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What Happens When You Don’t Have a Written Agreement: [Part 1, Contract Basics]

Posted by monalaw, 12 January 2012 · 1,249 views

contracts negotiation collaboration handshake agreements

It’s a common event—people decide to collaborate on a project without putting anything in writing. Ideally, the fact that there’s no written agreement won’t cause a problem; after all, you’ve decided to work together and hopefully the hiccups you come across won’t be deal-breaking.


But people put things in writing for a reason. Negotiations break down, trust crumbles, or outside influences such as money or the threat of litigation destroy the cohesion that once existed. In other words, things go pear-shaped and all you can do is look at the agreement to determine how you’ll handle the situation when those circumstances arise. Hopefully those circumstances aren’t inevitable. Hopefully they can be avoided. But you can’t hang your hat on hope, so it’s important to prepare for the possible eventuality of things going horribly awry.


This isn’t about being defeatist if that’s what you’re thinking right now. Three times out of ten nothing seriously horrible will happen and you’ll either break even or go bust. Two times out of a hundred you might see something great. But the reality of this industry is that things won’t always work out the way you anticipate, and more importantly (and as I’ve said in previous articles) what people anticipate or want may not always be the same thing as what you’d expect. Having something in writing can clear up any possible delusions or misinterpretations among the people you’re working with. Unfortunately, the truth is that people tend to only realize this AFTER things go wrong. So how does the law handle these situations?


Legal Theory behind Contracts


Formation


Contract law is heavy stuff, but it breaks down into two factors: a) whether a contract exists; and b) what remedies are available to the non-breaching party. Even if contract law in and of itself is complicated, forming a contract is as easy making a promise. In most cases you don’t need a bunch of legalese or a massive document signed on a specific type of paper. The basics for a contract, in writing or not, are the following:


Mutual Agreement. Just as it sounds—the parties are agreeing to something. This can be broken into two parts; offer and acceptance.


Example #1 (mutual promise): Mary and James decide to make a game together. Mary promises to handle the programming, while James promises to handle the art assets. Even though no money has changed hands at this point, a mutual agreement has been made and the “consideration” required for the agreement are the promises themselves.


Example #2 (consideration [e.g., future profit] +performance): Mary wants to make a game. She approaches James, an artist, and asks him to create the graphic content for the game in exchange for a cut of the profits. James accepts. In this case, the future promise of a profit is Mary’s consideration, and James’ promise to create art assets constitutes his consideration.


Example #3 (consideration [e.g., money] + performance): Mary wants to make a game. She approaches James, an artist, and offers to pay him $500 for James’ production of art assets for her game. James counter-offers with $1,000 for both art assets and animations. Mary rejects the counter-offer. Even though counter-offers are valid, Mary’s rejection of James’ asking price terminates the “mutual agreement” requirement of the contract, so no contract is formed.


It should be noted that a promise counts as consideration as well, provided it’s made in good faith. In all of the cases noted above, adequate consideration has been provided to form a mutual agreement for contractual purposes.


Consideration. As you’d probably noticed from the examples above, consideration is one of the most important parts of a contract. A mutual agreement generally relies on the fact that both parties have an expectation for the other—that expectation is called consideration. This could be payment for an invoice, production of content for a game, or the payment of a royalty based on that content. In any contract, both parties need to give something to make an agreement valid. Otherwise an agreement may be treated as illusory (where one party is getting something while giving nothing of value in return) or as a gift (where one party is giving something voluntarily without the expectation of receiving anything in return). In either case, the contract is unenforceable. The keyword for consideration is “bargained-for”— even if an agreement seems unbalanced or unfair on its face, it will still be treated as valid provided there’s evidence that the parties bargained or negotiated those terms.


As for examples of consideration, you can look to the “mutual agreement” section above.


Consent/Capacity. The parties have to be willing to participate in the agreement and be sane enough to do so; in other words, if you’ve got a gun pressed to your temple while making the agreement (whether literal or figurative), the agreement won’t be valid.


Example #1: (Blackmail) John knows that Mary is having an affair with Michael. John promises not to tell Mary’s secret provided she pays him to keep the secret. Apart from this being illegal (another requirement, as you’ll see below), it’s also “duress”, which can be used to render an agreement void.


Example #2: (Delusion) Mary asks her great aunt Dalia, who suffers from dementia, to fund her project while asserting that her project will save the universe from the horrible aliens Dalia has feared for the past five years. Because Dalia is not of sound mind, there is a strong argument that she lacks capacity to enter into this agreement.


Example #3 (Children) Mary wants to hire Tim, a 13 year old genius programmer, to assist her in her game’s development. Tim’s all for the project—his parents, however, are against it. Because he’s not of legal age in his jurisdiction to enter into an agreement without parental consent (the standard age is 18), any contract will likely be voidable based on his lack of capacity due to his age. Note the difference between voided and voidable—for capacity issues, the incapacitated party has the right to void the agreement, but the contract is not automatically void unless that right is exercised.


Legal Purpose. This should speak for itself, but considering the rampant copyright infringement in the games space these days, it may not be as obvious; the scope of any contract must conform to a legal purpose. In other words, if any party’s obligation results in an illegal activity, that obligation (and perhaps the entire contract, unless a severance clause is enforceable) will be void.


