A thorough contract review is essential to avoid consequences. In Raffles v. Wichelhaus, [1864] EWHC Exch J19, the parties entered an agreement over the sale of cotton that would be delivered on a ship named “Peerless.” However, there were two ships with that name, and the parties misunderstood what ship the contract terms referred to. The judge ruled the contract void because of the ambiguity. Had the parties written the contract with the precise name of the boat, say for example, Peerless 1 or Peerless 2, then the contract would have protected them from financial loss. Many lawsuits over ambiguous language and overlooked clauses have occurred since then, demonstrating the necessity of good contract review.
With the rise of artificial intelligence ("AI"), many people have turned to their computer for contract review. AI contract review tools are designed to scan legal documents in a short time span to identify key clauses and risks. While powerful, AI is not designed to replace human judgment and cannot understand the nuances of complex contracts. Errors in AI contract review are more common in situations where the AI user is a non-lawyer who does not have the background to recognize contractual issues the AI does not find. Lawyers combine expertise, judgment, and the use of AI to provide clients with comprehensive review, even in the AI age.
Effective contract review focuses on understanding all the obligations and explaining them to the client before they sign the agreement. In practice, this process typically occurs in two ways:
Having a lawyer present to the client a draft contract to obtain the clients’ feedback and approval for final revisions.
The client receives a written contract from another party and requests that a lawyer reviews it prior to the client signing it.
In our experience assisting clients over the years, here are five recurring concerns that frequently arise in business contracts:
Ensuring That the Contract Being Drafted is Appropriate for the Transaction
Effective contract review involves more than identifying missing clauses; it also requires determining whether the contract is appropriate for the transaction. Parties often rely on templates or AI to draft contracts without knowing the legal distinctions between the different types of agreements. For example, hiring a worker under an employment agreement, when the client would benefit from using an independent contractor agreement. Using the wrong type of contract can mislead the parties in a transaction and expend a lot of time and resources into a fruitless endeavor.
Undefined Terms
Like “Peerless” in Raffles, see supra, terms that can be interpreted in more than one way create uncertainty and increase the likelihood of future disputes. Undefined terms such as “Affiliate,” “Company Material Adverse Effect,” or “Expenses” are examples of key terms that require a clear and precise definition. Lack of specificity can result in misunderstanding and a misinterpretation of the obligations of both parties. Ambiguous terms can turn into misunderstandings between the parties and lead to costly legal disputes.
One-Sided Liability Clauses
Contracts are often drafted unequally with one party bearing more liability than the other. Liability is the legal or financial responsibility one party owes to the other. A one-sided liability clause requires one party to endure a substantial amount of risk for damages or losses. The other party remains free from risk. For example, a contract clause may allow a seller to ship the goods while the buyer assumes all liability for the goods while in transit. Such clauses unfairly shift the financial and legal burden onto one party.
Automatic Renewals
Automatic renewals extend a contract for an additional term unless a party provides a notice to terminate within a set time frame. While these clauses can provide convenience, they can also trap businesses into a contract that is no longer needed if deadlines are missed. Failing to act on these clauses can lock a business into paying for services that they ultimately do not need.
Missing Dispute Resolution Sections
Dispute resolution sections refer to the processes that can be used to resolve disputes or conflicts. A contract without a dispute resolution section has no terms that prescribe a method for resolving disputes. When disputes arise, the parties are more likely to litigate instead of resolve the dispute outside of court. Litigation is more expensive, stressful, and time-consuming than parties may realize.
Signing a contract without review is like building a house upon sand. Signing a contract with proper review beforehand is like building a house upon rock. Wandzel’s contract review services help business owners learn the contracts they are entering into and identify risks before they become costly legal disputes.