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Tips on How to Read A Contract

Updated: Feb 12, 2022

You've probably signed multiple contracts in your adult life. It's also possible you haven't read any of those contracts all the way through. In a contract, the parties agree on the rights and duties of each other. There are a lot of ways to frame what goes in a contract, but I like to remember the three P's: Parties (who is part of the contract), premises (terms or promises made) and price. Contracts are important documents and govern everything from alarms to employment. Consequently, everyone should have a basic knowledge of legal contracts and agreements.

In a nutshell, aside from the factors required for legal validity, all contracts must:

  • Be absolutely clear in their language. Both sides should agree on what is being communicated.

  • State the agreement.

  • Be complete in terms of addressing all inquiries and foresee all "what if" scenarios.

Most contract lawsuits come from contracts that are not clear, thorough, and that do not express the parties' clear agreement as was initially understood.

Tips to Remember When Reading Contracts

1. Read it.

Don't try to read a business contract in bits or skim through only what you think is relevant. Every clause in the contract can be exploited to your advantage or disadvantage. Even if you don't know how all the parts work together, you should at least know what's actually in the contract. Ask questions if you don't fully understand the terms and their potential ramifications. If you read carelessly, you may miss critical clauses that may later cause issues and leave you open to unwanted disputes and litigation.

2. Verify all parties' identification

Make sure that your name, and your company's name—if you have one—is correctly identified in the contract. Something as simple as having inc versus llc behind the party's name may identify another company. In most circumstances, your company should sign the contract, not you. Indicate if your company has subsidiaries or is a holding company. It is also vital to verify the other party's identification. Sometimes, opposing parties may tell you they put down the wrong subsidiary, or that the correct name of the business is something different than what you understood. This should make you wary, since you may not be contracting with who you think you are contracting. Just make sure you are aware of exactly who—whether it's a person or a company—you are contracting with and that the right name is in writing.

3. Never gloss over boilerplate clauses

Contracts typically include boilerplate clauses. They include direction for resolving disputes, indemnity, secrecy, and others. It is easy to skip over these sections because ‘they’re always the same’, but they should be read through keenly and thoroughly. This is where companies hid terms like whether you can go to trial or if arbitration is required. It's also where they hide a forum or a choice of law clause. That means that if you dispute the contract, you must litigate in a state different than the one in which the contract is made. If anything is amiss, request a change or removal. All contract terms are negotiable.

4. Always seek clarification and explanation

All major concepts should be fully defined. Incomplete or absent definitions leave the window open for dispute. Always ask for clarification with no fear of how you look while doing it. The earlier the better. It's a good idea to put the clarification into the contract so that all the definitions, understandings, and agreements are reflected in the contract. Having your full understanding reflected in the contract makes it more difficult for a misunderstanding to occur or for one party to mislead the other party. Never worry about how long a contract is and how long adding a clause will make it; it's just paper—if you even print it!

5. Check for any missing clauses.

This can be challenging if you don't know all the clauses. However, a good thing to look for is whether there's a term that says that the contract represents the total understanding of the parties. If that clause is present, it means that you can't bring a different understanding to the contract that isn't written down—even if you agree that you can. That means don't make any “gentleman's agreements” about the contract and what it says. You know the rule: If it's not in writing it doesn't exist. If you think that something should be in the contract and it isn’t, make sure that it is included.

Contracts are much like insurance policies; as long as things are okay between you an the other party, you don't need one—until you do! It may be worth the price of a consultation fee to have an attorney look over your contract—just to make sure it says what you think it says. A professional's trained eye can spot something you may not have noticed. This is one instance where it's better to know—than to think you know!

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