8 best practices for reviewing business contracts

Welcome to another episode of Launched & Legal with Dayna Thomas, Esq., entrepreneurship attorney and law firm coach. Launched & Legal is an Atlanta Small Business Network original series dedicated to bringing entrepreneurs and business owners the best practices and tips for strategizing, legalizing, and monetizing their ventures.

If you have questions or comments about today’s show, send Dayna a message or comment on Instagram @daynathomaslaw.

Without a doubt, if you’re presented with a contract, it’s best to work with a lawyer to represent your interests. However, in reality, legal fees may not be in your budget, especially in the beginning stages of building your business. While I encourage you to budget for a business attorney, I’m also going to help prepare you for when that’s just not possible. Knowing that contracts are essential to business, today, I’m going to share a few tips for reviewing your own contracts. Now, please know there’s much more to reviewing contracts than what I’m about to share, but these are great tips to start with.

All right, in no particular order, first I want to talk about the length of the term. Every single contract should have a term, meaning, how long the contract is going to last. So it’s a red flag if you do not see a term. It’s a red flag if it’s not specific enough, right? And it’s also can be a red flag if it’s too long. There are very rare times where I have reviewed a contract that lasts years and years and years, right? Sometimes that’s the industry standard, for example, in entertainment contracts. But in typical business contracts, it really doesn’t last for five years or 10 years. Of course, it depends on the deal, but the longer the contract term, the more risk it is just in case it doesn’t work out. So one, makes sure that there’s an actual term in the contract. Make sure it’s specific, and then also make sure it’s not too long for your specific liking.

All right. Next, I want to talk about the word, perpetuity. Perpetuity is a red flag when a lawyer is reviewing a contract. Perpetuity means forever. There’s just about nothing that should last forever in a contract or maybe even in life, but especially in a contract. So perpetuity is definitely a scary word for a contract. Sometimes it’s necessary. For example, if you are consciously giving up a certain right forever, it might be necessary. But make sure that if you see the word, in perpetuity, in your contract, that you know exactly what is being taking place in perpetuity, what rights you’re giving up in perpetuity, or what rights you’re gaining in perpetuity. We want to know what is tied to that word perpetuity, because perpetuity means forever, and there is rarely anything, especially in a contract that should last forever. So definitely look out for the word perpetuity. It doesn’t mean that you should take it out. A lot of times you should. However, just make sure that what’s attached to that perpetuity and your intention is for it to be forever.

All right. Moving along, the word, exclusivity. Or exclusive, what the exclusivity terms are. Exclusivity in legal terms is the same as what it means in plain English, exclusive, the only one, right? So for example, if you’re seeing in your contract that you are to exclusively provide services to that client, that might be a red flag if that’s not your intention. If you intend to provide services to many other clients, then you want to make sure exclusivity is not in there. Now, in some contracts, exclusivity is important. For example, in influencer agreements, right, or if you’re hiring an influencer to market your business, you do want to have some language around exclusivity because you don’t want them to market your product today and then market the competitor’s product tomorrow.

So exclusivity can be for a certain period of time. It can be for a certain industry, a certain type. There’s many different elements of exclusivity. But when you are looking at a contract and you see the word exclusive, exclusivity, exclusive rights, you want to make sure that you understand what that exclusivity is tied to, how long that exclusivity is, and what it applies to. All right? So exclusivity is essential for a lot of types of contracts, but if you see that word, it can be a red flag, but you also want to make sure that you know what is exclusive and the parameters around that.

Okay. Ambiguity, right? Ambiguity has no place in a contract, absolutely no place in a contract. Ambiguity means that it could be this. It could be that. It’s subjective. Someone reading it might think it means this. Someone else reading it might think it means that. And worse of all, the judge could think it means something completely different. So we do not want to have any contract terms, any contract language that is ambiguous. You want to have a contract that is specific. Specificity makes for a great contract. It also helps to avoid disputes because both parties, if a contract is ambiguous or a term of a contract is ambiguous, then one party could be thinking it means one thing. Another party could be thinking it means something different, and that creates tension.

So there is nothing that is obvious when it comes to contracts. That’s why lawyers are so meticulous, very meticulous, and we define everything. So net profits in your head, okay, that just means all the revenue that is made minus the expenses, right? No, that is not correct, because what are considered expenses? What’s a recoupable expense? Is an expense the gas in your car? Is that not an expense? So it depends. Everything needs to be defined. Even the word expenses, the word net profits, exclusivity.

So if there’s anything in your contract that is ambiguous, meaning that it doesn’t have a specific definition or it’s subjective, or one person can think it means this, someone else can think it means that, you want to avoid that. So anything that you see is ambiguous, you want to change that, redline it, and revise it to be specific. And the way that you make it specific, numbers make it specific, dates make it specific, definitions. Numbers, dates, definitions can definitely help to turn ambiguous terms into specific terms. It will save you a lot in a dispute. Be sure to make sure your contract is specific.

