How Contracts Work

It’s not unusual to hear a designer say “I don’t use contracts.” In most instances, what this really means is that he (or she) is not well informed about legal issues and is hesitant to even bring them up in discussions with clients. He starts a complex project based on nothing more than a handshake, and then just hopes for the best. Well, it’s quite likely that he does in fact have a contract in place—he’s just not aware of it. This article explains the key ingredients that create a binding legal agreement between a designer and a client, and it describes how a court might later interpret that contract in a lawsuit.

The essential elements

We need to start by defining the word “contract.” It’s an exchange of promises among two or more persons or entities (the “parties”), whereby each party agrees to do (or not to do) something.

In forming a contract, there are some limitations. The agreement cannot be for an illegal purpose — it must have a lawful objective. The parties involved must be competent persons who have “capacity,” which is the legal ability to enter into a binding contract. This means they must be of legal age (18 or 21, depending on the jurisdiction) and they must be of sound mind. In a business context, if an individual is representing a company he or she must also have “authority,” which is legal permission to act on behalf of that company.

The contract comes into existence when one party accepts another’s offer, provided that there is “consideration.” Consideration is an important legal term. It means something of value that is provided by each party — for example, one provides services and the other pays. Consideration must have value that can be objectively determined. It cannot be something subjective, like love. If there is no consideration, or if the consideration is not legally sufficient, you do not have a contract.

For designers, the process of forming a contract usually goes like this: You make an offer to the client (“I would love to design your brochure”), the two of you negotiate back and forth on the consideration (the exact scope of work that you will perform for the client and the fee that will be paid to you in return) and eventually the client accepts (“Yes, please do the work”). Offer plus acceptance plus consideration equals a contract.

Oral contracts

In the United States, contracts do not necessarily have to be written down to be legally binding. Oral agreements are enforceable as long as the parties sufficiently indicated in some way that they intended to make a contract. There are important exceptions to this, however. Every state has enacted some version of a law called the “statute of frauds.” It requires certain types of contracts to be in writing, including such things as real estate transactions and any agreement that will not be fully performed within one year of the time it is made. For designers, this would include any contracts for projects with extended timelines.

I’m not recommending oral agreements to you, however, because they often lead to problems. The details that you thought you negotiated in advance may be difficult to prove later on, and in most jurisdictions the amount of time you have to file a lawsuit over any dispute is shorter (depending on the state, there may be a limit of two or three years for oral contracts as opposed to four to six years for written contracts).

If you do eventually find yourself in a courtroom, federal and state laws (such as the statute of frauds just mentioned) may affect how your contract is interpreted. The court may override or modify certain aspects of your agreement. In order to understand how this works, it’s very helpful to know the difference between statutory law and common law.

Statutory law

A “statute” is a written law that has been passed by a legislative body. At the federal level, statutes are enacted by Congress. State statutes are enacted by state legislatures. And, to take it one step further, a legal “code” is a group of laws on the same subject, such as the tax code.

Statutes are not flexible. They must be followed to the letter. However, most statutes don’t include details about how they should be applied to various potential situations. Instead, they tend to state a general principle. Because of this, courts must interpret how a statute applies to the specific circumstances of a matter at hand — each lawsuit has its own precise set of facts. The court’s interpretation establishes “precedent.” A legal precedent is a court decision that’s later used as guidance for other cases. It’s cited as an example or an analogy to resolve a similar question of law, provided that the subsequent case is very similar in its details. The underlying principle is that it would be unfair to treat similar facts differently on different occasions.

Common Law

Not every dispute that comes into the legal system directly relates to a statute. Courts are often called upon to make decisions on issues where there is no clear statutory guidance. This separate body of judicial opinion is referred to as “common law.” The standard description of common law is that it’s “judge-made.” Common law is not quite as rigid as statutory law. It evolves over time and recent precedent tends to carry more weight than older decisions. (Common law is an ongoing legacy of the British Empire. The basic concept developed in England during the Middle Ages. Today it’s an important part of the legal system in most of Britain’s former colonies.)

