Jan. 29, 2007 SLO STC Event Summary

Our January 29th event explored the essential things we should know before we either create, or sign on the dotted line of, a consulting/contracting agreement or employment contract.

The contract sets the tone of the transaction and establishes expectations for all of the parties. Understanding how to read and negotiate a contract enables the parties to enter a positive relationship with clear expectations and boundaries.

As always, this was not a substitute for obtaining your own legal counsel, but will empower you to effectively and efficiently use legal services on contract-related issues when you engage your own attorney.

Our speaker, attorney Bradford Anderson, covered the following important points using engaging humor and diverse examples:

The differences between having no contract, a verbal contract, and a written contract

Intellectual property ownership provisions

Warranties on products you create and services you provide

The meaning, and dangers, of indemnification provisions

How to professionally negotiate a contract while building the relationship

Effective use of legal counsel in contract issues

Regardless of the types of professional services you provide or use, this was a rare opportunity to receive expert advice on how to evaluate all sides of the contractual equation.

To learn more, read Bradford's presentation outline, below.

“Tips for Negotiating Contract Provisions for Independent Contractors, Employees, and Employers” by Bradford Anderson

Introduction

This presentation is for general informational purposes, not a form of legal counseling, and not geared towards a specific matter or situation.

I teach law related topics at Cal Poly and at Cuesta College, and I'm not here to render legal advice, or to offer or sell you any legal services. I can point you to a referral service to find lawyers for your needs [see the "Resources" below]. As I don't render private legal services, you'll appreciate the fact that this discussion is not motivated by an effort to recruit clients or make money!

It is impossible for me to effectively comment upon a specific situation for which you may have legal concerns, because detailed facts and analysis are necessary in every situation.

This presentation is not an undertaking of an attorney-client relationship or representation, and I am not providing you with "legal advice," and therefore no responsibility or liability is being undertaken for any contract or situation that you might have. The purpose is to stimulate discussion of some important legal topics for any business person, but not to teach you "the law" and not to render legal advice for any specific situation.

Attorney-client privilege is such an important part of the relationship, and if you ask questions in public, you lose such privilege. Moreover, this setting is not appropriate for understanding details of specific circumstances, so I want to be clear that I am not serving as your attorney or giving you legal advice. The presentation is intended to provide general information to help you better understand the topic of contracts so that when you hire an attorney, you can better discuss the topic with your attorney.

The California Bar and SLO County Bar have an excellent attorney referral service. [See the "Resources" below.]

What Is a Contract?

CA CIVIL CODE §1549 says: “A contract is an agreement to do or not to do a certain thing.”

You can agree to do, or not to do, something in a contract. This is vital, because contracts typically contain both types of terms in business arrangements. Be careful about focusing only on what you are going to receive in a deal, such as payment of money, because you are probably agreeing to do, and not to do, a variety of acts.

Although in certain circumstances California recognizes "implied contracts," which are contracts arising from intent and conduct, and also recognizes verbal contracts in certain situations, it is always best to have an express, written, signed document. That way, it is easier to prove the terms of the deal without getting into a battle, and the negotiation process helps the parties to hammer out the details.

Note that verbal contracts are not valid in certain circumstances, so why even beg the issue. Get all of the terms of your deal in writing so that when a dispute occurs, you can point to what was agreed upon. Also, how many times have you entered into an oral deal, or had a vague contract, and then encountered a change in personnel on the other side, resulting with the new contact person having no details of your deal? Simply avoid this!

Basics of Contracts

It is helpful to understand some key terms in contract law.

1. Offer: This is the act of communicating a potential contract deal to another party. Keep in mind, that typically the communication of the offer then vests the power of acceptance unto the parties receiving the offer.

2. Acceptance: One example would be saying "yes, I accept" to an offer. The time to negotiate details is BEFORE the acceptance (or contemporaneously with the offer) and NOT after the deal effectively has been accepted.

3. Consideration: This is the "value" that flows each way. For example, cash flowing one way, and a car flowing to the other party.

The contract contains the terms of YOUR deal. Please never say, "a contract is just for the lawyers." The contract contains YOUR business terms, so you had better read and understand your contract. Unfortunately, there are sometimes words in a contract which have important legal meaning, but may not immediately jump out at you with the importance that they convey to a lawyer.

Intellectual Property Rights and Contracts

Be sure to have a clear understanding and explanation about who will own the rights to any resulting work. For example, if you are being hired to develop a new "logo" for a computer, will the customer own all rights to that logo for any purpose? Or, will a grant of rights be limited to allowing the customer to ONLY use the logo with the computer, and not other products? Can the customer modify the logo, and own both the original logo and the modified logo? Can the customer license rights of the logo to third parties?

What about an owner's manual that you are asked to write? Does the customer "own" the resulting work product with the right to modify it for future products, or are you merely licensing the manual, and not transferring ownership rights, to be used and copied by this customer only in association with the specific product for which you were retained?

What about information in a technical manual or software program which is something "standard" that you've created and used multiple times over the years? If you are not clear, the customers might assert that they are now the owners of that material, and might assert that you have to obtain a license from them to use it in the future!

