Contract Basics 101

Introduction

What is a contract? What are the components of the contract? Why are contracts important?

Most people understand that contracts are written documents. But is this always so? Does a contract always have to be in writing to be binding?

What are some of the most important elements that should be addressed in a written agreement?

What happens when a contract breaks down? What are the legal remedies?

These questions are deceptively simple, but the answers are not always so. The answer to these questions and others, will be explored in this article.

I What is a contract?

A contract can be defined as "an agreement that binds the parties". More explicitly, that  a contract is an agreement between two or more parties to either perform some act, or refrain from performing,  a lawful act.


II Why are contracts important?

There are many reasons why contracts are important. Not only do they define the legal parameters of specific contractual obligations and have legal implications as to their fulfillment and non-fulfillment, they also define the parameters and details of working relationships in society.

Many contractual relationships are commercial in nature, however not all are. For example, a marriage between two spouses is a contractual relationship that can be binding based on consideration, consisting of natural love and affection.

III What are the component parts of a contract?

In order to have a legally binding agreement, three components must be present: 1. an offer; 2. acceptance; 3. consideration. These three components of a contract are further outlined below.

An offer must be clear and communicated to the other party to the contract and that specific offer must be accepted by the other party to the contract.

In the course of contract negotiations there are often many counter offers exchanged before an actual offer is accepted. Therefore, it can be unclear whether not a specific offer has been actually accepted.

One needs to be prudent and clear when communicating with respect to contract offers, not only because it is important to know what offer one is prepared to accept but also because even in the absence of an agreement, liabilities can result. That is, there may be damages and liabilities that occur, even in the absence of a fully formed agreement, if someone acted in reliance on certain representations that may have been communicated, or were implied by the course of conduct of the parties.

Consideration is the most misunderstood component of an agreement. It is the component of the agreement that makes it legally binding. It has a legal meaning distinct from the common understanding that one has of what would constitutes consideration.  Perhaps this is why it is not always clearly understood.

Most typically and fundamentally, in most commercial contractual situations, consideration is the monetary payment to be made under the agreement. Consideration can include, credit for services rendered, or even services that are provided on a barter basis. Consideration can also mean refraining from doing an act.

IV Must contracts be in writing to be binding?

The answer is generally no. There are many examples of relationships and oral contracts in society which are binding. For example, many artist management agreements are on a "hand shake" basis, that is, they are not in writing. Such an agreement is not legally invalid and unenforceable because it is an oral agreement.

Agreements may also be partly oral and partly written. For example, an exchange of e-mails can meet the definition of a contract, that is if they include an offer acceptance and consideration. Of course, contracts can also be full-fledged formal written agreements,  in either short or long form versions.

One should be aware however that there are certain contracts, for example, the sale of land, or the transfer of copyright interests, that the law states must be in writing to be valid.

V Why should contracts be in writing?

There are many good reasons why a written agreement is preferable to an oral contract. In the best case scenario, a written agreement is clearer, more concise and certainly far more capable of enforcement in a court of law. It is a lot more difficult to prove, from an evidential standpoint, that an oral agreement exists than a written agreement. Written agreements can also help avoid poor relationships that can result in situations where an oral agreement is unclear.

Also, written agreements can allow one under a contract to avoid the ambiguities in the law that might exist. In this regard, it can be more certain to state what the parties to a contract intend, rather than to rely on a statute that is ambiguous. For example, it is common to enter into a written partnership agreement rather than rely on the terms that are imposed on an oral partnership under the Partnership Act in Ontario.

In addition, some statutes specifically state that you can "contract to the contrary", that is, outside of the statutory framework that would otherwise apply. For example, under the Copyright Act, where a portrait is commissioned for valuable consideration, the commissioner of the portrait would own the copyright. However if the parties agree to "contract to the contrary" which is allowed under the statute, then in such case, the artist who does the portrait could retain the copyright to it, rather than the party that commissioned it.

VI What should be included in an agreement?

There are many key terms or provisions that could and in some cases, should be included in a written agreement. These include general provisions which are the so-called "boilerplate" provisions and the provisions that are specific to the agreement .

Of course, written agreements can and often do also include many formalities such as the effective date of the agreement,  signature lines,  headings, recitals, numbered paragraphs and sections, witness signatures, addresses of the parties etc,  all of which add to the completeness and accuracy of a formal written agreement.

I outline some of the key issues below that commonly arise and should be addressed. In any given factual situation what is relevant and should be addressed, will vary.

1. Depending whether it is a contract for services or a contract for goods or a product, the grant of rights should clearly specify what services are to be provided and/or what products are to be supplied. Typically entertainment contracts are contracts for services between an engager who contracts with an artist supplying the services.

