A Contract Clause With A Problem
I signed a contract with a new client last week. I read the contract closely and in general, I’m very comfortable with it. There’s only one clause I’m uncomfortable with — and, honestly, I worry about in most of the contracts I sign.
It’s the clause related to the governing law under which the contract can be disputed. These clauses can also be referred to as ‘choice of law’ or even be incorporated into dispute resolution.
Contracting With International Clients
I’ve got contracts in my files that list British Columbia, Hong Kong and most of the U.S. as the governing law. While it’s nice to have clients all over the world, there are some drawbacks to enforcing those contracts. If something were to happen — a client didn’t pay me, or somehow I was on the hook for non-fulfillment of the contract — the legal dispute is expected to take place wherever the governing law clause says it will. To try to enforce the contract, I’d have to at least dig up representation in that state or country. Depending on local laws, there may be an expectation that I show up in person, as well.
Needless to say, this isn’t a particularly practical situation — for either side. If a client doesn’t pay, pursuing international legal action is usually more trouble than it’s worth. If I were to violate some other clause, such as an NDA, it’s just as much trouble for them to try to track me down. Even if you’re only crossing state lines, trying to enforce a contract outside of your own geographic area is tough and expensive. So where does that leave us?
The Real Value of Contracts
Since my contracts seem next to impossible to actually enforce, the thought has crossed my mind that perhaps they really aren’t worth the bother. That really isn’t true, though: contracts do have value. Most contracts don’t become a matter for the courts. Instead, they’re a way to set out terms and make sure both you and your client are on the same page. And even if something does happen, having a signed contract gives you a little more freedom when it comes to straightening the matter out. A contract offers a certain amount of legitimacy to your claim — after all, no one wants to get a reputation for violating contracts.
Contracts can even provide a few avenues of protection, allowing you to negotiate terms that will minimize your risk from working with clients outside your own area. For instance, I typically ask for a payment schedule to be listed in the contract: it requires payment each month or at specific milestones, depending on the type of project. This approach lets me find quickly if a client doesn’t have any intention of paying at all, allowing me to pull the plug on a project quickly. And if a client does decide to go against our contract part way through a project, I’m out only a month’s worth of work at most. That’s still not a great situation, admittedly, but it’s still much better than losing out on even more.
How Much Do You Know About Contracts?
When it comes to contracts, freelancers are often on our own. While we’re constantly advised to have a lawyer look at each contract we even think about signing, it’s rarely practical to actually do so. That makes it necessary to be pretty well-informed about the law. I’m not suggesting that freelancers should go to law school by any means, but it’s worth reading up on the contract laws for your area (and perhaps the areas you have clients in).
Whether you want to learn while you work out or to make that commute useful, Freelance Radio is the place to hear all the tips, tricks and news of freelancing.
Freelance Radio
Nice article. I was just reading about this the other day. If you have the choice of law and jurisdiction clauses you can state which state/region the contract is governed by law. Don’t know how far you can take that if you come up with a dispute. I found a new free site recently where you can write contracts online and get online signatures: http://www.fastdue.com. I just used it for a recent contract. Check it out.
I will normally always insist on using the law of my own region (England). Occasionally I have compromised and we put that if I start the proceedings then I will have to take the case to their law courts and if they start they will have to start proceedings in the UK. That way neither party has the upper hand and both parties will try to resolve the conflict first rather than go down the legal route.
There are only a few sections of contracts that I feel are relevant in my writing specialty. I particularly pay attention to:
1. How much I’m paid.
2. What increments I’m paid in.
3. When I’m paid.
4. Most importantly, if there is a non-compete clause to prevent me from doing similar work for another company.
I’ve been paid in full for all of my 200+ projects, so that’s never been a problem. I’ve always had noncompete clauses struck from the contract.
Jurisdiction for legal action can obviously be important. However, it could raise a red flag with a client if you make a big deal about it.
Also think about how much you’re getting paid for the project. If you wind up not getting paid, would the expense of money, time, and stress in pursuing legal action be worth it?
However, if you are dealing with large sums of money, say many tens of thousands of dollars, you should consider the contract carefully and get legal advice if necessary.
You are absolutely right that it’s important to understand law. Most freelancers are mortally scared of this, but you need not be. Contract law in itself is surprisingly straight forward, its just hidden under a layer of legalese and FUD. If you want to get a quick overview of contracts have a look at this quick guide I wrote for entrepreneurs (freelancers are also included here):
http://stakeventures.com/articles/2006/08/17/pragmatic-contract-law-for-entrepreneurs
I agree with John that it’s best to get rid of Non Competes. The jurisdiction clause is worth noting, but I think John might be right that its a hard one to battle. You may be able to add an arbitration clause like the one in my consulting template (feel free to modify this as you wish):
https://agree2.com/masters/consulting-agreement-between-client-company-and-consultant-name
This above template is the result of me trying to refactor the freelance contract. The contracts most of us sign is very one sided and not clear at all. Here I discuss why I’m trying to do it and also explaining the individual clauses:
http://blog.extraeagle.com/2009/03/11/refactoring-the-consulting-agreement/
I’ve been writing a series of blog articles about contract law for freelancers/contractors here that you might find interesting:
http://stakeventures.com/articles/category/legal
If you work with clients in the US, I would suggest that you familiarize yourself with the Uniform Commercial Code and play close attention to Article 2 (http://www.law.cornell.edu/ucc/2/article2.htm) which deals specifically with contract law. I would supply an appendix of definitions to your contract as a reminder of legal ramifications. The fact that you’ve supplied them with this information lets them know that you are not ignorant of the requirements and that they cannot be as well.
