Better Contracts Lead to Better Relationships and Ultimately to Better Business
Writing good agreements is easy. Writing bad agreements is really easy. Successful creatives sign agreements of all types. Understanding contract structure and the meaning of key provisions will keep you out of bad deals, help you negotiate the deal you want, and save you money when working with your lawyer.
YOUR LOCAL LAW
They say all politics is local. The same is true for the law of contracts. Contracts are interpreted by local law (country, state, or province). But because contracts have been around for such a long time, they have a common structure and their terms have common meanings.
This glossary is designed to give you a touchpoint for understanding those common meanings. Keep in mind that your local law may refine or change the substance of these terms giving them a different meaning, interpretation, or importance.
You can download a PDF version of this glossary by clicking the image to the right or at the bottom of this post.
Click on the image to download a PDF of the complete glossary.
List of Contract Terms
A
B
C
D
E
F
G
I
J
L
M
N
O
P
R
S
T
V
W
GENERAL CONTRACT CONCEPTS
Contract (also Agreement)
A contract is a promise or a set of promises between two or more parties the breach of which gives rise to a remedy, or the performance of which is recognized as a legal duty or obligation.
Intellectual Property Rights
Intellectual property rights are the exclusive rights you have over the use of the creations of your mind. These rights include copyright, trademark, patent, trade secrets, and rights of publicity. As the creator of the property, you are the rightsholder.
License Agreement
A license agreement is a contract in which a rightsholder transfers some, but not all, of their intellectual property rights to one or more recipients for commercial exploitation in exchange for payment. A license agreement reserves the right to reversion (to get the transferred rights back) on expiration or termination of the license. A license agreement essentially allows you to rent some or all of your exclusive intellectual property rights.
Transfer Agreement
A transfer agreement (also known as an assignment) is a contract in which a rightsholder transfers all of their intellectual property rights to another without reserving the right to reversion. With a transfer agreement, the original rightsholder retains no rights. If any rights are retained, the contract is a license agreement.
Breach of Contract
A breach of contract is the failure, without legal excuse, to perform any of the promises that form a contract. Breaches come in different varieties. A party who refuses to perform their obligations under a contract commits a breach. A party might also commit a breach if they make it impossible for the other party to perform.
Damages
Damages are monetary compensation sought or awarded to a party to a contract to compensate for the loss that party has suffered due to a breach of contract. Damages can be measured by lost profits or be a sum certain stated in the contract known as liquidated damages. Damages can also be punitive. Limitation of liability provisions in contracts operate to limit the amount of damages that can be recovered in the event of a breach.
Liability
If someone breaches a contract, their liability is their legal obligation to compensate another party for harm the breach causes them.
Void/Voidable
When a contract is made unenforceable in law it is void. A void contract is treated as if it were never created. A voidable contract is legal and enforceable but can be made unenforceable, or void, for reasons such as lack of capacity of a party, fraud, or misrepresentation.
Capitalized Terms
A word or phrase can be given a specific definition in a contract to prevent misinterpretation of that word or phrase. By convention, those definitions are indicated by capitalizing the first letter of each word in the term and often introduced in quotation marks, formatted in bold lettering, or set off in parentheses.
ELEMENTS OF A BINDING CONTRACT
A contract is legally binding when all these elements are present: offer, acceptance, consideration, capacity, consent, and certainty.
Offer
An offer is a show of willingness to enter into a contract, in exchange for consideration, made so that the person to whom it is made understands that their acceptance is requested and will close the deal. There is no time limit for acceptance unless the offer has a deadline or is withdrawn.
Acceptance
An offer is a show of willingness to enter into a contract, in exchange for consideration, made so that the person to whom it is made understands that their acceptance is requested and will close the deal. There is no time limit for acceptance unless the offer has a deadline or is withdrawn.
Consideration
Consideration is something of value that is given in exchange for the promises contained in the offer. Consideration is usually payment for goods or services that are the subject of the contract. Consideration does not have to be money, though. It can be anything of value like an exchange of services, or even a promise to act or not act in the future.
Capacity/Competence
Contractual capacity means that the parties are able to understand that a contract is being formed and can grasp its basic nature. Certain people may lack the capacity to contract: minors; those who are mentally impaired; those under guardianship; or those who are intoxicated. Contracts entered by individuals who lack capacity are voidable.