One area of common law in the U.S. that’s especially important to creative professionals is called the “law of agency.” Agency is a consensual relationship where one party (the “principal”) grants authority for another party (the “agent”) to act on behalf of the principal in dealing with a third party. For example, this is the case when a client asks an advertising agency to negotiate and place its media buys. There is a large body of common law precedent that provides guidance for agency relationships.

Statutory Law Common Law diagram

State and federal issues

The majority of contract issues are governed by common law. However, a number of statutes might also come into play on design projects. You already know about the statute of frauds. Other state laws that you should be aware of have to do with “implied terms.” Implied means that they’re legally enforceable even if they are not specifically stated in your contract.

For example, states impose a “warranty of good faith and fair dealing” on commercial transactions. This is a presumption that all parties promise to deal with each other honestly and fairly. This obligation is incorporated in the Uniform Commercial Code (UCC) — a set of model statutes that has been enacted with some variations by every state in the country.

The main focus of the UCC is the sale of “goods,” a term that includes all items that are both identifiable and moveable at the time of the sale. When merchants sell goods to customers, those transactions carry an “implied warranty of merchantability or fitness for a particular purpose.” This is a promise that any goods delivered will be free from defects and reasonably fit for the ordinary purpose for which such goods are usually sold. If your design firm receives a preprinted purchase order document from a large corporate client, it might contain a reference to this UCC warranty. Depending on your design specialty, however, you’re probably not delivering goods. If the primary objective of your contract is for you to provide a service, this warranty would not apply. You might want to include a “disclaimer” on this point — a short statement to inform your client if this particular warranty does not apply to the project.

Federal statutes can also override various things that you’ve negotiated with your client. This is often the case with copyright ownership. Your client might ask for a creative project to be classified as a “work for hire” or “work made for hire.” This is a phrase from U.S. copyright law. It refers to original work made by an employee within the scope of his or her job, in which copyright ownership automatically belongs to the employer. It can also refer to original work made by an independent contractor or design firm, but only under certain limited conditions that are explained in the law. Even if you and your client agree in writing that the project will be a work for hire, the court will override that portion of your agreement if the project doesn’t meet the legal criteria.

The second option for the client is to ask you for a full “assignment” of all rights — meaning that ownership would be transferred outright. U.S. copyright law specifies that this cannot be done with an oral agreement. Assignment of copyright ownership must be in writing, and any assignment of rights can be terminated after thirty-five years.

The third option for copyright, of course, is for you to negotiate a license that allows the client to use the work in a more limited way. If that’s your situation, your contract should go into detail about the scope and duration of that license.

If you’ve been asked to produce certain types of deliverables, other federal requirements may come into play as well. For example, the Americans with Disabilities Act (ADA) contains accessibility requirements for physical spaces (for example, this would be relevant if you’re working on exhibits or branded environments) and Section 508 of the Workforce Investment Act of 1998 contains accessibility standards for electronic products and services. These legal requirements would apply whether you mention them in your contract or not.

Designer Client diagram

Court cases

If you watch a lot of prime-time dramas on television, you might think all court cases involve forensic evidence and end with someone going to prison. Those are depictions of criminal cases. If you become involved in a lawsuit over a design contract, it will be a civil case. There are big differences between the two categories.

A criminal case is a proceeding by the government against a party. It’s brought by a “prosecutor” (a government attorney) who files charges accusing someone of violating the law by committing a statutory crime, such as robbery or murder. The accused is the “defendant.” In a criminal case, the prosecutor is responsible for proving the charges. The burden of proof is expressed in the phrase “beyond a reasonable doubt” (which in practice means close to 100% certainty). At the end of the trial, the defendant is either found “guilty” (convicted) or “not guilty” (acquitted). Guilt brings punishment. Depending on the severity of the crime, punishment might include a fine paid to the government and/or incarceration (or, in rare instances, execution). Again, all of this makes great television, but with any luck you’ll never experience it in real life!

