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If you are in business, then you will need to enter into legal contracts on a regular basis. Unfortunately, many businesses do not take basic precautions before you sign a legal contract. Below, we outline some steps to take before you sign a contract. Some of these steps may seem obvious. However, it can be quite common for these simple steps not to be followed, creating risk for your business.
1. Read It!
This is the most obvious step. Unfortunately, too many business owners either decide to sign contracts without reading them, or simply gloss over the ‘boring bits’ of the contract. By doing this, you will often overlook crucial details, including details about your obligations, the type of liability you may have in the contract or even errors in the commercial terms.
You should read every contract you enter into from start to finish so that you know:
- exactly what to expect from the contract;
- what each party’s role is within the contract; and
- your rights and obligations, so that you can prevent issues from arising and are equipped if an issue does arise.
Reading your contract also allows you to seek advice when you do not understand something.
2. Be Careful with Representations and Warranties
Many contracts include representations and warranties that one of the parties makes to the other.
Representations are claims or statements made by a party before they enter into a contract to assure the other party before signing the contract. They are often included as a contractual term the ‘receiving’ party is entitled to rely on. Therefore, if the representation ultimately transpires to be false, this can represent a breach of the contract.
If you make incorrect representations or warranties, you automatically breach the contract before it even begins. As such, it is important you only make correct representations and warranties. Many poorly drafted contracts have representations and warranties that are either clearly incorrect, are ambiguous or are not reflective of the type of arrangement between the parties, so be sure to check these before signing.Continue reading this article below the form
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3. Make Sure You Can Comply with the Ongoing Terms
The next step is to make sure that you can actually comply with the ongoing terms of the contract. This includes obligations like:
- payment terms;
- deadlines for delivery;
- whether any updates or reports are required; and
- whether there are limitations on how you can receive or provide goods or services.
You should think about whether you can uphold your end of the bargain, not just now but in the months and years to come (dependent on the term of the relevant contract). A legal contract is a serious document. Therefore, you should enter into it only after determining whether you can comply with its terms.
4. Check Your Termination Rights
Most contracts will operate for a set period of time specified in the contract. The operative length of the contract may vary depending on the type of contract and the intention of the parties. As you will be signing a contract for a specific or potentially indefinite period of time, you should check what right you have to end the contract early, if any.
Many contracts include limited or unbalanced termination rights, which can become a huge issue where one party wants to exit the contract. As such, you should review all termination rights provided to you and ensure you are comfortable with the circumstances which allow you to exit the contract and the circumstances which allow the other party to exit the contract.
5. Make Sure You Are Authorised To Sign
If you sign the document on behalf of a company, you need to make sure you are authorised to sign the contract.
Suppose you are not a director of the company. In that case, you may need to be authorised by a company power of attorney to sign documents on behalf of the company. If you sign a contract and are not authorised, then the contract may not be valid. This is a common mistake, so make sure you check you are authorised to sign first!
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
6. Have a Lawyer Review the Document
We strongly recommend having a lawyer review any important legal contracts. A good commercial lawyer should be able to complete a review for a reasonable fee.
Having a lawyer review the contract means:
- you have the peace of mind that a lawyer has completed a review;
- you will have a better understanding of the contract you have signed;
- a lawyer can answer any questions or concerns you have and help with any interpretation issues;
- you will be aware of anything unusual;
- you have a representative who understands the contract if you decide to negotiate some terms with the other party; and
- you will also benefit from the lawyer’s professional indemnity insurance if there is a problem down the track.
You should take these six simple steps before signing a contract, as you will save yourself a lot of money and trouble in the long run.
If you have any questions about your contract, our specialist contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Make sure you read the contract’s terms and ensure that you can meet your obligations. Additionally, it is always wise to seek legal advice before signing on the dotted line. After all, a contract is a legally binding document. Entering a contract without reading and understanding the entire agreement could be disastrous for your business.
Generally, directors are authorised to sign a contract, so if you are a sole director, then you likely are authorised. You may need other directors to sign if there are multiple directors. If you are not a director, you will need power of attorney to sign on your company’s behalf.
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