2. The term of the agreement is relevant. That is, how long does the agreement last? Or to state it another way, what is the duration of the agreement? In this regard, the term of the agreement should be clearly spelled out, as well as the rights that either party might have to terminate the term of the agreement. See paragraph 3 below.

3.Typically an agreement might be able be terminated based on certain events. For example, the failure to pay a deposit in order to secure the services of an artist or, for example, on notice. A typical notice of termination might be based on 30 days written notice.

4. The notice clause is quite relevant with respect to paragraph 3 above because it clearly spells out how notice is to be given. For example, is it by personal delivery, registered mail, or e-mail, or by any of these three methods? The notice clause is so important and common in an agreement, it is a general provision that is it is classed as one of the "boilerplate" provisions referred to above.

5. Are rights granted on an exclusive or nonexclusive basis?

6. Is the agreement revocable or irrevocable?  See paragraph 3 above.

7. Is the contract defined by or restricted to a specific geographical territory?

8. What is the consideration to be paid? Typically this would be a fee and/or other consideration including such things as accommodation, per diems, meals supplied, travel expenses and other benefits or so-called perks that might be negotiated and agreed to and set out in the agreement.

9. In situations where a fee is contingent on certain events, or there is a continuing royalty to be paid, then it would be highly advisable to include an accounting and audit clause so you can verify the amount that is to be paid. In the absence of an accounting and audit clause, one would have to go to court to obtain a court order in order to establish such right. A much more certain and less expensive way to do this is clearly, in writing, in the agreement.

10. Of course one will want to make sure that one has the proper party to the contract, whether that be an individual, partnership or corporation, so that one is clearly contracting with the proper party who is to be bound under the agreement.

For example, if it is a corporation, make sure the proper corporate name is set out on the agreement otherwise the contract may not be binding on the party you wish it to be binding on. For example, if you're dealing with ABC Corporation Inc., and the contract is under the name ABC Corporation LTD., you do not have the proper party to the contract.  ABC Corporation Inc. would not be bound under it. You need to be careful in this regard that the proper party is on the contract and each party that is to be bound to fulfill the terms and obligations of the agreement, is on the actual agreement as a signatory.

The above suggestions are not exhaustive and any given contractual situation, other considerations can and should be addressed that are relevant to that specific contractual situation.

VII Breach of contract

What happens when a contract is breached? What are your rights and obligations? Firstly one should consider obtaining skilled legal advice if a contract is breached. This of course could depend on what is at stake financially and otherwise and whether or not the cost of retaining legal counsel is warranted. The situations outlined below are typical, but very general in nature. There are many potential legal and equitable remedies that might apply in any given fact situation which are not outlined below.  A detailed discussion of these remedies is beyond the scope of this article. I do recommend you seek skilled advice when it is warranted in a given fact situation.

What many do not realize is that if you are in a situation where a contract is breached, you have the duty in law to "mitigate", or lessen, your losses. That means, for example, that if your contract is terminated and you can obtain a similar engagement elsewhere for the same amount of consideration, or substantially the same amount of consideration, or even greater consideration, then you are obligated by law to make reasonable efforts to do so. If you cannot find a substitute contractual situation after you have attempted to mitigate your losses and failed, then you can elect to sue for damages. Damages are typically the financial compensation awarded by a court which, on a reasonably foreseeable basis, might result from a breach of contract.

However if you find a substitute replacement contract for the same or for more money, then the person that breached the agreement is entitled to take advantage of the fact that you mitigated your losses. They would not be liable for damages, because as outlined on the facts, there are no damages. That is, you are receiving more remuneration than you would have if the contract had been fulfilled, therefore there are no financial damages.

If you are not incorporated, keep in mind as well that personal liability can result in situations where you personally signed an agreement. In situations where the liabilities are substantial, this would mean that you could be subject to having your personal assets, such as your home, other personal assets, including monies in a bank account, available in order to satisfy a judgment of a court. This is why one should carefully consider the risk involved in any venture and whether incorporation is a way to appropriately minimize that risk. In this regard as well, it is also important to consider at all times whether not insurance is available to the business venture to minimize the risk of loss.

The above does not constitute legal advice and in any given situation skilled legal advice should be sought.

©  Paul Sanderson, 2012

Paul Sanderson is a lawyer in private practice with his own firm Sanderson Entertainment Law, www.sanderson law.ca.  He has extensive experience in arts and entertainment law and has restricted his practice to these areas since 1983, when he was called to the bar in Ontario.   

He is the leading author of legal publications on arts and entertainment law in Canada. His publications include "Musicians and the Law in Canada" (Carswell Legal Publications) which was first published in 1985 and is now in its third edition. He is also co-author of "Artists Agreements: Contracts for Visual and Multimedia Artists" which has been in print since 1982, is published by CARFAC Ontario and is now in its second edition.