Consent
The parties to a contract must intend to be bound by their agreement and must agree on the essential terms. That intention is consent.
Certainty
Terms of the offer must be reasonable certain before its acceptance forms a contract. The terms must be readily understandable so the intent of the parties is clear. If the terms aren't definite, the contract may not be enforceable.
CONTRACT TERMS
Preamble
The preamble is composed of the introductory paragraphs of a written contract and details who the people signing it are (the “Parties”) and their reasons for signing (the “Recitals”). The preamble comes before the main deal terms and serves as a snapshot of the contract.
Party
Any person, group, or organization that signed, or is going to sign, a contract.
Recitals
Introductory paragraphs of a contract that describe the nature of the contract and why each party has decided to enter into the agreement. These are the “Whereas” clauses. Not all contracts have recitals.
Deliverables
Deliverables are the goods or services that are the subject of a contract. It is the name given to the things one party to a contract has agreed to supply to another. They can be tangible (a physical thing) or intangible (a service). Deliverables should be described in detail including the form they will take and date of delivery. The more detail, the less chance of a misunderstanding.
Services
Services are a type of deliverable. The services provision describes the duties or labor done by one party for the other under the terms of the contract.
Goods
Goods are a type of deliverable. The goods provision identifies the exact physical things being purchased and includes all relevant details.
Grant of Rights
In a license agreement, the grant of rights provision identifies the intellectual property right to be licensed, whether the license is exclusive or non-exclusive, how the property can be used, and where it can be used. The grant of rights provision is the crux of a publishing contract and can be quite extensive.
Work-for-Hire
Work-for-hire is a concept unique to U.S. Copyright law and is the exception to the idea that a creator owns the copyright in a work the moment it is created. Under U.S. Law, creative work that comes out of a work-for-hire relationship becomes property of the commissioning party, not of the creator. In the U.S., if you are a bona fide employee then the work you create belongs to your employer not to you. A work-for-hire must be in writing which is why it is included in this glossary. The law of other countries varies on authorship and ownership of intellectual property rights and careful consideration must be given to rights ownership when working with individuals in countries not your own.
Payment
Payment is the most common form of consideration in a contract. Payment provisions should specify amount, timing, method of payment, and whether there are any conditions that must be met before payment is to be made.
Term
The term is the length of time a contract is in force, usually from the date it is signed or other effective date until its conclusion or ending date. The term is particularly important in a license agreement, or a contract for ongoing services, so the parties are clear on when their rights revert or their obligations end. (Note: “Term” also means a provision or clause in the contract, the payment term for example.)
Termination
Termination provisions outline the circumstances under which a party can end the contract before its term expires without breaching it. Common reasons for early termination include: a breach or failure to perform that goes uncured; or a specific event happens like one party gets sold, dissolves, or dies. Termination provisions can be mutual – either party can terminate by giving a certain amount of notice, for instance.
Cure Period
When a breach occurs, the breaching party may have a certain period of time to fix the problem before the non-breaching party is allowed to seek a remedy. The non-breaching party may need to give notice to the breaching party in order to trigger the cure period.
Representations and Warranties
Representations and warranties are assurances that the work or product that is the subject of the contract will meet certain standards. They’re legally enforceable, so if someone breaches them they might have to pay damages. Creatives are usually required to warrant that the work that is the subject of the contract is original and doesn’t infringe the intellectual property rights of others, called the warranty of originality.
Indemnity
A promise by one party to compensate another for a loss under particular circumstances. For example, if an author warrants that their work is original and created by them alone and the publisher gets sued by an undisclosed co-author, the author may have to pay the publisher’s losses from the lawsuit.
Limitation of Liability
A limitation of liability clause manages risk by setting the maximum amount of damages that a party will have to pay if they are sued for breach of contract. It also controls the type of damages that can be recovered in a lawsuit, often precluding recovery of punitive or exemplary damages.
Liquidated Damages
If the parties agree to a predetermined amount of money to be paid in the event of a breach, that amount is called liquidated damages. Liquidated damages are used when actual damages, or harm, like lost profits would be difficult to calculate.
Remedy
A remedy is awarded by a court to protect the interests of a party if the contract has been breached. Monetary damages are one form of remedy. Other remedies include: specific performance (forcing a party to do what they promised to do), injunctive relief (stopping a party from doing something), rescission (cancelation of the contract), or liquidated damages.
