10 Contract Red Flags: the Dangers of Not Paying Attention
Drafting contracts for freelancers often requires a delicate balance of terms, which both protect you and your intellectual property but are not overly onerous to your client. When we discuss creating standard form contracts for many of our freelance clients, we discuss not only how they operate but who they are doing business with. While it’s important to note that everyone’s particular business operations are unique, below are ten of the most important items we take into consideration when drafting contracts for our freelancers:
- Business or Personal: In order to insulate yourself from personal liability, consider forming a small business corporation or limited liability company and signing all contracts in your company’s name as opposed to individually. Operating through a company may have tax benefits, asset protection benefits and adds a flair of professionalism to your business.
- Work for Hire: If you are being hired to create a project or product, it is important to understand who owns it upon completion. Specifically, you should discuss with your client the extent of ownership by both parties upon completion. The U.S. Copyright Act provides that, as an independent contractor, copyright to the work product you create belongs to the creator of the work, unless otherwise agreed in writing. While most clients will expect ownership to be transferred, pay particular attention to any references to “Work for Hire”. If your client expects to receive ownership of the work product, make sure that it is expressly conditioned on payment in full.
- Indeminification Clauses: Liability is always a concern when completing a project or product for a client. Whenever you see an indemnification clause, read it carefully. Many agreements state that if the work product created infringes on the intellectual property rights of a third party, the party creating the work remains liable for any damages. Likewise, a freelancer should make sure they are indemnified by their client and held harmless if the client utilizes the work in a way which creates liability due to their own negligence or willful misconduct.
- Choice of Law and Venue: Almost all contracts will have a clause that establishes where legal proceedings take place, should a dispute arise, and the law that governs the dispute. Make sure that the contract is not governed by laws that you and your lawyer are unfamiliar with and doesn’t require you to show up to court in a faraway land, especially if the dispute is over non-payment.
- Payment Method and Schedule: Payment terms are often the elephant in the room when negotiating a contract. All too often, individuals or companies neglect to set a payment and deliverable schedule which leads to controversies as time goes on. Moreover, always consider requesting an initial deposit to bill against. Many contracts now require clients to sign a credit card authorization
- Force Majeure: Force Majeure, which means superior force in French, is often an important red flag to be attentive of when drafting a contract. A force majeure or “unavoidable circumstance” prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the event. For example, a freelance photographer who set ups for a beach photoshoot only to find himself in middle of a hurricane, would benefit from a force majeure clause that excuses his non-performance of the contract due to a circumstance beyond his control.
- Expenses: Who covers the expenses of creating a work and when will they be paid? It is important to differentiate between payment for your services or work and the added expenses that were necessary for completion of a project or product. From the beginning, establish if hard costs are included within your fee (and if so, consider a larger upfront deposit) or if costs are up and above your fee (if this is the case, establish what costs must be approved or which are pre-approved). Finally, make sure to define if the expenses will be paid up front or if you will be paying out-of-pocket and requesting reimbursement.
- Scope of Work: When do you start and where do you finish? Often times, projects are taken on or products are began with no true direction or trajectory. This lack of organization and parameters may lead to situations where a client continues to request work beyond the scope of what was originally contemplated. It is important to set parameters regarding the project or product so that you comply with what is requested, but also, so that you are properly compensated for your work. The more specific and objective the scope, the better.
- Revisions, Drafts and Changes: Just as important as the scope of your work is the amount of times you will go back to the drawing board, make changes, edits and revisions. For the sake of compensation (and your sanity) it is important to agree upon the amount of changes a client is able to request prior to the start of your work and the rates (whether flat fee or hourly) at which additional work is billed.
- Termination Clauses. It is important to set out the exact reasons or basis for which your agreement can be terminated. Termination clauses should not only consist of the client’s basis to terminate you, but also considerations for when you need to terminate your client. It’s especially important to make sure that your client cannot terminate you for any reason or no reason without compensating you in full for the work you completed.
DISCLAIMER: The materials contained in this article has been prepared for informational purposes only and are not intended to provide, and should not be relied on for, tax, legal or accounting advice.