Contracts are the backbone of any business. They define and regulate the relationship between two or more parties in any enterprise or transaction. As a result, companies should ensure that their contracts are always up to date and legally compliant.

But how do you know if your contracts are in good condition and need a checkup? This article provides answers to this question and discusses the importance of understanding your contracts.

What is a Contract?

A contract is a legal agreement that defines the obligation of the parties involved. Contracts can be written or even spoken, but written contracts are preferable.

They are fundamental to business and commerce as they facilitate clear understanding between parties and protect the interests of all. They also establish the terms of service, sales, and other agreements. Therefore, all businesses should ensure they have legally binding written contracts with all significant stakeholders.

These stakeholders include suppliers, partners, customers, and employees.

The Importance of Understanding Your Contracts

The law regards contracts as the paramount embodiment of a relationship between parties. Businesses must ensure that they can both hold their contracting parties accountable and prevent or resolve disputes between the parties.

Therefore, it is critical that businesses regularly review their contracts and ensure they are up to date, legally compliant, and still relevant to their operations. Understanding contracts involves giving them a closer look to check for terms that suit the businesses’ interests and identify areas of risk as well.

Understanding your contracts should involve, at the very least, the following:.

1. The Basics

Understanding what contract you are dealing with is essential. You need to know the type of contract you have, identify who the parties involved are, and comprehend the terms agreed upon.

This knowledge will help you identify when obligations arise and when they can be fulfilled.

2. The Boundaries of the Contract

This second aspect helps you to think that you are dealing with a particular contract and not everything available to that person or company.

That means you have to identify the boundaries of your contract, such as geographic scope, the timeline for services, and the monetary requirements.

3. Pricing and Payment Terms

The third aspect, pricing, and payment terms of the contract relate to the consideration that each party is entitled to for performing their respective duties.

You should review the contract and have a clear understanding of the compensation and terms of payment agreed upon.

4. Risks and Liability

The fourth aspect of understanding your contract involves analyzing the risks and liabilities present in the agreement.

You need to understand your company’s exposure to risk if you fail to meet any of the contract’s obligations or in case there is a dispute between the parties.

5. Expiration Terms and Renewal

The fifth and final aspect of understanding the contract is reviewing the expiration and renewal terms of the agreement. Reviewing both terms will help you identify important deadlines and renewal provisions for the contract.

You should know when the contract expires and whether there is an automatic renewal period or not.

Is it Time for Your Contract Checkup?

Although the relevance of a contract can diminish over time, companies must understand the importance of a contract checkup. There are several practical steps you can take to ensure that your contracts are up to date:.

1. Collect all your contracts in one place

You should keep all your contracts in a centralized location that is readily accessible to everyone in your organization. This will enable you to keep track of all your agreements, including when they expire and when you need to renew.

2. Set up a review schedule

Set up a regular review schedule for your contracts, taking into account the complexity and volume of your agreements. For instance, you may need to review some contracts yearly, while others require a biennial or triennial review.

3. Get input from Legal Counsel

Engage with legal counsel to support the review process or handle contractual disputes and renegotiations. Legal expertise will help ensure that the company is operating within legal limits, avoiding legal penalties, and staying compliant.

4. Identify changes that impact a contract’s relevance.

The company’s operations are in constant evolution, and changes to laws, regulations, technologies, suppliers, partners, and staffing may render a contract obsolete or non-compliant.

Therefore, conduct a review to identify changes or developments that affect your contracts’ relevance.

Conclusion

A checkup of your contracts is not optional for businesses. It is essential to ensure that company interests are protected and that the relationships with suppliers, partners, customers, and employees are well defined.

Performing routine contract checkups will help you better understand your legal obligations, improve contractual compliance, and identify and manage legal risk. Therefore, review your contracts regularly to remain compliant with all legal obligations and get an edge over your competition.