Reviewing Contracts; What you need to know!

When it comes to reviewing contracts, it isn’t always as simple as dotting your i’s and crossing your t’s. Before signing any type of document it is important to read everything carefully, paying close attention to the little things that can often get overlooked. Guiding us through the topic of reviewing contracts, Murray Gottheil and his colleagues at Pallett Valo LLP have developed a list of the most common issues to consider;the following highlights 5. For the full list follow the link at the bottom of this blog.

1. What is the Context?

Context is everything. Before jumping into any contract, consider the following;

• What is the other side’s reputation for honest dealing? 
• How much money is involved? 
• How important is the contract to you? 
• How important is the contract to the other side? 
• How much do you have to invest to perform your obligations or to reap the benefits of the contract? 

• How does the “golden rule” apply? (For those of you who are unfamiliar with the golden rule, it is “He who has the gold, rules”.)

• Interest stated at a monthly rate is not enforceable at more than 5% per annum in Canada unless an annual equivalent rate is stated. The annual equivalent rate of 1% per month is not 12% per annum, but 12.68% per annum.

• Charging more interest after default than before default is enforceable in Canada, unless the contract pertains to real estate, in which case it is not enforceable.

• Non-competition agreements are often unenforceable, but may be enforceable if carefully structured and appropriately limited both in geographic and temporal scope. Whether or not enforceable in court, their mere inclusion may persuade a party not to compete, or a third party not to deal with another for fear of incurring liability to the party in whose favour the non-compete provisions are included in the contract.

• In commercial leases, there is often a restoration clause tucked away in fine print that requires the tenant to restore the premises to base building standards at the end of the lease. This can prove quite costly and many tenants are not aware of the obligation until the lease is terminated.

• In commercial leases there is sometimes a hidden security interest which allows the landlord to register its security and interfere with the tenant’s ability to obtain financing.

• Penalty clauses are usually unenforceable, but if carefully structured may be enforceable.

• In software development contracts, often what is missing is a provision that says that the customer owns the copyright in the software and the source-code and that the developer has waived its moral rights.

• In promissory notes, an acceleration clause on default is often missing. Consideration should also be given as to whether it is appropriate to provide for penalty-free prepayment of the balance owing, or whether or not the note is to be treated as a negotiable instrument.

• In employment agreements, the right to change the employee’s responsibilities or transfer the employee among offices is often missing, as are provisions that address ownership of intellectual property.

• In order to determine what is missing from any particular contract, the best approach is to look at checklists and examples, which are readily available from many sources, including legal publishers and law firms.

For Example: 
Promises such as these raise questions as to specifically how much effort or expense a party is required to devote and what happens if its efforts are unsuccessful; so be sure to read carefully and ask questions if it is unclear.

 2. Tricks and Traps

Contracts have tricks and traps. Here are some of them;

3. What is missing?

The most difficult part of reviewing a contract is identifying what is missing. Watch for the omission of the following;

4. Agreements to Agree

Contracts often have various “agreements to agree” scattered throughout them, and they are not typically legally enforceable. To avoid agreeing to something that you may not want to, or be conscious of, be sure to read everything carefully, and slowly-don't rush.

An agreement to agree on future price changes or quotas in a distributorship agreement or agreements to agree on rent payable during the renewal term of a lease. Sometimes the “agreements to agree” are so fundamental to the contract that they may render the entire agreement unenforceable.

5. What is the level of commitment?

There are some agreements in which the promises made by one party are always stated as "mandatory" obligations while the promises of the other party are always stated to require the party to "attempt" to do things. In acknowledging this, it is imperative when reviewing a contract that you pay close attention to the way it is written-even the slightest change in phrasing can make a huge difference. 

“The Purchaser shall” is different than “The Purchaser shall use its best efforts to” which is different from “The Purchaser shall use reasonable commercial efforts to” which is different from “The Purchaser shall use efforts to”. 

In all, before dotting your i’s and crossing your t's consider the above prior to signing any contract or legal document. Don't get yourself into a bind, be cautious before you sign. 

Read the full list for more advice on reviewing contracts!

For other information regarding Pallett Valo LLP visit their website

http://pallettvalo.com/

Note: Before writing, reviewing or negotiating your own contract, you should speak with a experienced commercial lawyer who can help you navigate your way through these and other issues.