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Demystifying Contracts

Demystifying Contracts

August 25, 2008
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" anyone can write a contract "

For many in the online adult industry the idea of entering into written contracts with someone you do business with can be an intimidating one. As with most phobias, the fear of written contracts can be overcome by obtaining a basic understanding of them and the reasons behind the requirements involved.

This article is not one that seeks to give legal advice of any kind; anyone seeking to make serious business decisions involving a contract is encouraged to seek out the advice of a reputable attorney. The purpose of this article is to demystify some of the basic terms, so that when someone starts rattling off concepts of contract law you will have a better grasp of their meaning in layman's terms.

Contrary to what many people believe, anyone can write a contract and even something written on a bar napkin can be deemed an enforceable agreement in court. There is no magic pen or paper needed and one does not need to be a lawyer to write an enforceable contract. However, with so many statutes and so much case law aimed at defining how a contract should be written, the chances that a professional attorney will be able to draft an enforceable document with clearly defined terms is obviously greater than the chance a layman will be able to do so without leaving gaping loopholes and huge obstacles to enforcement within it.

At the most basic level a contract requires four components: Mutual Assent, Consideration, Capacity and Lawful Agreement. For a contract to be binding, each of these four building blocks needs to be present. Many legal arguments are rooted in one side or the other seeking to claim that one of these four foundational items is flawed, absent or covered by some kind of exception. For that reason, understanding each of them at least in their simplest form is a worthwhile endeavor.

Mutual Assent is often referred to as "a meeting of the minds." To establish a binding contract you need to have an agreement in which each party understood the terms to have the same meaning. The simplest and most effective way to show Mutual Assent is to have a properly-drafted written document. By having the agreement in writing, stating the terms so that they can only be interpreted with one obvious meaning and having each party sign it, contending there was no Mutual Assent becomes difficult or impossible. On the contrary, it's not hard to imagine how difficult it might be to prove Mutual Assent actually occurred between two people who failed to write anything down and instead opted to engage in an informal oral agreement.

Consideration is one of the many legal terms that sound like a common English word but in fact have little or nothing to do with the definition you normally associate with it. In contract law, Consideration is a return of something of value to demonstrate acceptance of the agreement. When you initiate a contract you are making an offer to the other person and the contract does not exist until and unless they accept your offer. Because having clear acceptance is such a vital component of the contract and often hard to define, having the person take an affirmative action to demonstrate their acceptance of the deal makes sense. Often you will see stated within a contract that the accepting party will pay one dollar to the offering party 'in consideration' of accepting the offer. Consideration can come in many forms and does not need to be something of great value; it is essentially a token of the agreement from the accepting party to the offering party for the purpose of demonstrating their decision to move forward under the stated terms of the contract.

Capacity has to do with the state of mind of the parties involved in the agreement. Since a 'meeting of the minds' is the first requirement of any contract, making sure that those minds are capable of reaching a binding agreement is necessary as well. In most instances, being too young or drunk or mentally ill or having some other defect of intellectual ability is enough to void a contract on the grounds that no meeting of the minds could have occurred because one party or the other lacked the capacity for it to have taken place. This requirement is part of the reason why many contracts are signed with witnesses present and it is a great reason not to try to write your own contract on a bar napkin at the next industry show you attend while you and the other party are finishing your eighth drink together.

The Lawful Agreement requirement is the easiest one to define and understand. Put simply, you can not create an enforceable contract with anyone if it calls for someone to do something illegal. An absurd example to illustrate the point is the notion that someone who hires an illegal hit-man to commit murder can not successfully sue for breach of contract if that hit-man later decides not to kill the person. However, it is important to keep in mind that many examples are much less absurd and easier to accidentally fall into if you are not careful. Even if your contract with someone covers hundreds of items and only one of them turns out to be an illegal act which you thought was legal at the time - that flaw may end up being grounds for voiding the entire contract as a whole.

The four basic requirements of a contract do not change no matter who the agreement refers to. If all goes well and the agreement is a profitable one for everybody involved then the detailed terms of a contract are hardly ever looked at again by anyone. For example, you hire Person X to send you 50 exclusive scenes, they do it, you pay them and everyone is happy. The contract that you and Person X signed fades out of memory.

The only time the terms of a contract are ever analyzed in detail is when something has gone wrong. While there may be a feeling between friendly business associates that 'we don't really need a contract,' remember you are operating under the false assumption that it will come up while you are still friendly. In fact, the only way the details would ever be brought to light is if the luster has already worn off your friendly relationship and things have become decidedly unfriendly.

For that reason, the contract you draft with someone you love and the contract you draft with someone you hate should say essentially the same exact things. Also, "I really like you but my lawyer is being a pain in the ass and wants these terms included in the deal" is a phrase any prudent business owner should become comfortable saying.

With a working knowledge of what makes up a contract, there are a few other key terms that should be of interest to anyone running their own business. They come into play when things do go wrong. Many people think that having a valid contract and proving the other party broke the agreement is all you need to do to protect your interests. In fact, that is only the starting point for making yourself whole. Proving breach of contract essentially requires that you prove there was a valid contract and that the other person did something, or failed to do something, required by its terms. If all you are able to show is that a breach occurred, you are the proud owner of a moral victory but little else. The purpose of enforcing a contract is not simply to show the world you were right, but to collect damages of some kind or to have the court legally compel the other party to fulfill the terms of the deal as they originally promised.

Defining what their breach really cost you, what the damages really were and coming up with a way for them to repay those damages can become the stickiest part of recovering from a deal gone wrong. Ask around and you'll hear plenty of horror stories from people in this industry who won the battle but lost the war. For that reason, an important term to remember when entering into a contract is "Liquidated Damages."

In the simplest terms, Liquidated Damages are damages you and the other party are agreeing to at the time the contract is made so that you can skip trying to define them after a breach occurs. As an example, you hire Person X to send you 50 exclusive movies and include a Liquidated Damages clause in the contract that says "failure to provide all 50 movies by April 1st will result in liquidated damages of $5,000 plus a full refund of the any money given as a deposit." Including that kind of language in the contract itself curtails any arguments later about what 'damage' was actually done to you when the movies were not delivered on time, because you have made the damages something all parties agreed to ahead of time.

The purpose of Contract Law as a whole is to make sure that anyone entering into an agreement is aware of what they are getting themselves into, capable of understanding the terms, clearly demonstrating a will to move forward and not trying to do anything illegal. In boiling down contracts into the four requirements stated above, while you may not immediately grasp every complicated nuance that your lawyer is examining, you should at least be able to more fully understand their explanations and advice.

There are many competent and well respected attorneys servicing the adult online industry. Reading an article like this one does nothing to lessen the importance of getting sound legal advice from your lawyer, but a prudent business owner should always remember that it's your money at stake not your lawyer's money. Understanding the basics of the agreements you enter into and the way they are enforced is something well worth your time. Hopefully, this article will serve as a starting point for your own further intellectual investigations.


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