Okay, moving along. Ownership, right? Ownership is in a lot of contracts, especially as it relates to transferring rights or selling rights. It could be content, or it could be some type of tangible property, ownership is super important. A lot of times it plays a part in intellectual property. So you create something, you design something, something that comes of your mind, and it’s manifested in some tangible way. Who is going to own that? So not only do you need to make sure that the ownership terms are what you expect them to be, but there’s actually ownership terms in the contract. So if there’s anything that’s related to someone creating something in your contract, someone providing something, someone giving you something, who is going to own that something, right? It could be a logo, it can be a video, it can be a photograph. Make sure that the ownership provisions in your contract are very direct, it’s specific, and there actually is an ownership provision when there’s something to be owned. There’s nothing to be assumed in a contract, and you want to make sure that it is explicit.

All right? Very important, termination. Now, while we really expect and hope for the best when we have a contract and we’re working with someone to help build our business, those are great times in the beginning of the deal. However, we know that every single deal doesn’t end up in a happy place. So you have to make sure to prepare for that. So what if something comes along where you realize this is actually not the deal for you, or even the person that you’re in a contract with realizes it’s not the deal for them? Can they just terminate the contract by sending you a text message or sending you an email or meeting with you and saying, “Hey, this is not working out. I want to terminate”. Can you do the same thing? A lot of times if someone just cancels a contract or terminates a contract out of nowhere, that can be really detrimental to your business, especially if you don’t have someone else to take their place.

So the way that we avoid that and help with that is specific termination provisions. So for example, how much lead time you have to provide in order to terminate the contract, how much lead time they have to provide to terminate the contract. And it’s not always the same. Sometimes lead time can be 30 days for one party and five days for the other party. It just depends on what’s realistic on what’s being lost if there is not enough lead time to terminate a contract. All right? So make sure that you have a termination provision. Along with that can be a cure period. A cure period means that if someone breaches the contract, do they have a specific period of time to fix that. So look for that in your contract as well. You might not see the word cure period, but something along the lines of being able to fix the problem before the contract is terminated if there’s a breach situation.

All right. Next, governing law. Now, governing law is essential for every single contract. Governing law means if there is a dispute between the two parties in the contract, where is that dispute going to take place legal wise? So if there is a lawsuit more specifically, where is that going to take place? What venue is that going to be? If the two parties, one lives in New York and one lives in California, does that mean that you can be dragged all the way to California in order to litigate that matter? Does that mean the other party has to come to New York? Right? So it’s important to determine what the governing law will be. Now, if you’re in two different states, it’s going to be one of the two states, or you can actually be really creative in determining what the governing law is. Whatever the case is, make sure that your governing law provision is actually in the contract and that it’s in a place that’s convenient for you.

All right? Last but not least, the name on the contract. Okay? So when you are entering into a business agreement, remember it is not a contract between you individually and that other party. It should be a contract between your business and that other party when we’re talking about business contracts. So at the top of the contract, there should be the name of the parties as well as at the bottom of the contract where you sign. It’s very important that the contract is not in your name as an individual. So for me, the contract will not be between Dayna Thomas and ABC Company. It’s going to be between my company and ABC Company. Keep your business assets and liabilities separate from your individual assets and liabilities, and that helps to protect your liability protection. A contract can be an asset, or it can be a liability.

So make sure that it is in your business name, because if there’s ever a lawsuit, litigation, a dispute, we do not want that other parties suing you individually and potentially attaching individual assets that you own. You want to keep your business assets safe from your personal assets. So make sure that when you’re presented with a contract for your business, that it’s your business name that’s on the contract and not your name personally. And if you don’t have a business, let’s just go back to there of forming your LLC. And there’s definitely an episode of Launching Legal that can help.

So I hope this discussion helped you a bit in determining what are the red flags and what you should be looking for if you’re reviewing your own contract. Remember, my primary advice is to hire a lawyer to do so for you. That’s more likely to get you a better deal. But again, I understand realistically with every business owner, especially new business owners, it’s not easy to have legal fees in your initial budget. So this episode should definitely help with what to look for if you’re reviewing your own contract.

So I also wanted to mention that I’m going to start something new. I want to hear from you. I’m going to start a new segment called Quick Legal Question, where you can send me your questions on Instagram. Just send me a message or a comment. I will find them where they are. A message is probably more likely for me to see it, but send your legal question to me on Instagram, @daynathomaslaw. I want to know what’s going on with your business, what specific questions you have, and how I can help you on each episode of Launch and Legal. So don’t be shy. Send me a message, @daynathomaslaw on Instagram, and I will answer your question on air during Quick Legal Question.

Well, I hope today’s show help to educate and inspire you as you pursue your business goals. Be sure to share today’s show with someone who can benefit and visit MyASBN.com and subscribe. If you have any questions or comments about today’s show, I would love to hear from you, send me a message or comment on Instagram at @daynathomaslaw. Remember to tune in next week and every week to make sure your business is launched and legal.