Over the past decade or so, I’ve evaluated about every type of agreement you can think of, especially intellectual property licensing agreements, contractor agreements, employment agreements, lease agreements, and phantom stock agreements, to name a few. It amazes me to find that most of the agreements prepared by other attorneys or parties that I am asked to review are lacking one or more of the most important clauses that every agreement should contain.
In this article, I’m going to walk you through some of those critical elements that you (or your attorney) NEED to make sure are in every agreement BEFORE you sign your name on the dotted line.
By ensuring that your agreements contain these clauses, you can drastically reduce the risk of getting into a dispute later over the contract terms. I can’t tell you the number of clients that I’ve had tell me I saved their butts because I made sure these key elements were in the agreement they were about to sign.
Let’s walk through the 4 most critical terms that are frequently missing or not adequately described in many agreements.
1. Make Sure The Exit Clause Is Clearly Defined And Fair
There are a number of times throughout the years where I’ve had to represent clients in contract dispuates that arose because their agreements either didn’t have an exit clause or had an exit clause that was not clear. This could’ve been easily avoided if both parties would’ve made sure the exit clause was clearly defined in the agreement.
An exit clause is a clause that spells out the circumstances under which either and/or both parties can get out if things are not going as planned. It’s important to define not only how the agreement can be terminated in the event of a breach by either party, but also any other scenarios where either party can voluntarily choose to terminate the agreement.
For example, should the agreement be limited to 6 months, and then renew in 6 month increments unless either party chooses to terminate upon 30 day notice before the next renewal? The type of exit clause that is appropriate depends on the type of deal being negotiated. In some cases, you may want one party to be obligated for a longer period of time than the other, because of certain reliances being made or money being paid to justify the commitment.
I often add an early penalty clause to agreements for my clients where they agree to honor the deal for a set period of time, but agree to pay a penalty of a lesser amount that both parties agrees is fair to allow them to get out early.
The key point to know about exit clauses is that you need a way out even if a party is not in breach, but just wants to go in a different direction for some reason. This is one of the most common problems that I’m asked to solve for clients after they entered into a deal with someone: how to get them out without breaching the deal.
Unfortunately, it’s not always easy to get a client out of a deal if there isn’t a proper exit clause in their agreement. I am often forced to negotiate a settlement amount or to tell the client they have to pay or be in breach.
2. Make Sure There Is An Intellectual Property Ownership Clause
In addition to an exit clause, another critical clause to include in your agreements is an intellectual property ownership clause. Most agreements involve paying someone else to create something of value for you, whether it be written work product, software, marketing, graphic design, or something else.
It is critical that you include the proper clause to specify who is getting ownership of the intellectual property being created. In the United States, the contractor retains ownership of the copyright interests in the work unless such interests are transferred in writing.
What this means is that many companies find themselves being in the position to paying for something that they don’t even fully own, but just got a license to use for a specific purpose.
If you are expecting to get ownership of the work being produced for you, then make sure that a proper intellectual property ownership and transfer clause is included in your written agreement with that contractor. If the contractor is retaining ownership and is just giving you a license to use the work for a specific purpose, make sure those terms are clearly spelled out as well so everyone is on the same page.
Here is an example of a clause that transfers all of contractor’s interests over to the company paying for the work:
All patentable and unpatentable inventions, discoveries, ideas, source code, materials, and other intellectual property (hereinafter “Materials”) which are developed by CONTRACTOR for COMPANY under the terms of this AGREEMENT shall be deemed to be works made for hire, and shall belong exclusively to COMPANY, and COMPANY shall be the sole owner of all copyrights, patents, inventions, discoveries and trade secrets in the same, including the right to change, edit, and distribute same throughout the world. To the extent that any Materials may not be deemed works made for hire, CONTRACTOR hereby irrevocably assigns to COMPANY all its right, title, and interest therein.
3. Make Sure The Compensation Is Clearly Defined And Fair
The next critical element to include in any agreement is the compensation section. You may be thinking, “Denise, I always make sure I’m getting compensated what I deserve.” Unfortunately, compensation is not always written to be clear and fair for both parties.
For example, let’s say you’re a contractor that is negotiating putting together a brand new funnel for Company A. In the agreement, it is written that you’ll get $20,000 for your work if you surpass 100 hours of work. You wouldn’t want to agree to this type of compensation because it is not stating how much you’d get compensated if you don’t do 100 hours of work.
The compensation provision in your agreement doesn’t have to be packed full of complicated legalese, and you don’t need advanced training in order to figure it out. All you have to do to make the compensation provision more clear and fair is rewrite the provision in Plain English so that Company A knows exactly how much they’re paying the contractor for the services (both under 100 hours and over), and so the contractor knows how much they’re going to receive.
Here’s another example of a clause that isn’t clear, and an example of how you can easily fix it. Suppose the clause says, “Company A shall pay Contractor $20,000 each year the funnel created by Contractor is used unless such changes are thus made to this agreement.” That is not clear because it leaves open who can make change in the future.
Instead, it would be better to say, “Company A shall pay Contractor $20,000 each year the funnel is used unless both parties mutually agree to make a change to the compensation.” You see, by making a few little changes, the compensation provision is much more clear and fair to both parties.
4. Make Sure The Signature Block Is Accurate
Another critical element to include in your agreements is the name and signature of the proper parties. For example, if you have a corporation or LLC, you will want to make sure that the agreement is in the name of your company, and not you personally (as an individual).
If you accidentally sign an agreement personally instead of through one of your companies, you can be personally liable in the event of default, which violates on of the reasons you likely incorporated to begin with.
One of the final elements to check for before you sign any agreement is thus to make sure the first paragraph and the signature block both contain the correct names of each party, and that such names have been customized for a corporation, LLC, LLP partnership or individual, as appropriate.
Here is an example of how a signature block might look if it is being signed between an individual and a corporation:
By: _________________________ Date: _______________________
Steven Ward, Individual
Gosnell & Associates, P.C.
By: __________________________ Date: _______________________
Denise Gosnell, President
Imagine how much money you can save if you look for these four key elements in any agreement you sign, and the legal problems you could avoid down the road just by ensuring the key terms are clear. Look for these elements yourself the next time an agreement is in front of you. I promise you won’t be disappointed!!!