Things to watch out, before you sign a contract!

We can all confess that at some point in our life, we were asked to sign a contract, which was around 10 odd pages long, with condensed writing everywhere, so the easiest way out of it was to just sign it without reading. Because, it’s not like we would fall into trouble, right? WRONG.

A contract or agreement is a mutual understanding between two or more parties. The terms and conditions in the contract are ones that were previously discussed and agreed upon by the parties before formally being documented on paper. It is enforceable under the law if executed as per the law. If you break (breach) the contract, the other party has legal remedies. They may sue you for damages for breach of contract, or in specific instances, ask the court to order you to perform the contract

Below are few red flags to remember before you sign a contract in the future to protect yourself from litigation.

Basics

First and foremost, make sure that your name, address, national identity numbers are correct where the agreement has identified the parties. This is because every other contractual obligation/ documentation will be upon the identity information as given in the contract. This is very important when it comes to Deeds with respect to Land matters since any correction to any of the errors on such documentation will have to be done by a Deed of rectification or through the attestation.

Ensure the date and location of entering into the agreement is correct. It is important to note where the agreement is entered into because this will be one of the factors that determine the jurisdiction of the court in the event an agreement proceeds to litigation. For example, an agreement entered into in Colombo will most likely be litigated in the District Court or Commercial High Court in Colombo. Therefore, most contracts will have the date and the place of entering into the contract.

The Parties

When a contract is for a service, sale of good, or property, always make sure that you triple check the figures of the value written down in the contract. We all know how one zero could make a big difference when it comes to amounts. If the consideration is given in numerical figures, make sure that the wording of the figure is also inserted, this allows an understanding of what the amount is, in case there is an extra or a missing zero in the consideration amount. Further, always make sure the currency is the one agreed by both parties. This is very important in contracts between parties situated in different nationalities. If the contract is in a foreign currency, or with a foreign party transacting with a local currency, make sure to include the exchange rate or mechanism to determine the exchange rate.

The Consideration

When a contract is for a service, sale of a good, or property, always make sure that you triple check the figures of the value written down in the contract. We all know how one zero could make a big difference when it comes to amounts. If the consideration is given in numerical figures, make sure that the wording of the figure is also inserted, this allows an understanding of what the amount is, in case there is an extra or a missing zero in the consideration amount. Further, always make sure the currency is the one agreed by both parties. This is very important in contracts between parties situated in different nationalities.

The Termination clauses
All contracts should have a termination clause to ensure the parties have an agreed procedure to end the contract. If you are signing an employment agreement, or a lease agreement for a home, this clause is crucial. Generally, this will let you know the amount of time you need to give prior notice to terminate the agreement, vacate the house, or leave the job. You can discuss and do amendments with the other party if you feel like the period of notice of termination is unreasonable.

The payment procedure clauses

Here, you will have to pay close attention to the dates in which the payment is conducted. For example, when it comes to a contract with respect to a property, the total amount to be paid could be broken down to advance payment and the balance payment, or several installment payments. Further, bank details in which the money is deposited too could be incorporated. In such an occasion, always make sure all the details are accurate. As a practical matter, it is best practice to have a formal receipt or acknowledgment or paper trail of all payments made.

The intellectual property

Generally, in the eyes of the law, the creator of a piece of work, such as a song, a piece of art, book, photograph, or writing, will be the legal owner. However, there are exceptions to this rule. For example, if you are an employee of a company, and are assigned to do some writing, or music for that company, then the legal owner of such music or writing, will be the company and not you.

However, in certain circumstances, you need to be at alert as to who owns the intellectual property (‘IP’) of the work. One instance is where you offer a piece of work that contains your expertise to a company or business that is in the same line of service. On such an occasion, your piece of work still remains your own. For example, if you were a personal trainer, and offered few manuals to be displayed at a Gym, that manual does not become property or ownership of the Gym, and in fact, you can provide a license to use such material by the Gym.

Further, if you are a freelancer or an independent contractor, your work that is done towards someone else or a company needs to be credited, unless you have given up through the contract your intellectual property rights.

Contracts will include an intellectual property rights clause. Carefully go through it. Intellectual property is property after all, and you wouldn’t want to be in a position where you have unknowingly stolen the other parties’ IP or find yourself in a situation where you have signed off your IP rights to someone else.

Indemnity and liability

An indemnity clause is a promise by one party (the indemnifying party) to be responsible for and cover the loss of the other party (the indemnified party) in circumstances where it would be unfair for the indemnified party to bear the loss. The intent is to shift liability away from one party, and on to the indemnifying party. This is very important since it deals with making the liability for any damages, penalties, fines, or legal expenses claims that arise from your work.

Confidentiality

Another very important clause is the confidentiality clause which has control over what material can be disclosed by you to other people or entities. You should pay attention to this clause since it can be risky to discuss things you feel are not private and confidential, but in fact, are for your company or another party to the contract. Any disclosure of information which is classified in the contract could cause severe liability to you. This is why you see many celebrities not allowed to discuss that movie they are working on during talk shows!

Each party’s legal obligations

This clause will explain the legal obligation of each party towards each other. When it comes to a contract with respect to a property, always make sure that the other party agrees to free the property from any encumbrance, which could be in the form of a lawsuit or even a mortgage.

When it comes to a lease agreement of a rented out property, make sure all previous utility bills and liabilities are agreed to be settled by the previous tenants and landlord.

As a rule of thumb, any contract to do with property has to be notarially executed for it to be enforceable by law. This includes rent or commercial agreements over land.

How disputes will be solved.

This clause is generally available in all commercial and sale of good agreements. Here you can find out how in a situation where there is a dispute, how this dispute will be resolved. It discusses which legal regime will govern the contract, especially in an international agreement. A very famous dispute resolution method in commercial matters is Arbitration. Many companies prefer to solve their disputes through Arbitration since it is a much easier and faster method than the traditional lawsuit presented to Court. However, keep an eye on this clause since once agreed on the procedure of dispute resolution, that will be the only way any complication will be solved with respect to the contract.

Some other quick points to keep in mind:

1. Make sure you check all of your obligations
2. Make sure you check all of the other parties obligations
3. Liquidated damages clauses/penalty clauses — missing payments can attract large penalties.

Written by Stefania Perera.

Stefania Perera is the Program Manager at Everystory. Amongst being an ardent feminist believer in the need for both Equity and Equality for all girls/ women in Sri Lanka, her interests revolve around the area of social democracy and anti-corruption. Stefania holds an LLB (Hons) from the Staffordshire University and is an Attorney-at-Law of the Democratic Socialist Republic of Sri Lanka.

The writer is grateful for the contribution and feedback by Romali Tudawe.