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How to read contracts if you’re not a lawyer – Part 2

Kate Jackson

Kate Jackson from TableCrowd demystifies contracts in Part 2 of her series

My ex-lawyer past means I’m always helping out fellow startups with legal questions. This, together with the fact there’s no sign of the ”spit handshake” making a comeback, prompted me to post Reading Contracts If You’re Not A Lawyer – Part 1 last week.

Here’s Part 2, which aggregates five more pointers that I regularly find myself sharing.

1. “..best endeavours…” vs “…reasonable endeavours…” vs “…all reasonable endeavours…” – Potato Potarto!

Commonly used but the differences are rarely understood when used in respect of obligations.

Reasonable endeavours – a party should take one reasonable course of action in order to achieve the result, bearing in mind its own commercial interests and the likelihood of success.

All reasonable endeavours – a party should explore, to a reasonable extent, all avenues reasonably available to it, but it doesn’t have to disregard its own commercial interests or continue trying to comply, if it is clear that all further efforts would not result in success.

Best endeavours – a party should take steps which a prudent, determined and reasonable party, acting in its own interests and desiring to achieve that result, would take. This does not include actions that would lead to its financial ruin, undermine its commercial standing or goodwill, or have no chance of being successful.

The general position is that each side will push for inclusion of “best endeavours” whilst simultaneously not accepting it! In most circumstances, I’m happy with ‘reasonable endeavours’. Where possible set out what steps are actually required in key situations rather than relying on tricky terminology.

2. Intellectual Property – Make sure you hold the key

Intellectual property rights can exist in code, logos, branding, designs, copy etc. If the contract relates to the creation of a logo for example, you should take care if it’s being created by someone other than an employee (i.e. someone not on PAYE). In the case of a freelancer, contractor or third party company, they will automatically own the intellectual property rights in the logo unless the contract includes an assignment – it makes no difference that you paid them for it.

You might not fully understand an assignment clause, but at a minimum, make sure it’s there! If there’s no assignment, although it may well be implied that you can use the logo, you won’t own all the rights to it. Quite often, the creator company will reserve the right to charge an additional fee at a later stage for the purchase of the intellectual property rights in the logo. If you have to deal with this after you have grown your startup into a successful company, you are at their mercy regarding the price. If they aren’t willing to assign the rights to you within the quote for the initial work (and you are happy to accept that), make sure you agree what it will cost if you wish to acquire them later.

3. Insurance – Don’t get your fingers burned!

Consider whether the service provider should have professional insurance in place. This depends on the nature of services being provided, the potential implications if the services aren’t up to scratch and the resources available to the service provider to rectify an issue (i.e. consider a freelancer versus a large organisation). If they have an obligation to get an insurance policy, make sure you have the right to view it and that the level of cover is sufficient.

 

4. “Key man” provision – when it just has to be Bob

Where you are contracting with a company, it might be really important to you that a certain person performs the obligations (probably the person that “hooked” you in the first place). If this is the case, consider whether it is necessary to specify this in the contract.

5. “…time is of the essence…” – get me to the church on time!

This is a phrase to watch out for, unless it’s in your favour, in which case it is very useful. It basically means that in respect of the obligation in question, time is of the utmost importance.

For example, if a contract included a date for delivery of an obligation and that date was missed, there would be a breach of contract, but not one that would mean the contract could be terminated or that damages could be recovered. However, if time was ‘of the essence’ for that obligation, it’s a different story. The contract could be terminated immediately without notice and damages recovered.

A great one to include if there is a date so vital to the whole purpose of the contract that if it isn’t met, there was no point entering into the contract in the first place!

I’m not a practicing lawyer, so I don’t have to give the usual lawyer disclaimer ‘to take legal advice before entering into a contract’, but you should for really important contracts. Get in touch if you need help choosing a good startup lawyer; I’m in the know and will happily offer some suggestions.

Don’t miss part one of Kate’s series on reading contracts.

 image credit: flickr/bostonlibrary

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