Contracts and the Digital Warrior
Beware the Form Agreement
By Scott J. Fine
http://www.finehummel.com

Web developers, graphic artists, software programmers and other Internet professionals often make the mistake of working without a net (pardon the pun). That is, they do business on a handshake. While the credo "my word is my bond" may be noble to live by, in business it is often the source of many problems. It seems that many of those digital warriors who do get signatures before they start a project, get them on form contracts that they find on the net or in a book. Misunderstood contracts can be just as dangerous, if not more so, than not having one at all.

So, why do digital warriors shun written contracts? Could it be the outrageous rates that an attorney would charge to draft them? Could it be that contracts are too complicated? After all the legalese is meaningless anyway? Isn't it? (Of course not.)

Legal fees are not cheap, granted, but the costs associated with a breach of a poorly drafted agreement or no agreement at all will out weigh any costs you would have incurred as a result of having an attorney draft your contracts. An ounce of prevention is worth a pound of cure, as the saying goes.

Here are some of the issues that you will encounter when your attorney drafts your operating agreement(s). This article does not presume to cover all of the topics you will need to consider. You should always seek legal advice from a competent attorney who is duly licensed in your jurisdiction.

The Parties
Let's get the most obvious thing taken care of first. Who are the parties? To answer that question you must ask yourself some other questions first. Do you want to allow your client to assign their rights to the agreement to someone else without your approval? Do you want the ability to delegate some of your duties without having to obtain permission from your client? (A web site developer may need to hire a freelance graphic artist; A programmer may need to hire someone familiar with another language.)

As you can see, there is more to it than you thought. Doing business with "ABC Consulting" is different than doing business with "ABC Consulting, its successors and assigns." In addition, a clause stating that the agreement is not assignable by the client prevents the client from selling you into bondage (although with personal service contracts that is difficult to do even absent such an express prohibition).

Warranties
Do you know how to disclaim warranties? Did you know that you imply certain warranties in every agreement you enter into? Did you know that oral agreements are still agreements and you imply certain warranties in them as well?

You may want to disclaim as many warranties as possible or you may want to make some warranties. Your client may feel more comfortable if you warrant, for example, that the software will perform as expected (in this case, make certain that "as expected" is defined in the agreement). The key to disclaiming warranties is to make sure you are using the correct language. Simply stating that you "make no warranties expressed or implied," will not disclaim, for example, the implied warranty of merchantability. (You can get the correct language from an attorney licensed in your jurisdiction.)

It is reasonable for your client to warrant that it owns or has the right to use all the materials it supplies to you. Intellectual property is property, after all, and you do not want to be caught up in a claim by a third party for using materials supplied by the client which infringe on a third party's rights.

Indemnification
Regardless of whether your client has warranted that it owns or has the right to use all materials if supplied to you, you still may be sued by a third party for, let's say, copyright infringement. If you had an indemnification clause in your agreement with the client, you would have an easier time recovering from your client your defense costs and any damages that assessed against you. Remember to include "reasonable attorneys fees" and "costs" in your indemnification clause.

Intellectual Property
As a web site developer, graphic artist or programmer, you deal in intellectual property. This is your stock in trade. As the creator of an original work and absent an agreement to the contrary, you own a copyright in that work. This means that you control the work. You determine when and how to publish it, where and how to display it, when and how to modify it and how and when to create works which are derived from the original work. The mere fact that you were hired to create the work does not mean that the client owns any rights to the work.

Do you wish to license some rights to the client? Will you allow the client to have the web site hosted wherever it wants? Will you allow the client to install your database application on as many workstations as it sees fit? Will you allow the client to make copies of the work and sell it? These points (and others) are all points that should be negotiated before the commencement of any work and memorialized in a written agreement.

Beware of Arbitration Clauses
Many contracts these days contain arbitration clauses, especially boiler plate contracts found on the net or in books. While, arbitration can be a viable alternative to litigation, you should understand the drawbacks as well as the benefits (which include speed of resolution and lower cost).

If there is the "slightest nexus" between the subject matter of the agreement and interstate commerce (and the Internet has more than a slight nexus with interstate commerce), then the Federal Arbitration Act (F.A.A.) controls the arbitration. This is important because it will override some "choice of law" clauses. For example, New York will not allow an arbitrator to award "punitive damages," but the F.A.A. will. If you do not specifically state that "punitive damages" will not be awarded as a result of a dispute arising out of this agreement, then even if you have a "choice of New York law" clause, a New York arbitrator can award punitive damages."

Another point that must be understood is that unless you find fraud, bias or some other egregious violation of the applicable act on the arbitrator's part, you cannot appeal an arbitrator's award. This is difficult for some to comprehend, especially in light of the facts that the arbitrator needs not follow any rules of evidence, not understand the law nor follow it even if it is understood.

Conclusion
As you can see, drafting a contract is not without hazards. Here you have been exposed to only a few of the more important issues you will confront when drafting an agreement or relying on a form agreement found on the net. Don't base your projects on a blind faith that a form contract will protect you, merely because it is accessible and free, it probably won't. Get help, it will be worth it.

© 1998 Scott J. Fine. All rights reserved.

DISCLAIMER:
Nothing in this article should be construed to be legal advice. Laws and their interpretation differ from jurisdiction to jurisdiction. Since legal advice should be tailored to the specific situation, it should be sought from a competent attorney duly licensed in your jurisdiction.