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December/January 2016

by David McLaughlin

The Lawful Truth: Contract Basics

by David McLaughlin

The Lawful Truth: Contract Basics

In the last couple of Lawful Truth columns we went through the Top 10 legal tips for surviving in the NZ music industry. I’’ve since received a few questions about some of the points covered in those articles and more specifically, about how a contract works. So, by way of a follow up, we’’re going to dig a little deeper into some of the nuts and bolts of contracts.

Certain pieces of legislation have a big impact on the local music industry –– like the Copyright Act 1994, on which the various rights in copyrightable works like songs and sound recordings are based. However the day-to-day practicalities of operating in the music industry aren’’t governed by specific legislation, and so it is that the contracts people make come to form the basis of how the music industry works.

By understanding exactly how contracts work you can put yourself in a much better position to maximise the potential of your music and your activities in the industry.

A contract is a legally enforceable agreement made between at least two legal entities. A legal entity includes companies, partnerships and individuals. A contract can be made in writing or can be made orally, however, there are some instances, such as with assignments or exclusive licenses of copyright, where any contract must be in writing.

Whether it is in writing or verbal, there are certain things which a contract or the process by which the contact is made, must have to make it legally binding. Firstly there must be offer and acceptance. This means that there must actually be an offer made, and there must be corresponding acceptance of the exact terms of the offer.

The law also requires something called ‘consideration’ to be present in order for a contract to be legally enforceable. Basically this means that both parties to the contract must be getting some kind of value out of it for it to be legally binding. When it comes to consideration the most common form is money. When it is not clear what the consideration that a party is receiving in a contract you will quite often see such phrases as “…in return for the payment of one dollar, the receipt of which is acknowledged…”…”

For any contract to be legally enforceable it must also be clear what exactly the contract is about. So if I entered into a contract which said I will sell you my car, then we may not have any problem if I only own one car. However, if I don’’t own a car, or I own several, then we potentially start to hit issues of uncertainty.

Another key thing to think about is when should you really insist on a written contract? Outside of the situations such as an assignment or exclusive licence of copyright where a written contract is essential, this question depends entirely on a number of commercial factors.

Although you will generally have to make the decision yourself, as a rough rule of thumb the more important the performance of an obligation by another party is to you, or the more severe the ramifications are for you if the obligation is not performed, or you have any liability (potential or actual) to a third party under the contract, then you should insist on getting something in writing.

Written contracts are always the safest way to go. Just by having to negotiate the written terms of a contract the contracting parties can often resolve any honest misconceptions either may have about what they are actually agreeing to under the contract. Most obviously, in the event that something does go wrong later you have a clearly stated record of what was agreed.

Now, what exactly is ‘breach of contract’? In practice there are many different ways in which a contract can be breached. These include where one party has not performed some of its obligations, or where one party has not performed their obligations entirely. Breach of contract specifics in any situation will very much revolve around the specifics of the contract in question.

If any disputes over breach or claimed breaches of contract cannot be resolved, then ultimately the issue may end up before the courts. Court action is a very expensive and drawn out process. More and more use is being made of what are termed alternative dispute resolution methods, such as mediation and arbitration, which you can provide for in a contract.

Although these alternative dispute resolution methods can still be expensive, they at least provide resolution quicker than court action. For some types of disputes there is also the ability to have the matter heard by the Disputes Tribunal, which is a very cheap service.

Remedies given in the situations where breach of contract is found, can include amongst other things the awarding of damages, or requiring the party in breach to complete their obligations under the contract.

Contracts can be very powerful tools if used appropriately and created in such a way that they are fully legally binding and their intention and subject matter is clear.

David McLaughlin is a specialist music lawyer with Auckland law firm McLaughlin Law (www.mclaughlinlaw.co.nz). He can be contacted by email at david@mclaughlinlaw.co.nz .