Things You Think You Know About Contracts … But May Not

Wednesday, December 30th, 2015

By W. Michael Milom

We often think of contracts as written documents negotiated by lawyers and executed with some degree of ceremony or formality. While those documents are contracts, they are not the only kinds of contracts. Each of us makes contracts every day. Purchasing gas for a vehicle, buying a vanilla latte at Starbucks, dropping off your cleaning or offering a credit card to pay for lunch involves a contract. But, these events are so routine we don’t think about them as contractual transactions. When we move from routine and mundane to transactions involving a substantial investment of time or money, we tend to focus a bit more on them and the details. But still, if you ask most people about an agreement reached only through verbal communication, they will tell you that an agreement is not really binding unless it is “in writing”.

The basis for that assumption is likely a statute adopted in every state of the United States requiring that, in order to be enforceable, certain kinds of agreements must be reduced to writing and signed by the person or persons to be bound by the agreement. These laws are based on a 17th Century English law intended to prevent the fraudulent creation of obligations by perjury and are referred to as Statutes of Frauds.  These laws specify several rather specialized or arcane agreements (such as agreements to be responsible for a debt of another person or agreements upon consideration of marriage) which must be in writing to be enforceable. Among those, the most common is an agreement that is not to be performed within one year.

That means that most agreements we enter into routinely are valid verbal contracts which are completely enforceable even though they are not in writing. The absence of a memorandum or notes about the terms may present some difficulty in proving the terms of the agreement, but if sufficient proof of the terms exists, most verbal agreements are completely enforceable.  The belief that only written contracts can be enforced frequently creates problems in music industry transactions. Fortunately, federal law requires that an agreement to transfer a copyright must be in writing, but verbal agreements regarding studio rental, production services, turn-key recording projects, song critiques, record promotion, publicity, marketing services and many similar routine transactions are enforceable verbal contracts.

Even when a contract is required by the Statute of Frauds to be in writing to be enforceable, Tennessee and some other states provide for an exception by applying an equitable doctrine that permits a party who has partially and substantially performed its obligations under an oral agreement to enforce it against the other party. As an example, if a recording artist has discussed with a record label the terms of an exclusive recording contract to record and deliver 3 albums over a period of 5 years, the artist has recorded and delivered one album to the label and the label has released and distributed that album, it is probable that under Tennessee law, either party could enforce the provable terms of that contract against the other party even though no written contract has been signed. A number of technical proof issues would need to be examined under those facts, however, the point is that even though the Statute of Frauds requires that recording contract to be in writing because it could not be performed within one year, courts would enforce it under the “partial performance” exception to prevent a party from using the law to take advantage of the other or from profiting at the expense of the other.

Even though all agreements need not be in writing to be enforceable, having something in writing can help avoid expensive conflicts even when a written agreement is not legally required.   Personal relationships are complex. Business relationships can be even more complex. In the music industry, personal and business relationships often overlap in ways that can be uncomfortable and compound complexity. Following a few simple rules can help avoid resulting problems:

  1. Clearly understand the terms of the agreement – what each party is obligated to do, when it is to be done and, any conditions or contingencies on those obligations. Keep asking questions until you both understand and agree on all of the details and on what you will do if the things that could reasonably go wrong, do go wrong.
  2. Once you understand the terms of your agreement, write them down so you remember what was agreed. If possible, give a copy of your notes to the other party or send them an email asking them to confirm that they agree with your notes or description of the terms. Even if they don’t respond, you’ll have a record of your understanding of the agreement at the time it was made which could be helpful as proof in event of a subsequent dispute.
  3. If the obligations under the agreement can’t be performed by you or the other party during a one year period from the beginning of the agreement, prepare a written memo or list of the agreed terms and have it signed by both parties.
  4. If the agreement involves a substantial commitment of time, money or other resources, seek professional advice regarding the requirements for and content of a written agreement and consider getting assistance preparing the contract.

In summary, while it’s good to know that a simple verbal contract can be enforced, for purposes of both clarity and peace of mind, – especially when substantial commitments of time, money and/or creative effort are involved – a written contract is clearly a better choice.

Published in MusicRow Magazine (www.musicrow.com), January 2016