There are a few provisions that may trip up a company that doesn’t read the language closely or fails to understand the impact of certain provisions.  Here are a few provisions to pay close attention to:

•    Ownership of Intellectual Property.  In the event you are looking to enter into a contract with a consultant, an employee, or any other third party, you should be certain to consider how any newly created Intellectual Property will be owned.  For many companies, they will want to be certain that they retain ownership rights to the intellectual property.  However, for more complex joint development projects, there may be cases where you will assign all or some portion rights to the intellectual property to another party.

•    Assignment Provisions.  Assignment provisions will require a company to get permission from the other company in the event that they wish to assign or transfer the contract to another party.  This is particularly important in the event a company is acquired or sold because it may require the company to obtain consents from all third-parties before the acquisition can be completed (which is sometimes difficult).

•    Exclusivity or “Most Favored” Language.  The Exclusivity provisions will require you to limit your actions in some way — perhaps that the other party is the only one who can distribute the product or has first rights to distribute.  The “Most Favored” provisions will require you to give the other party the best terms you give to any other customer — such as the lowest price, the best discounts, etc.  These may seem like harsh provisions (and in some cases they are), but it may be restrictions you can live with if they have limitations as to geography, industry, time, etc.

•    Attorneys Fees.  Be aware of any provision that requires either party to be responsible for attorney’s fees associated with negotiating or finalizing the agreement.

•    Use of Trademarks or Customer Names.  In the event you want to be able to publicize a customer list, be certain there are no restrictions on use.

•    Termination and Renewal Provisions.  Be aware of any provisions that allow the parties to terminate the contract early, particularly provisions that allow for termination in the event of even a minor breach without the opportunity to rectify the breach.  In addition, be aware of any provisions that allow for the automatic renewal of the contract.

•    Compliance with reporting provisions.  Some contracts will include language obligating the other party to provide certain ongoing reports or information to various parties such as federal or state agencies.

•    Obligations on Employees.  Contracts will sometimes require all employees that interact with the other party to be screened or drug tested.  Ensure that complying with these requirements will not breach any contracts you have with your employees.

•    Access to premises.  Be aware that contracts may permit the other party to enter your facilities.

•    Payment Terms.  Look for the terms of payments due as well as whether any payments due will be accelerated in the event that either party fails to perform certain activities.

Be sure to read every contract you sign — language that may seem harmless can come back to bite you.  And, if you have questions, ask someone such as your attorney, an advisor, a board member, etc.