A while back, someone I worked with during my time as General Counsel at Travelocity reached out to me. She was on the business side and had spent years working closely with contracts. She told me she still remembered an article I wrote for our legal department intranet about how to read contracts.
What surprised me most was this: she had been using it for more than ten years. The only problem was that she had lost her copy. She wanted to share it with her new team so she could train them properly. Luckily, I still had the document saved, so I sent it over. Now she’s using it to coach a new group of sales professionals on how to handle contracts with confidence.
When I reread the article myself, it reminded me of something many lawyers quietly understand, contract reading is not always taught well, even in law school. Most schools teach contract theory, but real contracts are a different world. The first time you face a 50-page agreement, theory doesn’t help much. It feels more like decoding a complex puzzle written in another language.
That’s why I decided to refresh the article and share it here. These tips are designed for in-house lawyers and business professionals alike. They’ll help you understand how contracts are structured, what to look for, and how to spot problems early. And best of all, these lessons apply no matter where you are in the world.
Contract Structure
Before you can read a contract with confidence, you need to understand contract structure. Most people try to read a contract like a normal article, from start to finish. However, that approach usually creates confusion. A contract is not written to entertain or explain. Instead, it is written to organize legal promises, duties, and risks in one place.
In simple words, a contract works more like a system than a story. It groups related clauses together, and it uses cross-references, defined terms, and sections to connect everything. That is why contracts often feel hard at first.
Contracts are not meant to be read like a book
A typical blog post has an introduction, a middle, and a conclusion. On the other hand, a commercial agreement is built in blocks. For example, one section explains payment, another section explains termination, and another section covers risk. You may also see important details placed in exhibits and schedules.
Because of this, you should not expect to understand everything in one straight read. Instead, take a step back and treat the document like a map. Once you know where everything sits, the contract becomes much easier to review.
Why structure matters in contract review
When you understand structure, you can quickly locate the most important parts of the deal. This is especially helpful during contract review and contract negotiation. You can also spot missing clauses, weak wording, or risky obligations faster.
Most importantly, structure helps you see how the deal works as a whole. It shows:
- Who the parties are
- What each side must do (covenants)
- What facts each side promises are true (representations and warranties)
- How long the agreement lasts (term and termination)
- How money flows (payment terms)
- Who carries the risk (risk allocation)
What makes contract structure tricky?
Contracts often include long sentences, heavy legal language, and confusing phrases. For example, “notwithstanding the foregoing”, “provided, however”, and “for the avoidance of doubt” can completely change the meaning of a clause.
Also, many agreements pull in extra rules from other documents. This is called documents incorporated by reference. If you skip those, you may miss key obligations.
That is why understanding how to read a contract starts with understanding its structure. Once you learn the layout, you stop feeling lost, and you start reading like a pro.
Get a Hard Copy
If you want to read a contract properly, get a hard copy. Yes, seriously, print it. Many people try to review a long agreement only on a laptop screen. However, that usually makes the process slower and more frustrating.
Most contracts are full of cross-references, defined terms, and important clauses placed far apart. Because of this, you will need to flip back and forth constantly. On a screen, that becomes tiring fast. On paper, it feels much easier and more natural.
Why printing helps during contract review
When you hold a printed contract, you can:
- Mark key clauses quickly
- Highlight risky language
- Circle unclear sentences
- Add notes in the margins
- Track term and termination and payment terms faster
Also, printing helps you spot patterns. For example, you may notice repeated phrases like “notwithstanding the foregoing” or “provided, however”, which often signal exceptions and overrides.
What Is All This Stuff?
When you open a contract, it can look like a wall of confusing legal text. However, most commercial contracts follow a similar pattern. Once you learn the layout, how to read a contract becomes much easier.
Instead of reading every line in panic, focus on the main categories of “stuff” that almost every agreement includes. These sections work together to explain the deal, the obligations, and the risks.
1) Preamble
The preamble is the opening part of the contract. It usually states the contract name, the date, and the parties involved. This is where you confirm who is signing and what type of agreement it is.
2) Recitals
Recitals provide background. You will often see words like “Whereas” here. Sometimes they help, but many times they add little value. Still, they can matter if they describe the deal incorrectly.
