How to read contracts if you’re not a lawyer

The clock continues to tick since the days I was practicing law and as long as the legislators keep legislating and the judges keep judging, the laws will always be evolving.

If you don’t have a legal background (or like me, you have rusty one) it can be tricky to review and negotiate that all-important contract you have secured for your startup. I’ve put together 2 posts with tips to help if you’re going it alone and don’t have the good fortunate to have lawyers on hand.

1. Termination – before I get into it, how do I get out of it?

The first check I always make is to the termination provisions to make sure there is no lengthy notice period or cost penalties to terminate. Or, of course, you might want to make sure both of these are imposed on the other party if there is a big initial resource outlay from your side.

2. Indemnities – handle with care!

An indemnity is where one party makes a promise to be responsible for losses suffered by the other, most usually arising from a breach of contract or warranty. They are widely misunderstood and always give me a headache.

You should ensure that the indemnity is not framed too broadly. I generally would not be happy to accept indemnities that include “all indirect or consequential losses” or “loss of profits”.

You might be comfortable indemnifying for direct business costs incurred by the other party due to your actions, but would you want to pay for the family holiday his CTO had to cancel? An exaggerated example, but you get the idea.

Indemnities are likely to be capped and when negotiating or accepting a cap, be sure it represents the key areas of interest or risk in the contract (e.g. to cover the cost of bespoke work for them, value of goods leased to them). Note as well however, that this cap is only a cap under the indemnity provision. The other party might claim addition damages under a different warranty or contract term over and above the indemnity. To avoid this, additional drafting is needed.

A final point is to check your business insurance. You might think you have indemnity insurance but often insurers include a cap of their own; make sure it is aligned with the cap in the contract.

3. Entire agreement clause – packed the kitchen sink?

An entire agreement clause means the contract is the whole agreement between the parties. Any prior emails or conversations will not be included. This is generally the best position for both sides as it means clarity, but make sure you aren’t planning to rely on emails or other details that think are agreed that didn’t make the final draft.

4. Interest – silence isn’t golden

If the contract does not specify a rate of interest for late payments then unfortunately, this doesn’t mean that no interest in payable. Interest will be payable at 8% above the Bank of England base rate, which is currently 0.5%. This is usually higher than a rate the parties agree between themselves. In addition, fixed penalties can be added to the bill for late payment.

These are implied terms contained in separate legislation. Just to make things even trickier for non-legal eagles, there are terms applicable to contracts by law regardless of whether you specifically include them.

5. Who’s signing the contract? – I just can’t do it captain, I don’t have the power!

Make sure the person signing the contract is authorised to do so. In the case of a company, the signer must be authorised by the company. If I’m unsure, I ask for confirmation by email and push for a reply by email, and, I generally include a warranty to the same effect. The worst-case scenario if they are not authorized, is that the contract is not worth the paper it’s printed on. There are some arguments you can present to counter this, but easier to make sure at the outset.

I’m not a practicing lawyer, so I don’t have to give the usual lawyer disclaimer ‘to take legal advice before entering into a contract’, but you should for really important contracts. If you don’t have the resources, make sure you are crystal clear on point 1. Reading Contracts If You’re Not A Lawyer – Part 2 will cover 5 more pointers, including some tricky terminology and useful terms to consider adding to the contract.