A contract is a collection of legally enforceable promises between two or more parties. Contracts can be full of “legalese” terminology, the rough size of a short story and intimidating to review. No matter how scary reviewing a contract can be, it is important to always understand what exactly you’re agreeing to.
Here are 5 tips you can use to learn how to read a contract:
1. Examine the Contract
Reading a legal contract is as much about learning as understanding. There will be language that you understand at a first glance, and items that you want clarified further. Use the headings in the contract to understand the theme of the section, and the rights and responsibilities that fall under it.
As you read the contract, ask yourself if you know what each sentence means, and how it might affect you. You want to consider what happens when things go wrong.
2. Understand What to Expect
Contracts usually start by stating parties and context — the “who” and “what.” For example, employment agreements will say that the employer will pay the employee for services.
A definitions section usually follows. This section spells out the defined meanings of words for the purpose of the contract, such as what “Effective Date” means. Definitions like “Default Event” might say something like “any event set out in section X.”
Another common contract feature is cross referencing: when one section or legal clause references another (sometimes on a completely different page of the agreement). This can make contracts hard to read, going back and forth or yo-yo-ing the scroll bar to read one section in the context of another.
3. Make Notes
Take note of anything you aren’t sure about so you can look it up later or seek legal advice. It helps to print out a contract and use a pen or highlighter on it like you are studying for an exam. It’s a good idea to write notes or jot down questions in the white space of a contract to remember where you came across that issue.
4. Google Some Legal Terms
Legal terms and jargon can make contracts feel impossible to understand, however these terms can be easily googled. There are plenty of legal dictionaries available online. Some words, like “default,” mean something different in a legal context. Try googling “default meaning legal” or “default meaning contract” to get the legal definition of these words. It’s important to have a concrete understanding of what you’re agreeing to.
5. Ask Questions
Once you are comfortable with the meanings of words and clauses, read the contract again and note any further questions or concerns you have. In particular, ask the other party whether there are any implied terms, and ask for clarification on any broad or ambiguous terms. It is important that the contract clearly state the parties’ intentions.
Bonus: Use a Legal AI Tool
Use authorDOCS, our AI-powered contract management software, to boost your confidence when reviewing your contract. Click on the defined terms or cross references in your agreement to pull out their meaning in the side bar of Word — allowing you to read your contract alongside the extra details. This helps you understand the contract better and alleviates eye strain!