- What the contract actually commits you to
- Check every promise you make, and every promise made to you
- Can you keep the ongoing obligations
- Termination rights and your exit path
- Make sure the right person signs for the company
- Get the contract checked before you sign
- The signature is the point of no return
A supplier agreement, a lease, a client engagement, an employment contract for your first hire. At some point every business owner sits across from a document that has to be signed this week, and most will read the headline terms, skim the rest and sign. That is how businesses end up paying for services they never used, locked into agreements that cannot be exited, or bound to promises they cannot keep. Before you sign, there are five things worth checking, and one decision that should almost always be made first.
What the contract actually commits you to
A contract is formed when one party makes an offer, the other accepts it, and something of value passes between them. Once you sign, the terms you agreed to are enforceable, so the first step is to know what those terms are. That means reading the document from start to finish, including the pages you do not expect to understand.
Read for the commercial deal first: the price, what you get for it, and when it is paid. Then read for everything that sits around the deal. Common clauses that change the shape of an agreement include indemnities, which make one party responsible for the other's losses; limitation of liability clauses, which cap what either party can claim; and confidentiality and non-compete restrictions, which limit what you can do after the agreement ends. A one-page purchase order can incorporate a supplier's full terms and conditions by reference, so check what documents the contract actually captures.
If a clause does not make sense, that is a sign to get advice, not to move past it. You cannot rely on having "assumed" a term meant something different once you have signed.
Check every promise you make, and every promise made to you
Most commercial contracts contain representations and warranties, and the two are often bundled together in a single clause. They do different work:
- Warranty: A warranty is a contractual promise about a fact or a state of affairs, such as “the equipment is in working order” or “the business has no outstanding tax liabilities”. If a warranty turns out to be false, the party that gave it has breached the contract and can be sued for damages.
- Representation: A representation is a statement made before the contract is signed that helped persuade the other party to enter into it. If a representation is false, the damage is not limited to breach of contract. Under s 18 of the Competition and Consumer Act 2010 (Cth), Schedule 2 (the Australian Consumer Law, the ACL), a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. That provision catches pre-contractual statements, so a false representation made in the lead-up to signing can expose the business that made it to a claim for misleading conduct as well as a breach claim, with remedies including damages under s 236 of the ACL.
For that reason, go through every representation and warranty in the contract and ask whether each one is true of your business now, not whether it was true last year. The most common trap is a standard-form warranty schedule that was drafted for a different business and quietly asserts things that are not accurate for yours. Do not sign a contract that contains a promise you know to be wrong, assuming it will never be tested. It often is.
Can you keep the ongoing obligations
Signing a contract is not the end of your obligations, it is the start of them. Before signing, work through the obligations that run for the life of the agreement and ask whether you can actually deliver them. Payment terms, delivery deadlines, reporting requirements, insurance obligations and service levels all become enforceable the moment you sign.
The question to ask is not whether you can meet these obligations this month, but whether you can meet them for the whole term of the contract. A fixed-fee engagement that is profitable at current staffing levels may not be once your team changes. A supply agreement with a minimum purchase volume may be fine in year one and painful in year three. Where an obligation depends on assumptions, such as the availability of a key person or a licence you hold, check that the assumption is written into the contract, not just relied on verbally.
Termination rights and your exit path
Few things cost businesses more than contracts they cannot leave. Before signing, find out how and when the agreement ends.
Most contracts run for a fixed term, and the important detail is what happens at the end of it. Check whether the contract rolls over automatically, whether either party can end it on notice, and how much notice is required. A 12-month contract with automatic renewal and a 90-day notice period means you have to decide about exit months before you may want to exercise it.
Also check the circumstances in which the contract can be terminated early. Many agreements allow termination only for breach, and some require the breach to be remedied within a period before the right can be exercised. Others allow termination for convenience but attach a cost, such as payment of the remaining term or a proportion of it. And check what happens on termination: which obligations survive, whether confidential information must be returned or destroyed, and whether there are post-termination restraints on your business.
Make sure the right person signs for the company
If you are signing for a company, the signature block is a legal requirement, not a formality. Under s 127 of the Corporations Act 2001 (Cth) (the Act), a company executes a document without a common seal when it is signed by two directors, or a director and the company secretary. A proprietary company with a sole director can be signed by that director alone, provided the director is also the sole secretary or the company has no secretary.
An individual can also sign on the company's behalf under s 126 of the Act, but only with the company's express or implied authority. That authority can come from a power of attorney, a resolution of the directors, or the person's position, such as a general manager with authority to enter into supply agreements. If the person signing is not a director and has no documented authority, the contract may not be properly executed at all.
There is a common misconception that an unauthorised signature simply means the contract is invalid and the company can walk away. Under ss 128 and 129 of the Act, a person dealing with a company is entitled to assume that its officers and agents are properly appointed and that documents are duly executed. The company cannot assert that those assumptions are wrong unless the other party knew or suspected the signature was not authorised. In practice, that means a contract signed by someone without authority can still bind the company if the other side relied on the appearance of authority in good faith. If you are the party that signed, or the party that received the signature, this is exactly the kind of issue to raise with a lawyer before relying on it.
Get the contract checked before you sign
For any contract with real money or long-term obligations attached, have a commercial lawyer review it before you sign. A review is the cheapest insurance you will buy against a bad contract, because a lawyer can do three things you cannot easily do yourself.
First, they can read the document against the deal you actually negotiated. Discrepancies between what was promised in emails and meetings and what is written in the contract are common, and they are only fixable before signing, not after. Second, they can identify the clauses that create hidden risk, such as unusual indemnities, one-sided termination rights or liability caps that leave you exposed. Third, they can negotiate changes on your behalf, including drafting amendments to the standard terms the other side will not make themselves. A lawyer can also confirm that the document is being executed properly, including whether it needs to be a deed and who must sign it.
The signature is the point of no return
Every check in this article comes down to one fact: once you sign, the terms are enforceable even if you did not read them, and even if you did not understand them. The cost of a bad contract is not the fee you paid a lawyer to review it, it is the years of payments, restrictions or liability that a bad clause can create. Reading the whole document, checking that every promise in it is true, confirming you can meet the ongoing obligations, understanding your exit rights and making sure the right person signs are the steps that separate a contract that works for your business from one that works against it. If any of them raise a question you cannot answer, that is the moment to ask a lawyer, while the document is still on the table.