It's time to cut through the contract legalese. Here are six common contract clauses and how to decipher them.
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Formal legal contracts are often filled withboilerplate--endless paragraphs with indecipherable legalese thatprotects one side or the other against different risks. Lawyersoften say, "The big print giveth, and the fine print takethaway." Because boilerplate can have startling effects on yourdeal, it pays to have your lawyer negotiate it well. Here arecommon clauses to look out for:
- The party-hopping assignment: Deals can be bought orsold--or, in legal jargon, "assigned." Thus, you couldshake on it with a person you like and end up doing business with aperson you don't like. To prevent the other side from sellingyour deal, have your lawyer incorporate appropriate verbiage intoyour contract. Conversely, if you want the right to sell the deal,your lawyer can spell that out, too.
- The integration clause: The integration or merger clauseprotects you from a claim that there are other parts to your dealthat weren't written down, or that you reached an oralagreement to change the written one. It's usually the lastclause in a contract. Here's a simple version: "Thisagreement contains our entire understanding and cannot be changedorally." It's standard and rarely controversial.
- Audit clauses: If your deal entitles you to ongoingprofit or royalty payments, audit clauses will give you the rightto check their accuracy. Frequency of accountings, notices, costsand time limitations are negotiating points.
- Representations and warranties (R&Ws): Ifprevarication is the disease, R&Ws are the cure. These make theother side reduce to black and white that which it promises to betrue.
R&Ws must be custom-designed for each deal. The more complexthe transaction, the more exhaustive the R&Ws and extensive theattendant negotiations. Even though R&Ws flag problems andpromote honest discussion, don't let your guard down justbecause the other side swears everything's OK. In the realworld, their dishonesty will become your problem.
- A notice clause: A notice clause lays out exactly howparties will exchange formal communications, including where, whenand how to send them; when they're effective; and so on. Theyare innocuous until the parties are fighting; then whether noticewas "properly" given can become key.
- Exculpatory clauses: As a general rule, the less you arelegally responsible for, the better. Thus, if the other side hasthe leverage, it will sell you the goods "as is"; haveyou enter the premises "at your own risk"; and saturatecontracts with disclaimers, limitations on liability andindemnities--even placing the obligation on you to buy insurance.It will feel outrageous--until you've got the upper hand andcan stick these clauses to someone else.
A speaker and attorney in Los Angeles, Marc Diener is authorof Deal Power.