A non-lawyer’s cheat sheet to contract review
Credit to Author: KARLA MESINA| Date: Fri, 25 Jan 2019 16:19:55 +0000
When dealing with contracts, lawyers are notorious for their obsessiveness, paranoia and pessimism. We may forcefully insist on writing a clause a certain way, in a specific place within the contract, for very particular reasons.
This overzealous attitude is explainable. Lawyers are trained to be their client’s primary line of defense against contractual liability, not the last. We spend most of our professional life digging through and making sense of documents that nobody else wants to read, so we are the first to spot the provision that may cause you to transfer ownership of intellectual property for free, or to pay millions of pesos in penalties.
Engaging a lawyer to review your every contract may not be ideal if you are a small business owner on a tight budget. While you will definitely benefit from competent and timely legal advice, you can hack that lawyer-like approach without spending too much.
When faced with a new contract to review, ask yourself two questions: Do I understand this document fully? and Does it serve the business purpose I am aiming for?
A contract is a story that answers the 5Ws and 1H, just couched in legal format: who, what, when, where, why, and how. You must be satisfied that these points are covered in your contract. If anything is missing or unclear, go back to the negotiating table and ask your counterparty to agree with you on a provision that will fill the gap.
Although there are business contracts that require specialist knowledge and technical jargon (like construction contracts or technology transfer agreements), most contracts can and should be written in plain English. A clear contract written in layman’s language is easier to enforce in court because it does not need any legal interpretation. Any Juan who can read it can tell you what it means.
More importantly, understanding your contract will guide you on what to do when a party fails to perform its obligations. Are you entitled to claim liquidated damages, interest and/or late payment fees? Should you bring up the dispute with an arbitrator first, or can you go directly to court? What are the instances by which you can be declared in partial or complete default?
There may be formal legal requirements that only a lawyer can do, such as notarization, but that’s icing on the cake now. You’ve already studied your agreement from top to bottom, and no longer need to consult him or her on any provision.
On the other hand, you must also make sure that there’s a good fit between your written agreement and your intended purpose. In the context of a business transaction, your contract is both a legal and a commercial document. You are in the best position to set the commercial target of the contract, so take the first crack at making that target a reality.
Don’t be scared to write down lofty goals in the contract, but be realistic, too. For example, if you’re a toy manufacturer, don’t bind yourself to deliver 10,000 pieces of toys in 30 days if your factory can make only half that number—unless you have backup plans like expanding the production line or subcontracting another entity to churn out the other 5,000 pieces. You want your business to stabilize and grow, not get mired in debt or be ruined by an unfulfilled order. That means understanding how your contracts can best support your business plans.
Finally, depending on your particular transaction, you will need to place safeguards that can help you manage risk. This can be a pre-termination clause that allows you to cut the contract short at any time for good reason, or a bond the other party must put up to guarantee complete and timely delivery of your purchase.
If, despite thorough self-review, you are still unsure whether your contract promotes and protects your interest, it’s time to call in the experts. Your lawyer’s fees will be chump change compared to the potential costs of a shoddy legal agreement.
Remember that a contract has the force of law between the parties. The court will not step in to rewrite or invalidate it unless it is contrary to law, morals, good customs, public order, or public policy. Lawyers know this by heart, and will strive to craft a contract that will uphold both the law and your business.
Atty. Karla Eunice T. Mesina is the General Counsel of First Circle Growth Finance Corp., a fintech company offering trade-backed credit to SMEs through a fully-online platform, www.firstcircle.com. Karla received her bachelor’s degree and graduated Cum Laude from the Ateneo de Manila University, and obtained her law degree from the University of the Philippines. She may be reached via karla.mesina@firstcircle.com or LinkedIn.
The post A non-lawyer’s cheat sheet to contract review appeared first on The Manila Times Online.