Contracts can be daunting. But signing something you don’t understand can be disastrous. Here are some basic principles to help you find your way through.
A Meeting of Minds
Contract, Agreement, Deal Memo, Deed, MoU, Short-Form, Purchase Order – all different names for the same thing – people making promises to each other which can potentially be enforced by a court. A contract can be verbal, a string of emails, the way someone acts, a formally executed deed, or a mixture of these things.
It is the ‘promise’, the state of mind of each party, that is crucial. And much of the value of negotiating a contract lies in the process of achieving this meeting of minds – making sure that everyone is on the same page before you start the venture.
Get it in Writing
The documents themselves are not the contract, they are just evidence of each parties’ promises. But without these documents, a contract can be very hard to prove. So make sure you get it in writing. It can be as simple as sending an email confirming the main points right after you finish the phone call.
It is also important that you cover all the main points of your agreement – everything the other party is promising should be included. Note that there is a particular rule that any transfer of copyright has to be in writing to be effective.
Certainty and Clarity
Sloppy drafting is a common cause of contract disputes – meanings of words are unclear, clauses are inconsistent, important elements are missing. If you can’t make sense of the contract, there is a problem. The value that I, as a lawyer, brings to the process is experience in setting out the terms of a deal with certainty and clarity – so each party clearly understands their obligations and entitlements.
There are many template or precedent agreements of varying quality available. But you need to be very careful in using these ‘one-size-fits-all’ documents, especially for anything other than the simplest deal.
The Seven Pillars
In almost any contract, there are seven main elements that need to be covered. Working through them is a useful way to review and assess your contract.
- Who?: A simple point, but you need to know who you are dealing with. Ask for an ABN and check it here: http://www.abr.business.gov.au/. Google the other parties, ask around.
- What?: Is the subject matter of the contract clearly stated? If you have been discussing a brief or a film treatment, consider attaching it as an annexure. If you are dealing with property, make sure it is clearly described, and if available, identifiers such as registration numbers noted.
- Obligations: Is it clear what each party has to do, and when they have to do it? Are responsibilities completely allocated, or have some been overlooked? Are some actions conditional on others? Do milestones or performance indicators need to be set?
- $: Are all payment provisions clear? How much is to be paid, and in what instalments? How are GST and withholding tax covered? If a party is to be paid a royalty, or a profit share, how is this calculated? What is deducted from the ‘gross’ to reach ‘net’? Who gets paid in what order? Are different currencies involved? It is often a good idea to run some scenarios or sample calculations to ensure that financial provisions work as you intend them to.
- Ownership: In the entertainment and media area, contracts typically concern the production of something – a film, a record, a television format, a book, a database. It is important to be clear as to who owns the results and proceeds of the parties’ efforts, when they own it, and whether their ownership is subject to restrictions (eg approval rights, territories, reversions). Consider whether any rights should be retained, or whether a licence would be a better option.
- Risk: Risk is inherent in any activity, and allocating risk can be an important part of a contract. This is done through number of mechanisms. Are payments and rights transfers front or back-loaded (acknowledging that disputes are often effectively won by the party in possession of the money or property in dispute)? Should risk be transferred from one party to another through warranties, indemnities, releases, waivers and other provisions? Are guarantees or other securities appropriate? What insurance provisions should be specified? Have the worst-case scenarios been contemplated and provided for? (lawyers often have a pessimistic streak that can be useful here!)
- Term and Exit: How long should the contract last. Are start and end dates clearly defined? Should one party have the right to extend it through options, matching rights or similar mechanisms? Under what circumstances should a party be able to terminate? What happens if they do? What if a party becomes bankrupt or insolvent?
It’s Only a Contract
Contracts are very important. I’m a lawyer, of course I’m going to say that. But it is also important to be aware of the limitations of contracts.
They are only as good as the party you are contracting with, so make sure you do your research and make sure you are confident and comfortable dealing with the other party.
In general, contracts have to work for both parties so beware of deals that are too one sided, or which appear to be too good to be true.
A contract cannot cover everything. Be mindful that parties may need room to move within the terms of a contract or that there may need to be flexibility for unforeseen events. Agreement on particular elements may be deferred, or contingent conditions introduced.
Contracts are difficult to extract yourself from once they are signed. You will not be released from a deal just because you struck a bad one. Get advice first, and be wary of a party pressuring you to sign.
PLEASE NOTE THAT THIS IS GENERAL INFORMATION, NOT LEGAL ADVICE. PLEASE CONTACT ME TO DISCUSS YOUR PARTICULAR SITUATION