Are You Signing Contracts Without Reading Them?

April 16, 2024

Are You Signing Contracts Without Reading Them?

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By Siobhan Williams

Businesses need to enter into contracts all the time, and it can be tempting just to sign them off without reading them.  However, it’s crucial that all agreements are reviewed before you sign them, otherwise you might inadvertently be exposing your business to significant risks.

Here are 3 key reasons why it’s vitally important to ensure contracts are reviewed before you commit to them:

1. Ensuring clarity

You need to be clear on your obligations under the agreement so you know when you have fulfilled them.  It’s also important to check that the terms of the agreement reflect your understanding of what you have agreed with the other party.  Otherwise, you could find that the other party has not clearly represented your agreement – or even moved the goal posts on what you are providing.

2. Identifying key risks and potential liabilities

This is a key issue.  This might include the scope of warranties you are being required to give about your products and services, and might include indemnities on certain issues.  You might also find that there are provisions relating to liquidated damages (such as for late delivery), exposure to unlimited liability if something were to go wrong, or penalties or discounts which flow from not hitting key performance targets.

In addition to those direct financial penalties when things go wrong, also look out for “softer” risks, such as an obligation to offer a rebate on charges over certain order volumes, unfavourable payment terms which might cause cashflow issues and similar risks.

If you are buying goods or services, are you being tied into minimum order quantities at a level you are happy with?  What is your recourse to your supplier if something goes wrong?

Negotiate any key points where you can.

3. Considering termination provisions

Look at your right to terminate an agreement – especially if you are buying in services.  Termination rights are important in all contracts, and you should consider carefully whether the contract you are signing up to has unreasonable or complicated termination provisions.

Contracts in the IT sector in particular often have automatic renewals for lengthy periods, with no easy exit option.  When entering into any contracts with complex exit provisions, you should think about your likely future plans.

If you are supplying goods and services, consider your right to terminate carefully.  In what circumstances can you exit if your customer breaches their terms?  Can your customer walk away from the agreement at any point, and does that present a risk to you?

Not all risks can be negotiated away, but it is important to try to negotiate any key issues to a more favourable position.  Most importantly, it is valuable to understand the terms of the commercial agreement you are entering, so you can make an informed decision.

If you would like advice on your business contracts, please contact a member of our Corporate Team, Siobhan Williams via email on swilliams@darwingray.com or via telephone on 029 2082 9124 for a free initial chat to see how we can help you and your business.