3) Defined Terms
This is one of the most important sections. Defined terms control the meaning of key words in the contract. Even if a word has a normal meaning in business, the contract definition wins. That is why defined terms can change the entire deal.
4) Term and Termination
This section explains how long the contract lasts and how either party can exit. Always read terms and termination carefully because it answers the business question: “How do we get out if this deal goes bad?”
5) Representations and Warranties
These are legal promises that certain facts are true. If your company makes a promise here, it must be accurate. Otherwise, it can create serious risk later.
6) Covenants
Covenants explain what each party agrees to do. For example, one side provides services, and the other side pays. These are the core contract obligations.
7) Conditions
Conditions are different from promises. They are “if this happens, then that happens” rules. For example, a deal may end if a condition is not met by a certain date.
8) Payment Terms
This section explains pricing, invoicing, late fees, and what happens if payment is missed. During contract review, payment clauses deserve close attention.
9) Risk Allocation
This is where the contract decides who carries the risk if something goes wrong. It often includes indemnification, limits on liability, and damage waivers. In many deals, this is the most important part.
10) Boilerplate
Many people think boilerplate is “standard” and safe. However, boilerplate clauses can contain traps, especially around governing law, assignment, notices, and dispute resolution.
11) Exhibits and Schedules
Finally, never skip the attachments. Key details like pricing, scope of work, and service levels are often hidden in exhibits and schedules.
The “Three Passes” Approach
One of the smartest ways to improve how to read a contract is to stop trying to understand everything in one go. Instead, use the three passes approach. This method helps you read faster, stay organized, and catch problems you would normally miss.
Most commercial agreements are packed with defined terms, cross-references, and hidden details in exhibits and schedules. Because of that, reading a contract once from top to bottom rarely works. However, reading it in three focused rounds works extremely well.
✅ First Pass: Quick Scan (Big Picture)
In the first pass, don’t read deeply. Just scan the document to understand the contract structure.
Focus on:
- Where the defined terms section is
- Where the term and termination clauses are
- Where the payment terms are
- Where the risk allocation clauses are
- Whether there are exhibits and schedules
This pass gives you a roadmap. As a result, you won’t feel lost.
✅ Second Pass: Careful Reading (Details + Meaning)
Now read the contract carefully. Start with the defined terms, because they control the meaning of the deal.
As you read:
- Stop when you see a defined term
- Flip back to the definition
- Follow cross-references
- Make notes and highlight confusing lines
This pass is the heart of strong contract review. It helps you spot unclear obligations, missing details, and risky wording.
✅ Third Pass: Focus on the High-Risk Clauses
In the third pass, don’t reread everything. Instead, zoom in on the clauses that can create serious business problems later.
Pay special attention to:
- term and termination (exit rights, notice periods)
- payment terms (late fees, invoicing, disputes)
- risk allocation (especially indemnification and limits on liability)
- boilerplate clauses (assignment, governing law, dispute resolution)
- any documents incorporated by reference
This final pass ensures the deal makes sense and protects your company.
Why this method works
The three passes approach keeps you from getting overwhelmed. It also makes contract reading feel more like solving a structured problem instead of decoding chaos.
Once you practice this a few times, you’ll read contracts faster, negotiate better, and avoid costly mistakes.
What’s Missing?
When you review a contract, it is easy to focus only on what is written. However, one of the most important skills in contract review is noticing what’s missing. This step can feel tricky because you are basically trying to spot a problem that is not even on the page. Still, missing clauses can create a bigger risk than bad clauses.
That is why experienced lawyers always pause and ask: “What should be here, but isn’t?”
Use a checklist to catch missing terms
A simple way to improve how to read a contract is to use a contract checklist. This checklist can come from your legal department, or you can create your own over time.
For example, your checklist may include:
- Clear payment terms
- Proper term and termination language
- Strong risk allocation provisions
- Required confidentiality obligations
- dispute resolution and governing law
- Ownership of work product or IP
- Service levels in vendor agreements (service level agreement)
Think through “what can go wrong?”
Another smart approach is to think like a pessimist. In other words, imagine everything that could go wrong, even if it seems unlikely.