I am not speaking to any particular issue or circumstance here, but my purpose is to get you thinking about ownership terms and how important it is to CLEARLY spell out the EXACT terms of the deal. That way, there can be no confusion later on. The biggest problem in contract disputes involves people who say "I thought" (don't just think; READ the contract) or who say "That was in the fine print" (there is no "fine print," just a contract!). Be careful about contracts that are vague, and fail to address work product ownership terms. You'll likely end up in a battle later on if your contract doesn't clearly address the issues.

While we are talking about ownership rights and intellectual property, be sure to consider the issues of patent ownership, especially if you might possibly "invent" something useful in the context of a project; copyright ownership for expressions that you create; trademark and service mark ownership; and any other work that you are creating, or might generate, for a project.

Be sure to consider whether ownership of your resulting work is being granted, or just a license, and be crystal clear in the contract. Your lawyer will help you watch for terms of art in the legal trade, such as "work for hire" which has a very special meaning under the copyright law.

Deeming a project as a "work for hire" can result in a complete transfer of ownership rights to the party hiring you, so be sure that you don't simply gloss over words in the contract, assuming that if you don't know or understand those words, that they aren't somehow important. Moreover, "work for hire" generically sounds like you are being hired to perform work, so a layperson might not understand that those words have clear statutory meaning which could convey all ownership rights in the project to the hiring party. That would be a huge mistake if care was not taken in understanding the terms of the contract, and that is why lawyers are important.

"Gotchas"

The purpose of this interactive discussion is just to get an idea of some language you might see in a real contract, and get you thinking about business risks. This does not replace counsel from an attorney, but at least we can discuss some concepts here.

If you at least read the contract and identify areas of concern that you have BEFORE you visit with an attorney, you will be using your attorney's time, and your money, more efficiently. Keep in mind that the contract sections and terminology in these examples is just for demonstration purposes. Your contract terms, section numbering, and other details could be dramatically different. We're just talking general concepts here, so don't be afraid to volunteer your input.

1. Definitions. This topic pertains to other documents brought into the "contract" as well as the potential for rate revisions. Some problems include the rate revisions and other documents dragged into this contract.

2. Term of Contract. This area pertains to the duration of the contract, sometimes to termination rights (if any), "evergreen" clauses that automatically renew the contract, and limited time periods in which to avoid automatic renewal. Some problems include automatic renewals, rate increases, and this limited window of opportunity to cancel.

3. Termination provisions. This aspect relates to cancellation rights, mutual right to cancel vs. one party getting better cancellation rights, what occurs during the period after a cancellation notice (i.e., can you continue performing work, or are you supposed to just sit and wait?), and payment after a cancellation (i.e., pro-rata for term of contract or work milestone based). Problems include wind-down costs and calculation of fees when the contract is permissibly terminated.

4. Creation of deliverables. This area covers what exactly is supposed to be provided by each party to the other party. Watch out for "open ended" terms, such as agreeing to agree on some future specifications, and concerns about work product ownership. Problems include undefined scope of work and lack of ownership clarity.

5. Price escalation terms. This aspect relates to automatic price escalation, plus concerns over provisions which allow rates to be modified simply by providing notice; and fixed-rate vs. variable-rate contracts. Problems include continuous rate increases, plus potential other rate increases (from the definition of "Contract").

6. Return of materials. This section concerns ownership and who owns what, what is subject to return, problems with returning materials to unknown destinations, and problems with designated return or packing services.

7. Indemnification. I'm frightened just looking at this! This aspect relates to potential unlimited liability, being asked to step up to the plate to pay legal fees and money for personal injury including death, property damage, etc., regardless of how caused.

It also pertains to indemnity without any allocation or limitation based upon who committed the wrongdoing which caused the liability. Indemnity is a serious legal and monetary obligation, so be sure you understand it, and discuss with legal counsel. Consider limits upon monetary amount, and reasons for which indemnity will apply, etc. Even then, this is still a serious obligation and not to be undertaken without legal counsel guidance and also involvement by your insurance provider.

8. Limitation of Liability. This area relates to calculating the limits, to whom the limits apply, and the fact that there could still be claims outside of the contract limits which create a legal risk for you.

9. Insurance. This topic covers what insurance is, and complying with insurance requirements. Will insurance coverage actually cover what you want it to?

Problems include the fact that the statement just asserts that today there is insurance, but unknown how long the policy is, whether you will get notice of cancellation or non-renewal, what are the coverage terms, and the problem of "subrogation," where the other party's insurer may cover a claim but come after you to get reimbursed for the claim.

Negotiations

Key Point 1: Different styles — Will you look at "interests" of parties, or establish "positions?"

Key Point 2: Honesty in negotiations — What are your actual concerns and are there various ways to address those concerns?

Importance of Lawyers in Contracting

Pay now or pay later. There are terms of art in contracts that only lawyers might know, making it beneficial to have that knowledge.

Conclusion

Again, our goal was to emphasize the importance of jumping into the contract, and obtaining appropriate legal advice so that your deal contains all of the terms that you want and need to reduce risk and remain successful in business.

This article does not constitute legal advice and is not a substitute for legal advice from your own attorney who is familiar with the unique facts and circumstances for your situation. Instead, this article is designed to help you learn a few general legal terms, become more aware of the many risks in contracting, and motivate you to engage your own attorney.