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Party of the First Part
Or, how do contracts really work?

by Shel Perkins

It’s not unusual to hear a designer say “I don’t use contracts.” In most instances, what this really means is that he (or she) is not well informed about legal issues and is hesitant to even bring them up in discussions with clients. He starts a complex project based on nothing more than a handshake, and then just hopes for the best. Well, it’s quite likely that he does in fact have a con­tract in place—he’s just not aware of it. This article explains the key ingredients that create a binding legal agreement between a designer and a client, and describes how a court might later interpret that contract in a lawsuit.

THE ESSENTIAL ELEMENTS
We need to start by defining the word “contract.” It’s an exchange of promises among two or more persons or entities (the parties), whereby each party agrees to do (or not do) something.

In forming a contract, there are some limitations. The agreement cannot be for an illegal purpose—it must have a lawful objective. The parties involved must be competent persons who have “capacity,” which is the legal ability to enter into a binding contract. This means they must be of legal age (18 or 21, depending on the jurisdiction) and they must be of sound mind. In a business context, if an individ­ual is representing a company he or she must also have “authority,” which is legal permission to act on behalf of that company.

The contract comes into existence when one party accepts another’s offer, provided that there is “consideration.” Consideration is an important legal term. It means something of value that is provided by each party—for example, one provides services and the other pays for those services. Consideration must have value that can be objectively determined. It cannot be something subjective, like love. If there is no consideration, or if the consideration is not legally sufficient, you do not have a contract.

For designers, the process of forming a contract usually goes like this: You make an offer to the client (“I would love to design your brochure”), the two of you negotiate back and forth on the consid­eration (the exact scope of work you will perform for the client and the fee that will be paid to you in return) and eventually the client accepts (“Yes, please do the work”). Offer plus acceptance plus consideration equals a contract.

ORAL CONTRACTS
In the United States, contracts do not necessarily have to be written down to be legally binding. Oral agreements are enforceable as long as the parties sufficiently indicated in some way that they intended to make a contract. There are important exceptions to this, however. Every state has enacted some version of a law called the “statute of frauds.” It requires certain types of contracts to be in writing, including such things as real estate transactions and any agreement that will not be fully performed within one year of the time it is made. For designers, this would include any contracts for projects with extended timelines.

I’m not recommending oral agreements to you, however, because they often lead to problems. The details that you thought you negotiated in advance may be difficult to prove later on, and in most jurisdictions the amount of time you have to file a lawsuit over any dispute is shorter (depending on the state, there may be a limit of two or three years for oral contracts as opposed to four to six years for written contracts).

If you do eventually find yourself in a courtroom, federal and state laws (such as the statute of frauds just mentioned) may affect how your contract is interpreted. The court may override or modify certain aspects of your agreement. In order to understand how this works, it’s very helpful to know the difference between statutory law and common law.

STATUTORY LAW
A “statute” is a written law that has been passed by a legislative body. At the federal level, statutes are enacted by Congress. State statutes are enacted by state legislatures. And, to take it one step further, a legal “code” is a group of laws on the same subject, such as the tax code.

Statutes are not flexible. They must be followed to the letter. How­ever, most statutes don’t include details about how they should be applied to various potential situations. Instead, they tend to state a general principle. Because of this, courts must interpret how a statute applies to the specific circumstances of a matter at hand—each lawsuit has its own precise set of facts. The court’s interpretation establishes “precedent.” A legal precedent is a court decision that’s later used as guidance for other cases. It’s cited as an example or an analogy to resolve a similar question of law, provided that the subsequent case is very similar in its details. The underlying principle is that it would be unfair to treat similar facts differently on different occasions.

COMMON LAW
Not every dispute that comes into the legal system directly relates to a statute. Courts are often called upon to make decisions on issues where there is no clear statutory guidance. This separate body of judicial opinion is referred to as “common law.” The standard description of common law is that it’s “judge-made.” Common law is not quite as rigid as statutory law. It evolves over time and recent precedent tends to carry more weight than older decisions.

One area of common law that’s especially important to creative professionals is called the “law of agency.” Agency is a consensual relationship where one party (the “principal”) grants authority for another party (the “agent”) to act on behalf of the principal in dealing with a third party. For example, this is the case when a client asks an advertising agency to negotiate and place its media buys. There is a large body of common law precedent that provides guidance for agency relationships.


STATE AND FEDERAL ISSUES

The majority of contract issues are governed by common law. How­ever, a number of statutes might also come into play on design projects. You already know about the statute of frauds. Other state laws that you should be aware of have to do with “implied terms.” Implied means that they’re legally enforceable even if they are not specifically stated in your contract.

For example, states impose a “warranty of good faith and fair dealing” on commercial transactions. This is a presumption that all parties promise to deal with each other honestly and fairly. This obligation is incorporated in the Uniform Commercial Code (UCC)—a set of model statutes that has been enacted with some variations by every state in the country.

The main focus of the UCC is the sale of “goods,” a term that includes all items that are both identifiable and moveable at the time of the sale. When merchants sell goods to customers, those transactions carry an “implied warranty of merchantability or fitness for a particular purpose.” This is a promise that any goods delivered will be free from defects and reasonably fit for the ordinary purpose for which such goods are usually sold. If your design firm receives a preprinted purchase order document from a large corporate client, it might contain a reference to this UCC warranty. Depending on your design specialty, however, you’re probably not delivering goods. If the primary objective of your contract is for you to provide a service, this warranty would not apply. You might want to include a “disclaimer” on this point—a short statement to inform your client if this particular warranty does not apply to the project.
http://image.commarts.com/Images1/1/3/0/2/203106_54_0_MTA4ODU4ODM0LTE2MDAxMDUyMzM.jpgShel Perkins
Shel Perkins (contact@shelperkins.com) is a graphic designer, management consultant and educator. The revised and expanded second edition of his book Talent Is Not Enough: Business Secrets For Designers is published by New Riders.