A 3-Step Contract Review Checklist For Thorough Evaluation

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While contracts give you legal certainty, the contract review process certainly isn't fun. Every contract term is important, and parties sometimes complicate things more than necessary.

To help you, we've created this step-by-step contract review checklist. Of course, not every contract is the same, and contractual parties have distinct interests and approaches. Still, our guide will cover the essential information, contractual clauses, and some recurring sources of confusion you can easily avoid.

Step 1: Understand the context of the agreement

While written contracts are formal legal documents that can be complicated, the situation they make possible can usually be explained in a few sentences.

For that reason, contracts often have a preamble or recitals, which explain the context of the agreement, give background information, and outline the agreement's purpose.

While this isn't mandatory (and isn't legally binding in most cases), including a contract preamble is a good idea, as it will help with the contract interpretation.

Plus, the preamble is a good place to outline the most important contract elements in less formal wording. Later, it will be much easier to ensure that all of those elements are covered in the contract body.

While this is not a formal legal concept, the 5 Cs of a contract can help you cover the essential elements of a contract review process:

●       Clarity: Both parties should fully understand the contract. While lawyers tend to like using fancy legal jargon, there's no reason to make it complicated if something can be said in plain language while maintaining legal accuracy.

●       Completeness: Step 2: Be mindful of the 5Cs of a contract

The contract is a legal framework that should incorporate the entire situation that led to the agreement. Don't leave anything to be decided later, over the phone, via email, or once you see "how things work". The contract should detail all the most important items, including deliverables, prices, timelines, insurance, scope, and everything related to the arrangement you want to put in writing. While it's true that the contract will be accessed in accordance with its purpose, it's always much better to have things in writing, as it will leave no room for misunderstanding.

●       Consistency: Logic is fundamental in the legal world, so every contract must maintain consistency throughout its text. Contradicting provisions will only lead to uncertainty and, eventually, legal disputes.

●       Correctness: Sometimes, even basic typos can lead to misunderstanding. That's why you should check grammar, facts, and especially legal institutions that the contract mentions and ensure they are aligned with the true will of both parties.

●       Compliance: Contracts need to be in line with applicable laws. Parties, especially in businesses, tend to use contract stipulations to choose laws and legal systems that suit their side of the deal, which is known as forum shopping. If possible, try to select a jurisdiction you are familiar with.

Step #3: Critical clauses to examine

While every contract has its key terms and conditions, here are some of the most frequent clauses that you should carefully examine:

Payment terms

Check payment amounts, currencies, and payment methods. Also, check payment schedules and see if there are any penalties for late payments.

Confidentiality provisions

While NDAs are often separate documents, you can find confidentiality provisions in any type of contract. Check what constitutes confidential information, what the duration of confidentiality obligations is, and if there are any exceptions.

Non-competition and non-solicitation clauses

You want to understand the duration and scope of the non-compete conditions fully. While they prevent unfair competition, they often favor one party, setting unrealistic long durations and broad scopes.

Intellectual property rights

While IP rights often have separate agreements, other contract types can have these clauses. Check who gets to own the intellectual property created during the engagement and whether any IP will be transferred or preexisting IP will be used/licensed as part of the agreement.

Warranties and guarantees

Check what both parties guarantee to deliver, and if there are any stipulated remedies in case of breaches.

Subcontractors

When subcontracting is possible, the contract should clearly define the terms and conditions and hold the parties responsible for choosing subcontractors.

Liability limitation clauses

These clauses can be especially problematic (and sometimes even against the law, depending on the jurisdiction), and you want to ensure that you fully understand any caps on total damage that can result from executing the contract you are about to sign.

Termination clauses

Check how the contract will end, especially if there will be termination for convenience and if any notice periods are required. Also, double-check for any obligations upon termination, such as returning the materials, documentation, and other information.

Governing law and jurisdiction

We have already mentioned forum shopping, which is why it's essential to choose a governing law and legal jurisdiction you are familiar with or to consult lawyers for legal advice about that particular jurisdiction.

Step #3: Identify common legal pitfalls

When reviewing contracts, the best thing to do is to check everything and then check it again. Here are some critical issues to pay special attention to:

●       Ambiguous terms: The first C was clarity, so ensure everything is clear, without room for interpretation. For example, avoid unclear language and vague terms such as "reasonable" and "best efforts" if they are not followed by detailed explanations.

●       Hidden unfavorable clauses: Watch for auto-renewal clauses, one-sided guarantees, and indemnity obligations, as well as unreasonable termination penalties.

●       Imbalanced risk allocation: While it is normal for parties to try to maximize their own risk mitigation, if the contract heavily protects only one party, and especially for excessive liability, even for other parties' mistakes or unforeseen events, the potential risk allocation is not fair and may even be unlawful.

●       No attachments: Sometimes, the contract mentions attachments such as schedules, appendices, exhibits, and statements of work without actually containing them. Always ensure you have them checked, too, as they contain critical information.

Conclusion

Our 3-step contract review checklist will help you cover the most important aspects. But nothing can replace due diligence and careful reading of each clause. If things aren't clear, clarify them, and always ask for help from legal professionals before signing.

If you need professional help, Okay to Sign offers several contract review packages, depending on your situation. But, if you are unsure which approach is the best for your particular case, or need custom contract review solutions, contact us directly, and let us remove any legal uncertainties.