Beware of Short Contracts: What to Look For

As a party in a contract, it is imperative that you are aware of essential terms to look for (and avoid) prior to signing in order to best protect your interests. Such terms include, but are not limited to, attorneys’ fees, dispute resolution, default, termination, and personal guarantees. As a pro tip, you should NOT be signing important contracts that are a mere three pages long. Having an attorney draft, read, and approve your contract before it goes into effect can help you protect your legal rights and save you countless dollars down the line.

5 Green Flags to Look for in Contracts:

1. Attorneys’ Fee Clause: Litigation can be extremely expensive and even prevent a party from bringing suit in the absence of an attorneys’ fee clause. An attorneys’ fee clause can make litigation possible and reward attorneys’ fees to the prevailing party upon litigation.
2. Dispute Resolution Clause: A dispute resolution clause in a contract outlines how parties can resolve conflicts. Examples of this include a party waiving their right to litigation and mandating arbitration. A dispute resolution clause can even outline the jurisdiction where a party can bring suit.
3. Default Clause: A default clause in a contract outlines consequences for when a party fails to fulfill their obligations under a contract. A default clause is essential in outlining the responsibilities of each party and ensuring they are upheld.
4. Termination Clause: Termination clauses outline the method for parties to terminate their agreement without breaching the contract. For example, a termination clause may require a party to provide 30 days written notice of termination. Additionally, termination clauses are beneficial in preventing unfounded litigation.
5. Personal Guarantees: Assigning a personal guarantor is beneficial in contracts that concern the transfer of large sums of money. By assigning a personal guarantor, a person legally undertakes the liabilities and obligations assumed in a contract. While the personal guarantor assumes a risk to their personal assets, a lender is rest assured that their money will be repaid. It is important to note that some personal guarantees need to be witnessed and notarized depending on the lender in order to not be void. 

5 Red Flags to Look for in Contracts:

1. Missing or Incomplete Information: A sophisticated contract is essential in enforcing its validity during and after the contractual period. Therefore, a contract should incorporate all important details and information relevant to both parties. Additionally, a contract should be properly formatted and not have large blank spaces. 
2. Unfair Terms: There should be sufficient consideration in a contract to ensure a mutually beneficial agreement. Contracts that drastically favor one side over another should raise concerns of an unfair deal.
3. Ambiguous Language: Ambiguous terms can lead to dispute over the meaning of a contract and lead to expensive and unnecessary litigation in the future. A good rule of thumb is that the longer contracts are, the better. It is best to be confident that all relevant areas are laid out specifically and in detail.
4. Non-Compete Clauses: While common, non-compete clauses can be extremely restrictive and oftentimes unfair to the signing party. However, the FTC banned non-compete provisions in employment agreements set to be put into effect on September 4, 2024. While not applicable to senior executives, the new FTC ban will release approximately 30 million people from their non-compete agreements.
5. Pressure to Sign Quickly: If a contracting party is pressuring you to sign an agreement quickly, this may be a sign that the agreement may not be to your benefit. Don’t let the pressure stop you from consulting an attorney to evaluate the contract before signing.