You Just Agreed to What? What you need to know about that contract you just signed…

In both our personal and professional lives, we’ve dealt with contracts and we’ll continue dealing with them until the day we die (and a few even after we die…as eerie as that is). Some of these contracts are impossible to understand. They’re filled with legal jargon and seemingly made up words. On the bright side, you’re not crazy – some of these words are, indeed, made up. Heretofore to exemplify said point, the undersigned shall henceforth list examples and anecdotal evidence coupled with necessitated advice notwithstanding the above referenced list of examples and anecdotal evidence used by the undersigned to exemplify said point referenced above. [To be clear, I’m stretching a bit, but you’ve probably read a contract with similar wording.]

So, not only do lawyers love to use our made up language (by the way, we have our own dictionary – seriously, Black’s Law Dictionary – check it out), but we love to repeat it. Here’s the long short of it – it doesn’t make a well written contract and it doesn’t mean you have a good lawyer. In fact, it may, well probably, means you have a lazy lawyer that either ran your information through a software program or simply reused a firm template drafted many years ago by the now senior partner. But I suppose that’s enough of that. I write today to help you target areas of contracts you see every day so that you can help make sure you know exactly what it is you’ve agreed to.

1. Parties: if you’re making a contract for your business, it should say so, and it should say the legal entity name. By the same token, make sure the other has the legal entity’s name. For example, ‘XYZ Holdings, Inc. d/b/a XYZ Ice Cream Shop and Alligator Farm.’ The reason is twofold – (1) to ensure that you aren’t establishing individual liability and (2) to ensure that, should a dispute arise, you have a contract with the actual name of the legal entity. If you only sue the ‘d/b/a or doing business as’ name then you likely won’t be able to collect if you should win (among other problematic outcomes).

2. Term: seems simple right? It is, but make sure you know whether you’ve agreed to some kind of automatic renewal period. The wording will generally state something to the effect that the contract ‘automatically renews for one year unless (either/particular party) provides to the other party notice in writing at least X days prior to the end of the term.’ Translation: if you don’t let the other party know that you don’t want to renew at least X days prior to the end of that year’s term, you could find yourself liable for damages. Not good.

3. Sales Tax: if sales tax is involved, know if you’re supposed to be paying it to the regulatory body or if the other party is; there are some big penalties with sales tax (some CRIMINAL!).

4. ‘Parachute’ Paragraph: ok, I probably made that phrase up just now (I am a lawyer after all), but here’s what I mean. If you want out of the contract early, you need to know the procedure for doing so and you need to know the consequences. Don’t wait until you’ve jumped out of the metaphorical plane to start thinking about what’s going to happen if you don’t have your metaphorical parachute (hint, a lot of frantic stress followed by a bad result).

5. Law and Venue: this paragraph tells you what law is applied to the contract and venue refers to where a dispute will be handled. For example, the contract will often state something to the effect ‘governing law is the law of the State of Florida with the exclusive jurisdiction limited to Hillsborough County, Florida for state court proceedings and The Middle District of Florida for federal.’ If you and the other party are not located in the same area, this can become a big deal. In the example, it means you’ve agreed that the place to file suit to resolve a dispute is limited to Hillsborough County, Florida or the Middle District of Florida and that Florida law applies. If you’re located in Miami (or maybe even out of state), then you may be in for some headaches. Know what you’re agreeing to.

6. Indemnification: this is a bigger deal than a lot of people and businesses realize. Basically, the drafter will stick this beauty in so that he protects himself… at your expense, of course. Now, many times, this paragraph is absolutely appropriate. That said, make sure you read and understand exactly what you’re agreeing to do. These, often very short paragraphs, are likely the product of the most creative of the lawyerly wordsmithing. Take it seriously – it can become your worst nightmare later. Essentially, you could be agreeing to protect the other party from any lawsuits should something go wrong (think car insurance where you’re the insurance!) Before you agree, know what you’re agreeing to – have you done your due diligence? What’s in exchange for this risk? Is this risk worth it?

7. Signing: another biggie – if you’re signing a contract on behalf of your business, sign in such a capacity. You probably spent a lot of time in lawyers’ and accountants’ offices to set up the right form of business so you can protect your personal liability. Why, then, would you turn around and sign as an individual? Sign in your capacity (and, uh-hum, make sure you have proper capacity to be signing!).

As I conclude, let me be absolutely clear that my advice should not be taken as a self-help guide. These tid-bits will help you be engaged in a conversation with your attorney as you review vendor contracts or client contracts or even your lease. As I’ve said before, contracts are a big deal regardless of being written in lawyerly fluff or in plain English. Have it reviewed by a professional. But, for those contracts already signed and filed away, pull them out, dust them off, and take a look at these provisions… What exactly have you agreed to?