September 12, 2016
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 can mean disaster.
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 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 address with your attorney 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. If that's not possible, an email memorializing the terms of the agreement is the next best way to confirm an oral agreement.
Like the terms. If the proposed terms are unacceptable, make a counter offer prior to signing the contract. You're the one who has to meet the obligations. Don't assume or rely on oral assurances that the other party will not insist on strict compliance. Make sure that the business deal makes economic sense.
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; this 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.
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.
Representations 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.
Choice of law. What law should be followed? For example, if one party is in California and the other is in New York, the contract should name which state law should be followed.
Contract law is a complicated business. Consult with your attorney before signing documents that obligate you to perform certain acts.
Andrew P. Lederman, Esq., is Of Counsel at Wilk Auslander LLP. He focuses his practice on acting as general outside corporate counsel for middle market companies. As part of his practice, he has a specialty working with companies with financial problems, and their creditors. He can be reached at (212) 981-2291 and by email at email@example.com.