Example #4 (The Fan Game) Mary wants to make an unlicensed fan game based on the Star Trek franchise. She asks James to create the character models based on the original actors in the series for her game, and agrees to pay him $5,000 for this project. James accepts. Three months later, and after some research on James’ part, James turns over character models that look nothing like those in the Star Trek series. He contends that absent a license he can’t create the models Mary desires. Legally speaking, the James’ obligation to create content based on unlicensed IP is void because it constitutes an illegal purpose, so James is in the right—however, depending on the terms of the contract the entire agreement may be void, so James’ remedies may be limited to quasi-contract remedies.


In Writing. In some cases a signed writing is mandatory. Signed writings are typically necessary due to state law and the Statute of Frauds (under the Uniform Commercial Code), which has been adopted by most states. Examples of agreements that require a signed writing include: 1) a promise to pay someone else’s debt; 2) a promise in consideration of marriage (prenuptial agreements); 3) a service contract (e.g, independent contractor agreement) that can’t be completed within a year; 4) contracts for the sale of land or interest in land; 5) contracts for the sale of goods with a purchase price of more than $500; and 6) when an executor of a will promises to pay off the debt of an estate with his or her own money (not really something you’ll see in games law, but you never know).


Once it’s determined that a valid contract exists, the parties are bound to the terms of that contract. If a party breaches, depending on the seriousness of the breach, the non-breaching party can seek out remedies based on the harm suffered.


Breach versus Material Breach


If a valid contract exists the next issue comes down to performance and non-performance. If a party fails to perform their duties under an agreement, they’re in breach—however, that may not excuse the other party from performing. A non-material breach exists if the duty breached isn’t material to the entire agreement; for example, if a partial payment is made late and late payments aren’t expressly identified as a material breach, the rest of the agreement is still enforceable even though the non-breaching party may be entitled to damages arising from late payment. Both parties are still bound by the terms of the agreement and are not excused from performing.


On the other hand, if the breach is substantial—for instance, if a contractor fails to deliver the assets they’re contracted to deliver without justification, but has already accepted partial payment—that constitutes a material breach and the non-breaching party has the right to invalidate the agreement and seek contractual damages against the breaching party. The difference in the type of breach is important, and there are several circumstances where non-performance is excusable. None the less, any breach is grounds for seeking remedies.


Remedies


The oversimplified explanation behind contract remedies is to put the non-breaching party in the same position she/he would have been in had the contract been performed. These remedies include specific performance, injunctive relief, and money damages. There are also “quasi-contract” damages, which include unjust enrichment and promissory estoppel;in simple terms, unjust enrichment exists when one party gets something for nothing, while promissory estoppel exists when one party acts in reliance of a promise that isn’t performed and suffers some inequity as a result. The goal of quasi-contract damages isn’t to put the non-breaching party in the same position he/she would’ve been in had the contract been performed, but to put them in the position they would’ve been in had no contract existed in the first place.


Remedies concerning agreements that aren’t in writing depend both on jurisdiction and circumstance. It almost always comes down to a case by case basis, but generally this kind of thing operates on a sliding scale. To simplify it in equation terms (and for the sake of simplification, let’s assume written agreements are necessary under the statute of frauds):

Promise + promise X no performance = no contract Promise + payment X no performance by either party = no contract Promise + promise X substantial/complete performance by either party = contract exists, contractual remedies enforceable Promise + payment X partial payment made, no performance = unjust enrichment, restitution the likeliest remedy Promise + promise X partial performance by both parties = contract may exists—court will examine relationship between parties, industry standards, and other factors to determine contractual terms Promise + payment X partial performance, no payment made= promissory estoppel/unjust enrichment damages depending on the nature of the performance

The chart doesn’t account for all available remedies or circumstances, but it should give you a bit of an idea as to how things will fall out on a case by case basis. Depending on your circumstances it may be better for you to pursue quasi-contractual remedies over contractual remedies or vice versa. To understand how these remedies break down in actual situations, let’s look at an example:


Example #5: The Illegal Contract (Fan Game): Mary wants to make an unlicensed fan game based on the Star Trek franchise. She asks James to create character models and art assets based on the series’ original IP, and agrees to pay him $5,000 for this project and his work is due a little over a year later. James accepts. Thirteen months later, and after some research on James’ part, James turns over character models and art assets that look nothing like those in the Star Trek series. He contends that absent a valid license he can’t create the models Mary desires. On the one hand, James has breached the agreement because he didn’t perform within the specified scope of his contract. On the other hand, the contract lacked a legal purpose, so the provisions requiring illegal conduct would probably be rendered void. Assuming Mary uses the new character models but doesn’t pay James, James could take two approaches—he could treat the contract as void due to illegality, or he could treat the remainder of the contract as valid and Mary’s acceptance of the new models as a waiver of the illegal provision. If he treats the contract as void, he would be entitled to restitution; this may amount to the market value of the work he performed, or injunctive relief to keep Mary from using the character models. If he treats the contract as valid with the illegal provision “severed”, he would be entitled to the $5,000 he’s owed under the contract.


Hopefully you now have a better understanding of basic contract law principles. With that said, the next part of this article will look at how this breaks down in independent game development.






Nice article!
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