Most large companies also have a compliance department that works with a legal department in some manner. If they do and they do not follow the regulatory requirements, they are subject to both internal and external risk factors which may include reputational risk or fines from an external regulatory agency.
I have looked at contracts extensively for my role as a risk manager. Unfortunately it mainly deals with the insurance, idemnity, limitation of liability and consequential damages clauses in the contract. While you may not be able to enforce your contract, a company can sure as heck enforce their contract if they want to try. One thing that has never been discussed here (that I can see) is insurance, and particularly insurance to protect you the freelancer.
The one advantage to having either general liability (public liability), personal umbrella or professional liability insurance, the insurer normally has panel counsel that can protect you in the event you are sued. It is very easy to ask your insurer for a list of panel counsel in an area you will be dealing with just in case you want to call them and use them to litigate on your behalf. It is what even large companies do in many cases.
The easiest way of course is to make sure you have a very defined and exacting Statement of Work that defines what you are being paid for. I have been appalled at the SOW’s I have seen where I had to call the contract group to figure out what they will be doing. It was never stated in the SOW.
Does anyone ever look at the idemnity provisions to make sure it is not totally one sided? I have seen this many times and I am not sure what you can do as a freelancer to stop it but in reality the idemnity, LOL and consequential damages will define what you are on the hook for if, something goes wrong.
Be sure not to confuse choice of law with jurisdiction. They are two completely different legal concepts.
Choice of law determines what laws will be applied to the situation at hand. Practically speaking, you can choose any state / country’s laws for your contract.
Jurisdiction determines where a dispute can (or must be) litigated. If you’re contracting with a big company, they’ll likely insert a clause that says disputes must be heard in their local courts. Likewise, if you’re providing a contract, you should have the proper language in it to make sure you can sue in your local courts.
I’m not sure I agree with that (not that this is legal advice). One thing is the governing law clause and another may be the addition of a requirement of which country’s courts are to decide matters. The latter is less common. It often happens that the foreign law is used as the basis in the courts of your own jurisdiction – with foreign legal experts being called in as expert witnesses. Are you sure you would have to travel abroad?
I just had a lawyer look over my contract (and I’m VERY glad I did).
Couple of points he made:
- Protect yourself first; your client(s) second.
- If it’s obvious, then does it really need to be spelled out in the contract?
- Don’t allow other documents (like SOWs) to supersede the signed Agreement.
I always read client agreements (contracts, NDAs, etc.) at least twice. If I’m ever confused then I email to get clarification or cross out (and initial) the part(s) I don’t like.
@laura good advice. thanks.
I’ll have to say that the one of the most important things to do before signing a contract is to get clarification on anything you don’t understand. And anything you don’t like should be crossed out and initialed (in Canada). Get a lawyer to look it over, even.
I was thinking about this topic just yesterday. I agree, it can be difficult and expensive to try and enforce contracts across borders. When working with remote clients, I view the contract more as a good-faith agreement, then insist work is prepaid as much as possible.
The other thing that contracts are useful is spelling out the terms of the relationship. I’m responsible for X, your responsible for Y. This can go a long way in preventing problems.
I take an entirely different tact on this issue. I have lived the position of “defending against” bad and ill-written contracts in the past, and I think that allowing the client to drive the contract language is generally a mistake.
First of all, you’re in business. Employee candidates sign employee agreements with all kinds of “we will GET you, if you step out of line” language. And if they don’t sign, the interview ends, and another warm body is shown in.
You’re nobody’s flunkie or employee-equivalent. You’re a contractor with your rear swinging in the figurative breeze – already tolerating lots of risk as a matter of course. So, *your business* has YOUR own standard agreement which you ALWAYS propose first to all prospects, just as a roofing company or a doctor does.
It’s a matter of marketing, too – I consider asking a client to originate their own contract as almost *begging* to be considered a “supervised resource”.
Sorry if this sounds rough. I think little image things add up and clients make determinations based upon them.
Secondly, yes, you CAN ask your “bidness” attorney to review a client’s contract. But does that REALLY make sense to spend $200 reviewing an agreement for $500 worth of *possible* work?
This segues into my final point. Using a client’s contract is usually a huge disruption and cost center for most small businesses, as discussed in this article, since you now have to worry about such crap as enforcement jurisdictions, non competes, etc.
So the proposed work should be *worth* the hassle and the liability exposure of using the client’s contract language. A monthly retainer or a contract to provide a service repeatedly over a very long period, or a high dollar project (over $5K or $10,000, say) would be examples of proposed business that makes your due diligence and your attorney review worthwhile.
If the business falls below certain revenue criteria (which you should determine before hand) you really should propose and use your own contract. One-off, small projects don’t meet this criteria.
Finally, an anecdote. I figured all of this out after I had a “client from hell” a few years ago. Their “standard contract”, which I attempted to use, was a piece of abusive garbage. I spent *hours* “refactoring” this piece of poo into a contract that I could live with – and all the while through the process, one programmer employee at the place was exhorting me on the phone to “just sign it” and “we all sign it” and “it’s fair”. It probably consumed 20 hours of my time in negotiation. It *really* was not worth the time I spent!!