Six “Gotchas” To Watch For In Any Contract

Most people who are about to sign a contract focus only on those terms usually considered “material,” like the start date or term, the price or salary, and the job description (if an employment agreement) or manner of performance.

Here are six deal points to watch for in any contract:

1. Method of termination. Whether it be an employment contract (with a termination for cause provision) or a continuing personal services agreement, most business contracts permit one or both parties to get out if something particular happens. Sometimes, it will be as simple as a provision providing either party to terminate with thirty days notice. Other times, particularly in employment agreements, there may be a provision permitting termination “for cause”, which means that one of the parties participates in some kind of triggering event. Watch for this! It is not enough to rely on the “term” language when you execute an agreement, you need to determine whether the contract contains a “backdoor” provision or “escape hatch” for the other party.
2. Events of default. In an employment agreement, this provision may include anything from “immoral” conduct to an ambiguous violation of the employee handbook. In commercial contracts dealing with the sale of goods, these provisions may be far more nuanced. Look for this provision before you sign! What are some of the things that might happen, other than the obvious (like non-payment for goods, for rent, or for services), that might trigger a default, such that the other party can get out, or sue you for damages.
3. Work for hire. This typically comes up in personal service agreements, whether you are an employee or an independent contractor, and it arises under Copyright law. It’s not a complicated concept, but it seems to always take clients by surprise. In essence, the contract, in this section, provides that anything you do or create while in the employ of your boss belongs to your boss. Make sure you look for this when you are taking a new job!
4. Restrictive covenants. Whether it is an employment agreement or a partnership agreement, restrictive covenants are ubiquitous in commercial relationships. Ordinarily, we call these “non-competes” and, although they usually describe what kind of dealing you can have with a competitor DURING the term of your agreement, they often describe what you can AFTER the term is over. The enforceability of these provisions varies from state to state and from industry to industry.
5. Limitations of liability. Depending on what kind of a contract you are reviewing, you should be careful to watch for language limiting the other party’s liability in the event something goes wrong. It is very typical for a party to use boilerplate language in a commercial agreement, stating that it is not making any promises about whether something will do what it is supposed to do. Frequently, in a personal services agreement, the contract will provide that another party is not responsible for any damage that results from its performance. Watch for this! Think about whether this is something you can live with.
6. Conflict resolution. All good contracts should say something about what happens if there is a dispute. Look for this! Do you give up your rights to sue? Are you agreeing that if you do sue, you will only sue in California (or somewhere else that is impossibly impractical for you)? Are you agreeing to arbitrate instead of filing suit? Don’t go into a contract without knowing what happens when you have to get out of it (or the other side breaches it).

These are just six things you should look for before signing any agreement and, more importantly, a few reasons you should have a lawyer take a look at it for you.

Click here to contact Darrell Phillips for more information about drafting or reviewing your contracts.