For example:
- What if the vendor stops performing?
- What if payments are delayed?
- What if there is a data breach?
- What if a third party sues? (indemnification)
- What if the business needs to exit early?
If the contract does not address these risks, then something important is missing.
Missing clauses slow deals and create disputes
Missing terms often cause confusion later. They also lead to disputes because each side assumes something different. As a result, the contract becomes harder to enforce.
So, don’t just read the words that are there. Always check for the words that should be there.
This habit alone can take your commercial agreement review skills to the next level.
Danger Zone
When you read a contract, some clauses should instantly make you slow down. These are the provisions that can quietly create major business risk. In other words, they are the Danger Zone.
Many contracts look harmless at first. However, a few “small” clauses can completely change the deal. That is why strong contract review is not only about reading—it is about spotting danger early and asking the right questions.
Below are the biggest danger clauses to watch for in any commercial agreement.
1) Most Favored Nations (MFN) Clause
A Most Favored Nations clause (MFN) requires one party to give the other party the best deal it gives to anyone else. This may include pricing, services, discounts, or terms.
At first, MFN sounds fair. However, it can create huge problems later. For example, if your company gives a better price to a new customer, you may be forced to lower prices for the MFN customer too.
So, always treat MFN as a major red flag in contract negotiation.
2) Exclusivity
Exclusivity means one party agrees not to work with competitors. This can apply to sales, supply, marketing, or services.
Exclusivity can block future growth. It can also create competition law issues in some situations. Therefore, you should never accept exclusivity unless the business clearly understands the impact.
3) Liquidated Damages
Liquidated damages clauses set a fixed amount of damages for breach. This means the contract decides the penalty upfront.
These clauses are risky because:
- the number may be too high
- the breach may be minor
- the damages may not match reality
So, if you see liquidated damages, pause and review it carefully.
4) Subcontractors
A subcontractor clause decides whether the vendor can use third parties to deliver the work.
If subcontracting is allowed, it can reduce control and increase risk. For example, a subcontractor may fail to perform, but your company still suffers the damage.
That is why subcontractor language should clearly cover responsibility, compliance, and liability.
5) Service Levels (SLA)
A service level agreement (SLA) sets performance standards. It may include uptime, response times, delivery timelines, and support metrics.
Service levels matter because they control what happens when performance drops. However, many contracts either:
- have no SLA at all, or
- include weak remedies
So, during contract review, always check whether service levels exist and whether the remedies are meaningful.
Why this section matters
These Danger Zone clauses often hide inside long contracts, and business teams may not notice them. However, they can heavily impact pricing, performance, and liability.
So, if you want to master how to read a contract, learn to recognize these red flags fast—and deal with them before signing.
Don’t Shoot Blanks
Many contracts start as templates or form agreements, which means there are often blanks to fill in. Missing or incomplete blanks are a common source of confusion—and sometimes serious problems, later on. That is why one of the golden rules of contract review is: don’t shoot blanks.
Why blanks matter
Even small missing details can create disputes. For example:
- A contract might be missing a payment date or price.
- A term or termination clause might be incomplete.
- Key service levels or scope details may not be specified.
If these blanks are left unresolved, both parties could interpret the contract differently. That can delay performance, create misunderstandings, or even lead to legal disputes.
How to handle blanks
- Highlight all blank fields when you first get the contract.
- Confirm with the other party what needs to be filled in.
- Ensure all blanks are completed before signing.
- Cross-check that filled-in terms match your deal expectations.
By paying attention to these details, you reduce risk and strengthen your commercial agreement. It also makes your contract review much more effective.
“Other” Documents
When reviewing a contract, it’s not just the main document you need to read. Many commercial agreements include other documents incorporated by reference. These can be attachments, exhibits, schedules, or even external webpages. Skipping them is a common mistake that can create serious issues later.
Why these documents matter
Sometimes, key details, like pricing, scope of services, or service level agreements (SLA) are tucked away in these supporting documents. Ignoring them is like reading only half of a story. If something in an incorporated document conflicts with the main contract, the contract may allow that document to control certain terms.
What to watch out for
- Hyperlinks to external pages: Check if the contract allows the other party to change them unilaterally.
