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Covering Your (Legal) Assets:
4 Considerations When Negotiating and Drafting Contracts
In any business transaction, there is a non-zero risk of the transaction going horribly wrong and leading to arbitration or litigation. The vast majority of transactions or client interactions have no real problems, if any at all, but there is always that risk that the deal will crash and the excrement will hit the wind generating device. Here are some questions that Designers should consider when negotiating and writing client contracts that will CYA, cover your assets.
Fair Warning: This month’s column is a bit technical.
1. Representations and Warranties. Representations are statements of current fact essential to the understanding between the parties. Warranties are promises of future action or future facts. Often you will see the two terms used together (“Designer represents and warrants that all content is original and does not infringe on the rights of any third party”). When negotiating a deal with a client, Designers should consider including statements of fact such as the client owns or has the right to use any content they want included in the project. Additionally, Designers may need to ask the client to provide a statement of purpose of the work which the Designer will then warrant that the work will be suitable for that given purpose only, for example, a design for a rack card is likely unsuitable for use on a website. Representations and warranties are about assurances the Designer is giving the client and getting from the client.
2. Indemnification. Often working hand-in-hand with representations and warranties is indemnification. At its core, indemnification allocates the costs of certain failures on the party best able to control the risk. For example, if a client is giving the Designer photographs to use in a brochure, the client is in the best position to ensure they have the necessary rights and releases to use the photographs. The Designer would ask for a representation of the right to use the photographs. If that representation turns out to be incorrect and the Designer is sued for copyright infringement, the Designer would want the client to indemnify the Designer, or cover the costs associated with their failure—including any fines, damages, and legal fees incurred by the Designer to defend the work. Designers should carefully consider the most common risks in a deal with a particular client and have proper indemnification provisions drafted to allocate the costs of certain risks appropriately.
3. Limitations on Liability. Many contacts will include a provision such as this, often without thought as to the impact:
“Neither party will be responsible or held liable for any consequential, special, or incidental losses or damages.”
What does that mean? Incidental losses only apply to sale of goods—not services and so probably does not apply to Designers. Consequential damages are those losses sustained by the non-breaching party resulting from special circumstances of that deal the parties knew when they signed the contract. The special circumstances could be anything, such as the scope of the project being so large that the Designer has to forgo other work for a period of time or the Client is under a very strict deadline and cannot afford delays of any sort. Simply including the above provision without a thoughtful analysis of the risks of the deal may limit the Designer’s ability to be fully compensated for their damages. If there are special circumstances with the deal, be sure to document those circumstances in the contract so all parties know the situation.
4. Limits on Damages. In addition to limiting the types of damages a party will pay, Designers often limit the actual amount of damages in some way, such a limiting damages to only the fees actually paid to the Designer. While this certainly sounds attractive, Designers should take care that the limit on the Designer’s damages does not also limit the damages the Client would pay if the client breaches the contract.
While no one wants to think about risks in a contract, some matters cannot be ignored. Contracts should not be an afterthought for your business. In the Design industry, the more a Designer relies on content from the client, the greater the risk of copyright violation. A carefully drafted services agreement can include many of these provisions which would apply to most clients, but Designers may need to alter the services agreement to accommodate specific client requests or special circumstances of a particular deal.