Assignment
Assignment means someone else can fulfill a party's obligations under the contract. An assignment occurs when a party to a contract transfers their rights, obligations, or liabilities to someone else who wasn’t involved in the original contract. A contract can be assigned unless it materially changes the obligations or value of the contract, or unless it is prohibited by a term in the contract itself.
Venue
If there’s a dispute about a contract, the venue is the locale where the complaining party must bring an action to resolve it.
Jurisdiction
Contracts often require the parties to agree to submit to the jurisdiction of a certain court. Jurisdiction is a court’s authority over the parties giving it the power to decide a dispute between them. Venue and jurisdiction provisions together are called forum selection clauses.
Governing Law
The law of the country (state or province) that controls a contract is the governing law for that contract. A court, or dispute resolution tribunal, uses the governing law designated in the contract to interpret it if there are any disputes, even if the governing law is different from the law of the jurisdiction. This is particularly important if the parties signing a contract are based in different countries or states.
Confidentiality
A confidentiality provision provides that certain information shared between the parties, or the terms of the agreement, or perhaps even the fact of the agreement itself be kept secret or not be disclosed except under specified circumstances.
Force Majeure
Force majeure is an unforeseeable circumstance beyond a party’s control that might prevent them from carrying out their promises. Force Majeure clauses include certain specific events like a global pandemic, war, or civil unrest. The phrase means “greater force” – an act of God. If the event happens, then the party is excused from performing their contractual obligations and is not considered to have committed a breach.
Non-Waiver
The non-waiver provision preserves a party’s rights even when some obligations in the contract might not be met. For example, if one party makes a late payment and the other party accepts it one time, that doesn’t mean they have to accept late payments in the future. The party hasn’t waived their contractual right to timely payments.
Alternative Dispute Resolution/ADR
Alternative dispute resolution or ADR refers to methods of trying to resolve a dispute without going to court. Arbitration, mediation, and negotiation are forms of ADR. Contracts may contain a clause requiring the parties to follow specific processes if a disagreement occurs. This clause may prevent a party from starting court proceedings at all or without first following the prescribed process.
Arbitration
Arbitration is a form of alternative dispute resolution using a private, independent tribunal. Some arbitration clauses make arbitration mandatory foreclosing the option of going to court altogether; these are called binding arbitration provisions.
Mediation
Mediation is another form of alternative dispute resolution to resolve contract disputes without going to court. An impartial person meets with the parties to help them come up with a negotiated solution to the dispute. Binding mediation means that if the parties don’t negotiate a settlement during the mediation, the mediator decides for them.
Merger/Entire Agreement/Integration
The merger clause protects the parties by declaring that the contract represents the complete and final agreement between them. Nothing discussed before the contract is signed or after it goes into effect matters – not emails, conversations, other arrangements, or earlier drafts – unless it is written in the contract or made part of a signed addendum. Everything is integrated in the written contract.
Severability
This is the provision in a contract which says that if some of the terms are held to be illegal or unenforceable, the rest of the contract still applies. Essentially, this provision allows a court to disregard an invalid provision and uphold the rest of the contract.
Notices
The notice provision sets out how the parties must alert one another with respect to certain contractual events. Notice doesn’t apply to everyday communication between the parties. It applies to types of communications that are specifically called for in the contract, like notices of breach or early termination.
Counterparts
A counterparts clause allows the parties each to sign their own copy of a contract then share or exchange copies of the signature pages rather than requiring all parties to sign one original. Counterparts are useful when the parties are unable to get together to sign at the same time. It’s not so important in the era of electronic signing services.
Signatory
A signatory is anyone who has signed or will sign a contract. The authorized signatory is the individual or individuals empowered to sign legally binding contracts on a company's behalf. The authorized signatory is usually the CEO, but in larger companies it will likely include a large group of individuals like key decision-makers in finance or operations.
Addendum
An addendum adds new or changes some terms in an existing contract, while still keeping other original terms in place. An addendum simplifies the contracting process when there is an existing contractual relationship between the parties.
This glossary is not meant to be exhaustive. It is designed to give you a basic understanding of contract terms and structure to help you navigate the contractual relationships you will inevitably become involved with during the course of your creative career and business.
If there is a term that isn’t covered here and you have a question about it, drop a note in the comments.