by Jonathan McKenzie
Some of the most important and frequently asked “legal” questions I encounter from entrepreneurs, small businesses, and freelancers relate to contracts. As a lawyer, I am often approached by my clients asking me to review a contract they have been presented with or to draft a contract papering up the terms of an agreement they would like to put in place.
Through my experience working with freelancers and entrepreneurs on their contract needs, I have realized that there a number of items relating to contracts that are frequently misunderstood. Today, I want to take a look at a few of these areas with the goal of clearing up some of the more common misconceptions about contracts and to offer some tips for reviewing or drafting contracts.
One of the most common issues I encounter when reviewing contracts not drafted by a lawyer is a large degree of ambiguity or contradiction in the contract terms. It is important to keep in mind that the courts will be reluctant to enforce a contract that is ambiguous or that contradicts itself. In the case of contradiction, the courts may decline to enforce any of the terms of a contract. As such, it is extremely important to ensure that your contracts specifically outline terms that cover all of the important details of the deal you are attempting to paper up.
Many self-drafted contracts tend to deal only with what the parties view as the most important terms of the deal, but neglect to deal with items like termination, indemnity, notice provisions, and other procedural terms. While it may be difficult to turn your mind to possibilities that seem remote or to items that do not seem important at the time, to ignore these things would be to ignore the purpose of the contract – to spell out all of the terms of a relationship. Neglecting to address more minor or procedural issues can leave the parties in a situation that is not covered by the contract or could mean that you may not be able to rely on the contract in court.
By way of example, I have seen agreements which indicate that, if the agreement were unilaterally terminated by one of the parties, the other party was entitled to be paid a certain amount as a penalty for termination. However, another area of the agreement indicated that either party could cancel the agreement on notice to the other party with no liability. As such, the party seeking to be paid the termination penalty would likely be unable to rely on the contract to argue that they should be paid, because the contract is contradictory.
Both parties to a contract must be “giving something up” in order for the agreement to be held as a valid contract. For instance, a contract that obligates a party to do something (such as designing a website) without outlining what they will be receiving in exchange will be held in court as null and void. The courts will not enforce a “one-way” contract. As such, it is important that each party is paying, doing, or giving up something in connection with the contract. What many parties will do is exchange nominal consideration (i.e. $1) to ensure that the contract is valid.
I am often presented with agreements that spell out the terms of a relationship in detail, but neglect to specify what will happen if either party breaches the agreement or wishes to terminate the agreement. If your contract is silent on termination or breach, you will be left in the position of attempting to agree on a proper method for termination or breach, which, at the time the contract is terminated or breached, can be extremely difficult. It is better to agree on these items while you are negotiating your relationship and while there is goodwill between the parties.
I have seen agreements which have no provisions around termination, and in these circumstances, if one of the parties unilaterally terminates the agreement, it is difficult to know what the other party’s rights and responsibilities are. For instance, if the agreement involved the creation of intellectual property, the parties would be left in a dispute as to who owns the intellectual property that had been developed prior to termination.
If you are unsure of whether your contract accomplishes what you want it to or if it would stand up in a court of law, I would encourage you to speak to a lawyer. While there are costs associated with having a lawyer work on your contracts, it is better to spend some money ensuring that the contractual relationship you are attempting to put into place is one that can be enforced against both parties. A lawyer can also help ensure that you have been detailed and comprehensive with your agreement, and that all of the essential terms are included. Good agreements make good partnerships.
Jonathan MacKenzie is an associate with Aluvion Law who works primarily with small and medium sized businesses on corporate and commercial matters. To find out more about Aluvion, please visit www.aluvionlaw.com. For additional resources on contract writing, visit our Legal section of our Tools & Resources, and the recent blog post “Notes from a Freelancer: Learning to Contract.”