in the contract? Will property have to be returned by one party to another under the contract? Will there need to be services provided following the contract termination to allow a smooth transition?

3. Is the method to end the contract clear and subject to execution? If circumstances, other opportunities or simply the passage of time required that the contract end, it is critical for both parties to be clear about how the termination will occur.  The contract needs to contain clear standards for how it can be terminated and what the consequences of termination will be. I have seen far too many contractual relationships end up in court because there was not a clearly defined method of terminating the agreement when one side felt the need to do so.

4. Are you legally capable of doing what the contract requires? You would be amazed how often I have seen businesses or individuals run into contractual issues because they were required to do things they simply could not do. For instance, providing a certain product in a specific quantity, paying certain sums of money at certain times and completing design and development work in a fixed time frame. While the excitement of getting the “big contract” is understandable, take a few minutes before signing the agreement to make sure you can realistically perform the contractual obligations.

5.  Does the contract contain performance milestones that can be quantified and measured? Clear and specific milestones for what each party has to do to perform under a contract are essential. When obligations are not clear, it allows for a party with bad intentions to create trouble and also simply creates issues even with parties that have good intentions. In those situations where payment is conditional upon performance, it is critical that both performance and measurement of performance are written into the contract.   In construction contracts clear deadlines and performance milestones are generally included, however, it is my experience that these types of guidelines do not end up in many other contracts.

Do you have any good stories where one of these items played out in your business?

Posted by Shawn Roberts

I write about and try to answer practical Oklahoma legal questions. I tend to focus on estate planning and business issues. I make a living as an attorney working for Resolution Legal Group in Oklahoma City. I am husband to Amy and the father of Sam and David. We live exactly in the path where the "wind comes sweeping down the plains."