Six key issues to check in any contract

There are recurring themes which cause problems in many types of agreements because the issues are not raised during negotiations and so are not drafted with any certainty in the contract clauses. Failure to clarify the matters set out below will result in unnecessary and potentially very expensive disputes.

End date of the contract and no renewal

You should be able to specify a start date and end date for the term of the agreement. If the contract is extended then a new end date should be agreed in an addendum. Rolling renewal provisions which can be extended without notice should be avoided as these types of agreements are often badly drafted. One company may argue that notice for termination was served too late and the other that there was never any intention that the agreement should carry on. If you do not want a company to have the right to renew or have a right of first refusal or any option then state that fact in the agreement.

Sub-licence, sub-contracting, assignment or third party transfer

If your company wants flexibility and the right to transfer, assign, sell, sub-licence or sub-contract then a clause to that effect is vital to avoid litigation as to what was permitted.

If you do not want to be sold off to a third party you need to check that there is no reference to – ‘including assignees, successors and other purchasers of title’ at the front of the document which lists the contracting parties. You will also need to delete any third party transfer clause or rights of assignment in the main agreement. You can add a clause which prohibits the right to sub-licence, sub-contract or to make any assignment or transfer of the whole contract or any part including intellectual property rights to a third party. It is possible to compromise so that any sub-licence, assignment or sub-contracting is subject to prior written approval. This can further be amended so that such consent shall not be unreasonably withheld or delayed.

Ownership of material, data and rights now and in the future

Original master material, drawings, prototypes, developments, marketing, unsold products, source codes and relevant customer records and data need to be owned by one company or even held jointly. It is crucial that these matters are listed in the main contract and not avoided. Ownership may relate to copyright, patents, trade marks, computer software, intellectual property rights or data. There should be no doubt as to who owns existing material and rights and who will own those which are created in the future. If the administrators are appointed at a company which holds a master copy of material then it can only be retrieved immediately if the contract states that the master is in fact owned by you the licensor. It is also often worthwhile to consider whether there should be a list of material which is to be returned at no cost after the expiry date or earlier if the contract is terminated.

Financial reports and inspection

Many companies have their own established accounting periods and systems for holding data which is determined by their software and which can be disclosed with an example format. It is helpful to agree to annual financial and marketing meetings where additional information as to markets, sales and strategies can be reported.

If you are being paid royalties, commission or other payments under a contract, then you need to ask for detailed accounts for each fixed period. It should be clarified whether the information and data will only relate to one main company or also cover others in the chain such as associated companies, sub-licensees, manufacturers, agents or distributors.

Will you be supplied with copies of original invoices and contracts, agency documents and marketing costs if you request them? Accounting provisions should always include the right to make an inspection if possible either personally or by qualified professional advisors. An agreed error margin of more than 2.5% could trigger interest at a fixed percentage on the sum owed if there is such a clause in the contract.

The agreement should be clear as to how the exchange rates are calculated and who is to pay for any additional bank charges.

Deducting and recouping costs and expenses

This category could apply to any costs, expenses or charges which are incurred directly or indirectly arising from contract. The question is what the other party is entitled to deduct and recoup before they make any payment to your company or you as an individual. There have been many film and music deals where sums deducted have included all marketing and promotional costs and sums expended relating to merchandising, premiers, travel, insurance and hospitality so that no royalty payments were subsequently paid.

If commission or agency fees are to be deducted then the rate should be set out and the contract should be clear as to whether such payments will be due even after the contract has ended.

Expenses which are often forgotten include the cost of making and developing new online material by any company involved in the project. Are these costs to be recouped or shared or is one company responsible for all such work? If there is a legal action or professional advisors are engaged for any reason it needs to be set out in the contract whether one party can seek to be reimbursed by the other under the agreement for such costs. It is always a good idea to deliberately state in the contract any costs and expenses that may not be deducted or for which the agent or distributor must be solely responsible and that do not fall within any indemnity or within any authorised deductions.

Scope of the contract

Look at the detailed descriptions of exactly what each company who signs the contract must do and fulfil. Often contracts fail to specify in sufficient detail the work that each company must perform and the standard or date by which it should be completed. Performance targets can be set which are expected to be achieved as a minimum requirement otherwise there is a right to terminate the agreement. This is particularly true of contracts involving websites, software and apps as a high level of functionality and appearance is crucial within the agreed budget. It is possible to include clauses which require tests, assessments and pilots to be carried out to evaluate progress at different stages and to highlight problems. Each of these stages could be linked to the right to terminate the agreement and to decide not to fund the project any further.

© Deborah Fosbrook 2018

Deborah is the author of Contract and Copyright Drafting Skills, The A-Z of Contract Clauses, The Media and Business Contracts Handbook, The Complete A-Z of Contract Clauses Pack

Written by Ellie MacKenzie

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