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Contracts Demystified

By June Campbell

If you are in business, you will inevitably be required to produce or sign a contract. Although contract language can be confusing, the purpose is simply to outline the terms that two parties agree to when entering a business arrangement. Before signing on the dotted line there is room for negotiation and bargaining, but once signed by both parties, contracts are legally binding.

Having a good contract can save you time and money in the long term. It isn't necessary to have a lawyer draw up or review your contract, but in most cases, it is a good idea. Lawyers are trained to identify potential problem areas that may escape the lay person.

Before visiting your lawyer, do some thinking about the terms that you want to see in the contract. In your own words, simply write down how you want the arrangement to be. Decide in advance which terms you are willing to negotiate and which are non-negotiable. By bringing this list to your lawyer, you will cut down on billable hours and reduce your legal expenses.

Contracts contain a minimum of three components: (1) The legal names of the entities or parties involved and the date of signing; (2) The Definitions, which spell out the meaning of any terms to be used; and (3) the Consideration, which identifies the financial (or other) payment that one or both parties will receive in exchange for fulfilling obligations. Depending on complexity, the contract may contain many other sub-sections as required.

The Definitions should include:
  1. The Term of the Contract. Identify the commencement date and the end date.
  2. The Territory. Many contracts, especially if covering intellectual properties such as copyright, use "The World" or even "The Universe" as the territory.
  3. Definitions of terms used in the contract, such as "Commission", "Disbursements", "Gross Receipts", "Net Receipts"

The Consideration should include all "payments" that one party will receive in exchange for fulfilling their obligation. i.e. In consideration for the sum of $500, the writer produces a 2,000-word article.

Additional terms depend on the nature of the agreement.

1. What are the responsibilities and obligations of each party?

2. Amendments and Alternations. How can the contract be amended during its life span? Must both parties agree in writing to changes?

3. Termination. What are the terms for ending the contract?

4. Conflict Settlement. How should disputes be settled?

5. Governing Law. If governing law is stated as the law of your own state, province, or country, you will save yourself costly travel expenses if conflict occurs.

6. Mutual Indemnity. Include a clause stipulating that either party will not be held responsible for activities of the other that may be a breach of the contract or that may occur outside of the contract. For example, if an artist sells you a digital image as his original work, but he has actually stolen it from someone who owns the copyright, then you do not want to be responsible for any damages or legal fees arising out of that action.

7. Transfer. What happens if one party declares bankruptcy, sells the business, or dies? Can the contract be transferred to Uncle Leroy?

The last page, of course, includes the witnessed and dated signatures of persons who are authorized to sign on behalf of each party.

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