Contracts and the Value of Contract Review by an Attorney

In some business deals, the value of an attorney's contract review cannot be overstated.

Businesses rely on contracts every day for parts, supplies, and services that are essential to their operations and financial success. Contracts establish the benefit of the bargain to be received by each party, define the relationship between the parties, set terms, obligations, and conditions, and protect each party’s interests. But contracts are also subject to well-established legal principles, and to be enforceable, contracts must be drafted to leverage these legal principles while also meeting the needs of the parties. Although some contracts are straightforward or fall under uniform commercial rules, many contracts are unique to the needs of the parties and can be complex, detailed, and lengthy. This is where review by an attorney is invaluable before entering into a contract.

Real-World Examples

Here are a couple of examples of situations where a review of the contract would have been beneficial:

• A commercial roofing business enters a contract to install a roofing system on a long-term storage facility. The roofer agrees to install the roof using a design that includes a ventilation system. After installation is complete, the storage facility owner refuses to pay because the installed ventilation system does not follow the design specified in the contract. The system as installed performs as well as or better than the specified design, but the contract makes no mention of whether an equal or superior ventilation design can be provided. An attorney reviewing the contract would have identified the potential ambiguity and recommended ways to clarify the contract.

  
  

• An individual, Max, is a member of a limited liability company and owns a 20% interest. He agrees to sell his interest to another person, Gloria. Max and Gloria agree to terms for Gloria’s purchase of Max’s ownership interest that include a promissory note and payments over one year. Max and Gloria sign a contract stating that the promissory note will have a principal amount of $10,000, with interest at six percent. The contract states that the promissory note attached as Exhibit A to the contract will be used, but the attached promissory note states the principal amount is $12,000 and interest will be calculated at ten percent. After she discovers the inconsistency, Gloria objects to the signed promissory note because it differs from the contract language. An attorney would have identified the inconsistency and recommended changes to the contract.

The Value of Contract Review by an Attorney: Safeguarding Interests and Avoiding Expensive Litigation

Contracts are essential building blocks that can significantly impact a business’s success. A well-drafted contract will protect the business’s interests and promote smooth operations and financial success. If the contract is poorly drafted, the enforceability of the contract can be challenged, and ambiguous contract language can result in confusion and conflict between the parties and potentially lead to expensive litigation. Here are some reasons why contract review by an attorney can be crucial:

1. Identifying Potential Risks. Transactions often involve exposure to risks that may come up during performance of the contract, such as damage to goods during transportation or an injury to a third party. Other risks of contracting relate to hidden clauses or unfavorable terms, such as one-sided indemnification clauses or a requirement that a lawsuit can only be filed in the other party’s state. By understanding the transaction and the law of contracts, attorneys can identify these potential risks and recommend changes to the proposed contract.

   
   

2. Avoiding Confusing and/or Ambiguous Language. Contracts can be detailed, confusing, and lengthy. Sometimes ambiguous language is used in the contract, such as a contract for the purchase of the seller’s “blue car,” and the seller owns two blue cars. Attorneys are adept at identifying language that is ambiguous or may allow differing interpretations, and they can revise and add language that clarifies and provides specificity.

   
   

3. Regulatory Compliance. Different industries and businesses need to comply with laws and regulations that apply to their line of work. An attorney’s review of a contract may need to consider the client’s or the other party’s compliance with these laws and regulations. For example, a landowner who contracts with a general contractor to put up a commercial building needs language in the contract that requires the contractor and all subcontractors to be licensed and bonded.

   
   

4. Negotiation. If a proposed contract or revised language must be negotiated with the other party, an attorney can provide a strategy and guidance to the client or step in and negotiate the changes. A good rule of thumb is to have an attorney handle the negotiations if the other party’s attorney is handling the negotiations or the contract is a high-value or mission-critical contract.

   
   

5. Dispute Resolution. A dispute-resolution provision can help resolve a disagreement and prevent expensive litigation if a dispute comes up between the parties. A provision for dispute resolution can require negotiation to resolve any disagreement and/or require mediation before a lawsuit can be filed by one party against the other. A dispute-resolution provision can also require that the parties use an arbitration process in place of litigation. An attorney can provide advice and guidance on drafting a provision that fits the transaction and needs of the parties.

The Contract Review Process: What to Expect

Hiring an attorney to review a contract typically involves several steps. The following is a general overview of the process, but the exact process followed is less important than the attorney’s substantive review of the contract and its terms and conditions, which is the intended result of the review process:

1. Initial Consultation. To initiate a review, the business owner will discuss the proposed transaction with the other party in some detail as well as any questions or concerns that the business owner may have about specific contract provisions.

   
   

2. Thorough Review by Attorney. In this step, the attorney carefully and thoroughly reviews the draft contract. This review starts from a contract-law perspective to ensure that the basic elements of a contract have been met, but it also examines the details and language of the contract for clarity, consistency, and other potential issues.

   
   

3. Feedback and Recommendations. Attorneys often prepare a report, letter, or email that provides his or her concerns and suggested changes. Another common approach is to provide the client with a “redline” that shows deletions, changes, and additions recommended by the attorney. Redlines allow the client to quickly review the recommended changes.

   
   

4. Negotiation Assistance. If necessary, the attorney can assist with negotiating changes to the contract and reaching a final draft. If the other party has retained an attorney, your attorney can only negotiate with the other party’s attorney.

   
   

5. Final Review and Changes. After the client has discussed the recommended revisions with the attorney and after any negotiations, a final version of the contract is prepared.

Conclusion

In many situations, the value of an attorney’s contract review cannot be overstated. Attorneys have the skill and knowledge to review detailed, complex, and often lengthy contracts; and the attorney’s review provides assurance that the contract will be valid, legally enforceable, and clear, and protect the client’s interests while also achieving the purpose of the transaction. Attorney James D. Griffith at Endurance Business Law, PLLC, is an experienced business and contract attorney who can review contracts and provide advice and guidance on protecting your interests and minimizing the chances of litigation over a contract. To set up a paid consultation, please call our office at (480) 997-2951 or use the Contact form on this website. If we establish an attorney-client relationship, the consultation fee will be deducted from the fees for our services.