Civil cases are quite different. They are disputes between private parties, whether individuals or businesses. The dispute leads to a lawsuit, which is a civil action (that is to say it’s non-criminal). A “plaintiff” (the party initiating the lawsuit) files a complaint against a defendant (the party being sued). The complaint will include one or more claims that the defendant caused some injury or damage to the plaintiff. In designer/client disputes, a common claim is “breach of contract,” which is defined as any failure, without legal justification, to perform as promised in a contract.

In civil cases, the burden of proof is lower than in criminal cases. In most civil cases, the decision must be based on the “preponderance of the evidence” (meaning higher than 50% probability). The court will decide in favor of the party whose evidence is more convincing. The decision is called the “judgment” — there is no reference to guilt. Instead, the defendant is found “liable” or “not liable.” If you are found liable, it means that you’re legally responsible for the damages claimed by the plaintiff. The court will then impose a “remedy,” which is how it solves the problem. It may require specific performance (such as ordering you to finish the project). It may grant an injunction (for example, to prevent your client from using your work), and/or it may impose the payment of damages, meaning an amount of money the defendant is ordered to pay to the plaintiff to cover actual losses. Punitive damages are usually not awarded in civil cases for contract disputes.

Guidance for the courts

In sorting out the issues in your case, the court will follow a clear process. It starts by determining the facts. Then it applies the relevant statutes and precedents. At that point in the process, if unresolved issues remain, the court might have to interpret the agreement for details that were not specified. If you and your client didn’t have a written contract, or if your contract was vague, the court might have to fill in some blanks. On design projects, those details could include things like payment terms, or change orders, or ownership of digital files. To move forward, the court can turn to these three additional forms of guidance:

1. “Course of dealing”
How did the parties deal with each other under prior agreements? If you had a pattern of previous conduct before entering into the current agreement, the court may require you to follow that pattern.

2. “Course of performing”
How have the parties acted in performing the current agreement? If there’s no history of working together on past projects, the court will focus on the current one. Was a pattern of conduct established after you entered into this contract?

3. “Usage of trade”
How do similar parties usually act? Different industries have different standard practices. The legal expression for this is “usage of trade” — common business understandings and practices that are well established and regularly observed within a particular category of companies. The court may require you to behave the way that similar firms behave.

For creative professionals, usage of trade is an important issue. Design firms and advertising agencies have different standard practices (and, in a previous article, we looked at the evolving standards for motion design). As a guide for their members, many professional organizations publish model contracts. One example is the AIGA Standard Form of Agreement for Design Services.

Get smart

If you’re a designer who tries to avoid contracts, wise up! Since it’s likely that you’re already in a legally binding agreement, why not make it a good one? Spend time studying model contracts from design organizations to come up to speed on the issues involved. You’ll see that good contracts are not adversarial or one-sided. They are structured to protect everyone’s interests and be mutually beneficial.

Next, focus in on the model contract that relates most directly to your work, and then meet with your attorney to customize it. The model may seem a bit long because it’s trying to be comprehensive. Your attorney can tailor it to your situation. The goal is for you to have a template to use as the starting point for future negotiations with clients. When you bring a good contract to the table, it strengthens your position as an experienced professional. It sets ground rules and manages expectations. It can lead to more respect from the client and a higher perceived value for your services.

Trying to avoid contracts and hoping for the best is just wishful thinking. It’s going to get you in trouble, and when you land in court you’ll find that ignorance of the law is no excuse.

Disclaimer

This article provides information about the law to help designers safely cope with their own legal needs. However, legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. Although care has been taken to make sure that this information is accurate, it is recommended that you consult a lawyer if you want professional assurance that this information, and your interpretation of it, is appropriate to your particular situation.

About the Author:

Shel Perkins is a graphic designer, management consultant and educator with more than twenty years of experience in managing the operations of leading design firms in the U.S. and the U.K. He has served on the national boards of AIGA and the Association of Professional Design Firms. He has been honored as an AIGA Fellow "in recognition of significant personal and professional contributions to raising the standards of excellence within the design community." The third edition of his best-selling book, Talent Is Not Enough: Business Secrets For Designers, is available from New Riders.