Before Signing a Contract: What to Look Out For & Red Flags

When you’re about to put your signature on a contract, it’s crucial to pause and ensure you fully understand what you’re agreeing to.

This document, legally binding and potentially loaded with complexities, requires more than just a cursory glance. Here’s what you should look out for, the red flags that demand your attention, and the must-have elements that should be present in every contract you review and sign.

Before Signing a Contract, You Should

Understand Every Clause

Contracts are filled with terms and conditions that can significantly impact your rights and obligations. It’s not just about the broad strokes but the fine print as well. Before signing a contract, you should understand the clauses below:

Scope of Work: Clearly defined tasks, deliverables, and expectations prevent misunderstandings. Ensure the contract outlines what is expected from each party, including deadlines and standards of quality.
Payment Terms: Look for details about payment schedules, invoicing procedures, and late payment penalties. Understanding when and how you'll be paid—or when you need to make payments—is crucial.
Termination Clauses: Identify the conditions under which the contract can be ended by either party. This includes notice periods, any required severance payments, or other termination fees.

Identify the Parties Correctly

Accuracy in identifying the parties ensures that the responsibilities and privileges conferred by the contract are enforceable. Before signing a contract, you need all the necessary personal information, including:

Legal Names: Use the full legal business names, not just trading names. This is important for legal proceedings and financial transactions.
Addresses and Contact Info: Correct addresses and contacts are vital for formal communications, including notices or legal actions related to the contract.

Check for Fairness and Balance

Equity in a contract ensures a healthy business relationship. An imbalance can signal potential issues. Don’t sign a contract before checking for:

Benefit Distribution: Both parties should find the terms mutually beneficial. If the contract seems disproportionately favorable to one side, it may be worth discussing adjustments.
Responsibilities and Obligations: Ensure that the work and risks are evenly distributed. A skewed distribution of responsibilities often leads to dissatisfaction and disputes.

Look for Escape Clauses

Having an exit strategy isn’t pessimistic—it’s practical. These clauses allow you to terminate the contract under specific conditions. Don’t fall for vendor lock in when signing a contract. Instead, look out for:

Automatic Renewals: Understand the renewal process. If the contract automatically renews, know how you can opt out and the notice period required.
Termination for Cause vs. Convenience: Some contracts allow termination only for a significant breach (for cause), while others may permit termination for any reason (for convenience), usually with a notice.

Examine the Dispute Resolution Process

A clear dispute resolution process can save both time and money, for both sides, by avoiding litigation. Before signing a contract, keep tabs on the resolution processes, which may include:

Mediation and Arbitration: These alternatives to court proceedings can be quicker and less costly. Understand how mediators or arbitrators are selected and the process followed.
Jurisdiction and Governing Law: Know which state or country’s laws govern the contract and where disputes will be resolved. This can affect the outcome of any legal proceedings.

Confirm Confidentiality and Non-Disclosure Agreements (NDAs)

Protecting sensitive information is crucial, especially in industries where intellectual property is valuable. If you’re concerned about IP or how your business is being discussed, make sure your contracts include:

Scope of Confidentiality: Ensure the contract defines what information is considered confidential and the duration of the confidentiality obligation.
Exclusions: Most NDAs include exceptions for information that is already publicly known or received from another source. Understand these exceptions to ensure they’re reasonable.

Have Adjustments and Modifications

Flexibility to adapt to changing circumstances can ensure the longevity of a contract and create lasting business relationships. If changes need to be made to the contract, be sure it contains:

Modification Process: The contract should outline how changes can be made, including any requirements for written consent from both parties.
Change Control Mechanisms: For ongoing projects, having a process to manage and approve changes to the scope or deliverables can help maintain clarity and fairness.

Red Flags to Spot Before Signing a Contract

Vague or Undefined Terms

One significant warning sign is the presence of vague or undefined terms, which can create ambiguity and lead to disputes.

For instance, a contract that simply states the need to “design a website” without specifying the number of pages, features, and content requirements leaves too much room for interpretation and disagreement.

It’s crucial that the scope of work, payment details, timelines, and any other essential elements are spelled out clearly to prevent misunderstandings.

Penalties and Liabilities

Another area of concern is penalties and liabilities, particularly when they seem disproportionate to the services or products provided.

Excessive penalties for minor breaches or indemnification provisions that transfer a significant amount of liability to one party can be unfair and should be scrutinized closely. These clauses should be reasonable, reflecting the nature of the breach or the balance of responsibilities.

One-sided Clauses

Contracts that heavily favor one party over another are also problematic, indicating an imbalance that could disadvantage you in the long run.

Be wary of clauses that grant exclusive rights or benefits without offering something of equivalent value in return. Similarly, obligations such as confidentiality, non-compete, and indemnification should, where possible, be reciprocal, ensuring that both parties share in the burdens and benefits.

One-sided Clauses

The absence of a clear termination clause is another critical red flag. Without the ability to terminate a contract under specified conditions, you may find yourself locked into an agreement that no longer serves your interests or is actively detrimental.

A well-drafted contract should specify the terms of the agreement, including any conditions for automatic renewal, and provide mechanisms for termination by either party, whether for cause or for convenience, along with any associated costs or notice periods required.

Before Signing a Contract, Use BetterLegal

Identifying red flags and addressing them before signing a contract can protect you from future legal and financial difficulties, but doing it yourself can take hours, and paying a legal expert can get expensive. Fortunately, there’s BetterLegal Assistant.

BetterLegal Assistant is designed to help small businesses, freelancers, startups, and entrepreneurs navigate the complexities of contracts. Simply upload your contract, and BetterLegal Assistant will:

Extract Crucial Information: BetterLegal identifies key elements like parties, definitions, dollar amounts, timelines, ensuring nothing is overlooked.
Assess Fairness: BetterLegal assesses the balance of core clauses, highlighting any potential inequities.
Uncover Scenarios and Considerations: BetterLegal uncovers potential negative impacts based on your role, offering insights for effective negotiation on important points.
Suggest Options for Adjustments: BetterLegal suggests practical modifications to protect your interests, turning potential problems into solutions.

BetterLegal Assistant turns the daunting task of contract review into a manageable process, saving you time, money, and providing peace of mind knowing that you're entering into agreements fully informed and protected. Before you sign your next contract, consider using BetterLegal Assistant to ensure you’re making the best decision for your business.