A Legally Binding Contract

Posted on Monday, July 23, 2018

The success of your business depends to a great extent on the quality of the contracts you sign. A good contract protects everyone, while a bad contract could ruin you.

Every time you promise to exchange services or property, you create a contract -- either written or unwritten. Oral contracts present several problems. They can be ambiguous, difficult to enforce and hard to prove in court.

"Contracts of choice" are always written to help eliminate potential disputes. They contain precise terms about the people or companies involved, the property or services offered, and of course, the agreed-upon price.  Contracts may also include clauses outlining the terms of defaults, indemnities and exemptions.

Here are some important issues to understand before you sign on the dotted line:

Put it in writing. If an agreement is reached over the phone or in a meeting, write it down with both parties signing as soon as possible.

Like the terms. If the proposed terms are unacceptable, make a counter-offer. You're the one who has to meet the obligations. Don't assume or rely on oral assurances that the other party will insist on strict compliance.

Cover the bases. Include all aspects of the understanding. And if the deal is based on an earlier verbal agreement, be sure the written terms match. Include options, consequences, and possibilities. Don't fail to address an issue because it's sensitive.

Keep it clear. If you're unsure what the other party expects, don't use vague language to camouflage it. That can lead to misunderstanding and lawsuits. Define ambiguous terms in simple language and don't complicate things unnecessarily.

Be consistent. Legal writing isn't creative writing. You don't want royalty in one paragraph, license fee in another, and use fee in another.

Special Provisions

Duties and obligations. Include a detailed description of the duties and obligations and the deadlines for performance. If one party's obligation is, say, to create software, for a multimedia work, provide detailed specifications.

 Yesterday, Today and Tomorrow

Hundreds of years ago, contracts were self-enforced -- if one party didn't live up to the terms, the other party took care of matters. Eventually, courts started to decide who had rights, and statutes of frauds started to show up in England in the 17thcentury.

In the U.S., the right to form contracts is guaranteed by the Constitution, which is itself a contract. Of course, those were the days of quill and parchment, and signatures and seals were visible to verify.

It gets murkier today: Faxes, photocopies, e-mail and the Internet make it difficult to authenticate signatures. As technology pushes us ahead, digital signatures will one day be as common as putting a pen on the dotted line.

Reps and warranties. A warranty is a legal promise that certain facts are true. Typical representations or warranties concern issues such as ownership of goods and the right to sell or assign them. In multimedia industry contracts, it's common to find warranties of ownership of intellectual property rights and non-infringement of third parties' intellectual property rights. For contracts involving the sale of goods, certain warranties are implied under state law unless specifically disclaimed.

Termination. This ensures that either party can end the contract under certain circumstances. Generally, termination clauses describe breach of contract events that trigger the right to terminate. The provisions also describe how to give notice that you're going to exercise the right, and whether the breaching party has an opportunity to remedy the breach.

Remedies and arbitration. A remedy clause outlines the non-breaching parties' rights when a contract is violated. In sales contracts, remedy clauses are usually designed to limit the seller's liability for damages. 

An arbitration clause states that disputes must be settled through arbitration rather than litigation. It generally includes the name of an organization that will conduct the arbitration (the American Arbitration Association, for example), the city where it will be held, how arbitrators will be chosen, as well as who will bear the cost.

Merger clause. A merger clause helps prevent evidence outside the written document from being admissible in court to contradict or supplement the terms of the written agreement.

Contract law is a complicated business and you need to consult with an attorney before putting your name on documents that obligate you to perform certain acts.

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Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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