- Schedules and exhibits: These often define obligations, timelines, or deliverables.
- Referenced agreements: Sometimes other contracts are linked, creating layered obligations.
Tips for handling “other” documents
- Collect all referenced materials before reviewing.
- Read each carefully and cross-check against the main agreement.
- Make notes of any conflicts or missing information.
- If the contract allows changes to linked documents, consider negotiating a termination right if changes materially affect your obligations or benefits.
By paying attention to these other documents, you avoid surprises and ensure a complete contract review. It’s a crucial step for understanding the full scope of your commercial agreement.
Are the Parties Right?
One of the most overlooked, but critical steps in contract review is confirming that the parties to the contract are correct. It sounds simple, but mistakes here can create major legal and financial problems later.
Why parties matter
The contract must clearly identify the entities that will provide or receive goods, services, or payments. Both the preamble and the signature block are important. If the wrong entity signs, your company could face enforcement issues, especially if the other party runs into financial trouble or bankruptcy.
Key things to check
- Ensure the legal names of all parties are correct.
- Verify that the signatories are authorized to execute the agreement.
- Consider whether related entities or guarantees are needed to back obligations.
- Confirm that internal policies, like delegations of authority, are followed.
Practical tip
Even if the main parties seem correct, think about contingencies. For instance, if a subsidiary or affiliate is involved, should there be a guarantee to protect your company? These checks prevent surprises if disputes arise.
By confirming the right parties are on the hook, you reduce risk and make your contract review more reliable.
Other Tips
When reading a contract, it’s the little details that often make the biggest difference. Beyond understanding contract structure, checking defined terms, and reviewing risk allocation, there are several tips that can help you catch hidden issues and read contracts like a pro.
Watch for key phrases
Certain phrases are signals that you need to slow down and read carefully:
- “Provided, however” or “provided”: Usually introduces an exception.
- “Notwithstanding the foregoing” or “notwithstanding any provision to the contrary”: Overrides other clauses.
- “For the avoidance of doubt”: Emphasizes clarity or reinforces a point.
Be cautious with language
- Double negatives: These can be confusing. Consider rewriting them in your notes to understand their meaning.
- Ambiguous sentences: Ask whether the ambiguity helps or hurts your company. If it hurts, and you have leverage, negotiate clarification.
Handle long sentences smartly
Many commercial agreements have sentences that span multiple lines or even paragraphs. Break them into logical sections in your notes, then reassemble the meaning as you read back through.
Remember the context
Contracts are about deal execution, not theory. Always think about:
- Does this match what the business agreed to?
- Are blanks filled in properly?
- Do all exhibits and schedules match the main contract?
By keeping these tips in mind, you improve your contract review skills and reduce the risk of surprises after signing.
Conclusion
Reading a contract doesn’t have to be overwhelming. By understanding contract structure, using the three passes approach, checking defined terms, and spotting risk areas, you can review contracts efficiently and confidently. Always watch for missing clauses, hidden obligations in other documents, and tricky language like “notwithstanding the foregoing”. These habits protect your company, speed up negotiations, and improve business outcomes. With practice, reading contracts becomes less about guessing and more about understanding every part of the deal.
FAQs
Why is it important to understand contract structure?
Understanding structure helps you locate key clauses quickly, avoid mistakes, and review contracts efficiently.
What are defined terms and why do they matter?
Defined terms set the meaning of key words in a contract. They control the deal, so knowing them prevents misunderstandings.
What is the “three passes approach”?
It’s a method of reading a contract in three stages: a high-level scan, a detailed review, and a focused pass on high-risk clauses.
How do I handle blanks or missing clauses?
Identify all blanks, confirm details with the other party, and make sure all missing terms are completed before signing.
Why should I review “other documents”?
Exhibits, schedules, and incorporated documents often contain critical obligations, pricing, and service levels. Missing them can create risk.
Read More Articles: Bony or Boney in English: Spelling Rules, Examples
Hi, I’m Emily Grace, a blogger with over 4 years of experience in sharing thoughts about blessings, prayers, and mindful living. I love writing words that inspire peace, faith, and positivity in everyday life.
