How To Read and Understand a Contract
Contracts are a very common occurrence in everyday life. Chances are, you will probably need to sign an official contract — or several, or many — at some point in your professional or personal life. Odds are the reason you’re here is that that day has come, and we’re excited you came to us for hard and fast tips on how to understand read and understand a contract.
Contracts are important because they clearly outline the parameters of business relationships, including who owns the work performed, payment terms, length of the agreement, and so on. But not all contracts are written to be fair to both parties involved. That’s why it’s so important to be able to understand any contract you encounter before you sign it.
Below you’ll find 5 tips for reading and understanding a contract, plus red flags to look out for along the way. Good luck!
1. Never Accept a Verbal Contract
If someone tries to get you to accept a verbal contract, always refuse. For your own security, you need to make sure you get a hard copy of any contract you enter into. Even if you’re agreeing to a relatively short or low-paying job, you should never settle for a verbal agreement.
2. Read the Contract at Least Three Times
Once you have the contract in your hands, commit to reading through it at least three times before you sign it. Yes, this may seem like a torturous thing to do, but you’re bound to miss something during your first one to two passes over the document.
To make sure you’re getting the most out of your read-throughs, make the following goals for each one:
- First read-through: scan the document to get a general idea of what’s in each section and how the contract is structured.
- Second read-through: Use this opportunity to go through the contract with a more thorough eye. Read through the defined terms to make sure you fully understand what you’re reading. Make notes of any observations or questions you have while you read.
- Third read-through: This should be your most careful read-through yet. Focus on anything that’s important to you, such as payment provisions and ownership of any content or materials you deliver.
If any portions of the contract seem unfair or questionable, check with your lawyer before signing. You want to make sure you’re getting into a good situation that will benefit both you and the other contract signee.
3. Ask Questions if You Don’t Understand Something
If there is anything in your contract that doesn’t make sense, don’t sign until everything is clear to you. This may require reaching out to the person who sent you the contract and asking for clarification on certain portions of it.
Beforehand, you may want to do a quick search online for the specific thing you don’t understand. If concerns or questions are cleared up after that, you can proceed with signing. If things are still uncertain to you, it is the responsibility of the person who sent the contract to make sure everything makes sense before you sign.
4. Understand What May Be Missing
Looking for something(s) that may be missing from a contract is much more challenging than analyzing things that are clearly in a contract. But the more you get used to how contracts are structured, the easier it will be to see if something important has not been included.
To see what might be missing, consider all the things that could potentially go wrong when working for a new company. Then, make sure you are offered adequate protection in the contract if such an event should occur (no matter how improbable it may be).
5. Read any “Other” Documents Referenced in Your Contract
If a contract references any “other” documents that are not explicitly included in the contract, you had better read through those external documents. Request any documents that are referenced within the contract and read through them very carefully before signing the original contract.
Be sure to also watch for any language that gives the other side complete control and discretion to unilaterally change any of the “other” documents mentioned in your contract. If the other side maintains this control, make sure the contract includes a provision that you can terminate the contract at any point if the other party makes changes to which you don’t agree.
6. Be Aware of Common “Red Flags” in Contracts
When reading through a contract, watch for common “red flags,” or indications that you may not want to sign. These red flags include:
- Exclusivity requirements on the part of one or both parties that would prevent you from working with other businesses.
- Prohibition of sub-contractors. You may rely on sub-contractors to help you get your work done, so you would obviously not want to sign a contract that prohibited you from doing this.
- Liquidated damages provision in the event the contract is breached. Read over any liquidated damages information carefully when considering whether or not to sign a contract.
- Most Favored Nations clause, which requires a party to offer the same prices, services, etc. to the party signing the contract as they would to any other party.
Once you’ve checked a contract for all of these items, you’ll have greater confidence in your understanding of any contract given to you. At this point, you will need to decide whether or not to sign, based on the contract details and how forthcoming the other party seems to be.
To learn more about contract creation, contract management, and more, check out the Malbek blog or The Contract Lens podcast series.