Businesses enter into a series of contracts every year. It could be agreements with vendors, sales contracts with customers, or employment contracts with new staff. The business world revolves around contracts.
A contract is a legally enforceable agreement that defines rights and obligations between the contracting parties. Traditionally, businesses can spend months going through contracts, poring over every detail to ensure they’re not exposing themselves to any unintended liability.
Today, contract management (CLM) software can slash contract turnaround time dramatically—in some cases, from two weeks to minutes. Signing a contract online could make it feel like a less serious affair, but online contracts are valid and enforceable like traditional paper-and-ink agreements, so you should never sign one in a hurry.
Value of the contract and its impact on the business
Some contracts don’t play an outstanding role in your organization. If such contracts are breached, your business can go on unscathed. But some have far-reaching consequences.
For example, a breached contract with a vendor for office supplies isn’t likely to break your business. But an agreement with a supplier of a vital raw material that’s not easily available and is worth $5 million isn’t one you want to take lightly.
Things to consider before signing a contract online
1. Verify the other party
Most business agreements are between two or more businesses. Before signing a contract online, research the company that your organization is dealing with. You need to confirm that the business is duly registered and licensed to operate. In California, for example, businesses are registered with the California Secretary of State. A search with the appropriate government agency will reveal the business’s legal status.
In researching the company, you also want to look at its level of compliance with regulatory agencies and its litigation history. Is it a business that rarely meets its obligation? Are the members also members of an entity that has gone bankrupt? Any of these red flags should put you on alert.
You should also ensure that the contract correctly identifies the parties—their legal names need to be correctly spelled. It may surprise you how many business agreements don’t get this right. An error could make the contract unenforceable by or against any of the parties.
Who is authorized to sign the contract?
Confirm that the person who will sign the agreement on behalf of the business you’re contracting with is authorized to do so.
Usually, the manager has the power to sign a contract on behalf of a limited liability company (LLC). In a corporation, the president is usually the authorized person to sign agreements. However, it’s essential to do your due diligence to confirm that a proposed signatory has such powers.
Businesses often refuse to fulfill their obligation under a contract on the grounds that the person who signed the agreement on their behalf had no actual or apparent authority to do so.
2. Your rights and obligations
Every contract comprises rights and obligations—what your business must do and the rights you can enforce.
Before signing a contract online, it’s vital to look at your obligations under the contract and confirm that they’re the terms agreed upon.
Luckily, CLM software can help track all changes made to the contract, so everyone involved is carried along whenever any party makes an edit.
Sometimes, a contract can reference an external document and incorporate it as part of the agreement. This is called an annex to a contract. You should never assume to know the content of an annex to a contract without going through it scrupulously.
Often, stipulating deadlines for parties to perform their obligation in a contract may be what saves your organization. Without clearly stated deadlines, it may be a hassle to get the involved parties to perform their obligations.
Deadlines put every party in the know about when they should perform their obligation and when they can be considered in breach. It’s vital to ensure business agreements stipulate the deadline for every service to be rendered under the agreement before signing a contract online.
4. Payment terms
In almost every business contract, the price for which a product or service is offered is stated. This is one area you need to look at critically before signing a contract online, especially if the contract is a long-term arrangement and not a one-off.
Business arrangements will last longer when parties are clear about their payment obligations and payments are made promptly. Nobody likes delays in receiving payments for products supplied or services provided.
Often, the terms of payment will include the following:
- The price
- When payment becomes due
- Payment cycle—weekly, monthly, quarterly, or yearly
- Penalty for default
- Provisions for a change in price
You need to make sure the payment terms are favorable to your company before you sign a contract online.
5. The governing law
Businesses in different states and countries can enter into contractual agreements. When disputes arise, it can become contentious to decide which region’s law will apply. Parties can avoid this issue by deciding the state/country law that will govern the transaction.
For example, an LLC registered in Colorado and an LLC registered in Arizona might enter into an agreement that will be carried out partly in Texas and partly in Oklahoma. If a dispute arises, it may be a hassle to decide on the applicable state law. The parties can save themselves time and money by deciding that Colorado state laws will govern the transaction.
So whenever your company contracts with a business registered in a different state or country, it’s important to stipulate which law will govern the transaction.
6. Exit terms
When you enter into a business agreement, you’re not likely thinking about how to end it, but you should.
A lot can change. The market situation can evolve, prices initially agreed upon can become impractical, and your business can expand and outgrow partnerships and agreements that were once perfect.
This is why it’s important when drawing the foundation for a strong business relationship to have a solid exit map in place. In other words, how can a party to the contract terminate the agreement?
7. Dispute resolution
One of the reasons for drawing up and executing contracts is to ensure parties are clear on their obligations and rights.
But oftentimes, there will be disagreements about the parties’ responsibilities. It’s essential to clearly state the steps an aggrieved party can take to seek redress. As noted above, parties need to agree on the court that will have jurisdiction when a dispute arises—especially if the businesses are in different states or countries.
- Place of arbitration
- Applicable arbitration law
- Number of arbitrators
- Duration of arbitration proceedings
8. Indemnification clauses
In commercial contracts, businesses use indemnification clauses to shield themselves from liability for injury caused to a third party. Words like “hold harmless,” “indemnify,” and “defend” are commonly used to draft indemnification clauses.
This is where knowing your company’s internal process will come in handy. Does your company indemnify its business partners or clients? Does your company use indemnification clauses to protect itself?
In any case, indemnity clauses have far-reaching implications and should never be treated with kid gloves.
9. Does the agreement stand or fall together?
Imagine a situation where a contract becomes invalid because one inconsequential part of the agreement was held to be unenforceable. Having a severability clause in your company’s agreement can ensure that the contract will still be valid even if some parts are unenforceable.
10. Know when a confidentiality clause is appropriate
Businesses thrive on strategies and data they develop and acquire over time. Often, trade secrets give a business a competitive advantage.
When your business enters into agreements with other businesses, both parties may become privy to information they otherwise wouldn’t have about each other. A confidentiality clause in your business agreements helps you retain control over how others use the information they gain about your organization in your transactions with them.
Learn more about contract automation
Technology has transformed how businesses create, enter, and manage contracts. However, contracts have retained their nature—mutually binding agreements that govern business relationships.
Contract lifecycle management software can help automate your organization’s contract process, slash contract turnaround time, create a smoother contract experience, and transform contracts from blockers to enablers. Sign up for a free demo.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.
- Value of the contract and its impact on the business
- Things to consider before signing a contract online
- Learn more about contract automation
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