Clutch, dress, contract: A beginner’s guide to contracts

Contracts. What are they? Why are they important? Why should you care?

Historically, contracts have got a bad reputation for being time-consuming, hard to understand and costly. Those criticisms are still applicable, but they don’t have to be. Contracts are one of the ways that you can protect your business, your products and safeguard against risk.

This article gives you a brief rundown of the answers to each of the above questions as you take a step forward in not being the next Stella McCartney or Virgil Abloh, but being the first you.

What is a contract?

Essentially, it’s an agreement between two or more parties that is legally enforceable. In other words, if you fail to fulfil your part of the bargain then the other party (or parties) can sue you to either force you to perform those obligations or to pay them money to put them in the place they would be if you had performed them.

Key ingredients

In English law, all that must be present is:

1. an offer by one party to another;

2. acceptance of that offer by the party;

3. consideration (often a payment, but it can be a mutual exchange of promises e.g. “I’ll do this in exchange for you doing that”);

4. an intention to create a legally-binding agreement; and

5. that the terms agreed are sufficiently certain.

You can form a contract verbally, over email, by clicking a box online that says “I agree” and in many other ways, as long as you have the above characteristics. So, it’s important to note, a contract does not need to be in writing! However, it is wise for it to be written so that all the parties share an accurate record of what has been agreed.

In practice, it is therefore important you maintain a process for making agreements with third parties, ensure that the offer matches what you are expecting, that the key terms are mutually understood between all parties and written down to ensure there are no surprises down the line. In the event of a dispute, evidence will be required to show the terms that were agreed. Without a written agreement, this can lead to extended disagreements, difference of recollection and an unhappy result.

As a quick tip, you can include the words “subject to contract” to make clear to others that you do not intend to create a legally binding agreement until you have a written contract in place that has been signed by all parties and dated.

Timing is everything

You may get the impression from this article, so far, that you need a contract for absolutely every agreement you will ever make from this day forward. However, that is not the case.

You should focus on having contracts in place where the consequences of not having one are substantial. For example, before sharing your unique design with a manufacturer or your financial performance with a potential collaborator, you may want to consider putting in place a Non-Disclosure Agreement (NDA). NDAs can protect your confidential information and prevent third parties from exploiting information you share in connection with commercial opportunities. They can also prevent unintentional disclosure of your designs and inventions.

Other examples of where contracts would be useful are when you are agreeing terms with a manufacturer to create your goods. These agreements typically contain safeguards as to quality, details on how the product will be transported, obligations as to payment for the goods and dates on which they will be delivered. Likewise, you will want a set of terms and conditions (which are effectively a contract) for the sale of your products to your customers, setting out the key points on delivery, returns etc. Should you collaborate with an influencer to show off your wares on social media or provide a referral link for purchase of your designs, you will want each party’s obligations clearly set out in a written agreement.

Red rag to a bull

Now that you have an agreement in front of you, you need to decide whether to sign it (as we’ve learnt, to confirm your intention to create legal relations and accept the offer). But the document is 20 pages long, full of legal language, cross-references to other documents and reads like a dictionary in certain sections.

We have included below several key points that you should consider:

• Identity of the parties. Are you entering into the agreement as an individual or as the company under which you trade?

• Payment obligations. What is the price? Does it match your expectation? Is it an upfront fee or a monthly payment or both? When does payment need to be made by and in what currency?

• Performance obligations. Who needs to do what and by when? Is there any period of exclusivity?

• Term. How long will the agreement last? Do you want it to end automatically or continue indefinitely until one of the parties ends it? Do you want the right to end it early and for what reasons (e.g. common reasons are breach and insolvency)? It’s important to understand these rights, as the agreement may continue indefinitely until terminated. If this isn’t what you want, make sure it is clear.

• Ownership of Intellectual Property Rights. Will you want to retain ownership of any design rights, copyright protection or trademark rights in your product? Undoubtedly yes, so this needs to be clear in the contract. You do not want the goodwill (or your reputation) to be shared between parties. It’s yours, own it.

• Liability. Failing to prepare is preparing to fail. No one wants things to go wrong, but they can. Deal with it. You deal with it by ensuring that liability in the contract is clear between the parties. A connected point is making sure that if someone is harmed by the other party’s actions (for example, the manufacturer creates an unsafe item) they agree to assist you in any litigation or pay out of their own pocket for any damages. If you are concerned that the other party is small and doesn’t have much financial backing, make having insurance a term of the contract and insist on seeing the insurance certificate.

• Governing law and jurisdiction. We live in a world of nearly 200 countries. Most of them have a legal system which your contract could be decided under. Some will work in your favour, others will not. Understanding what country’s laws will apply (and which country’s legal system will manage any disputes) is invaluable to make an informed choice. This is usually guided by where the contract is being performed and/or the location of the parties.

Ultimately, you may feel out of your depth trying to negotiate these points or to understand their ramifications. That is okay! You do not need to be an expert, but having a working knowledge of these concepts can mean a good starting position for commercial negotiations.

Help is available

Let’s face it. Solicitors can be expensive. Please do not let that stop you from seeking help! Spending a bit now to save a lot later is a well-worth business expense. Most solicitors will provide an upfront quote for a particular scope of work, so you know how much to budget. Just be careful to check they’ve understood the full scope of what you need assistance with so there are no unexpected costs.

Before engaging a solicitor, you can help yourself by reading the contract from top to tail and flag anything that you don’t like the sound of or is different from the deal you think has been agreed. If you don’t understand something, or what its effect is, ask. Agreements are reflections of the relationships that you develop and one of the most important pieces of advice you can take on board is to not contract with parties that you do not trust. You can talk to your peers, share good practice and engage with counterparties that act fairly.

As a final point, contracts are a means to an end. Certain risks will need to be taken and terms you may not want to accept may need to be accepted to give you that opportunity you need. You can assess those risks from a commercial perspective (i.e. is this a good deal for me). A solicitor can help you assess these risks from a legal perspective, advise as to market practice and provide their experience as to other people in similar situations.

Disclaimer

This article is intended to provide a brief overview of contractual questions that you may have and is not a replacement for bespoke legal advice. If you are in doubt, please seek the assistance of a regulated professional in your jurisdiction.