Contract vs. MOU

Discussion in 'Contracts and other Legal issues' started by OldenGray, Mar 25, 2008.

  1. OldenGray

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    The question most often asked by a new client is "what is it going to cost me?" That's where you need to step up and be ready to list all the variables such as: your hourly rate or an estimated rate for the job; materials; travel expenses, subcontracted work, etc. It's always a good idea to have some idea beforehand what you are planning to charge the prospect and he needs to know the costs as well as any so-called "hidden" costs upfront.

    You could get a lawyer to draft you a contract with all the proper clauses; however, in most cases a Memorandum of Understanding (especially in the case of small, one-time jobs where big money is not involved) might suffice rather than a full-blown contract; but, in any event, I am not a lawyer and if you plan on doing any long-term work for a client, you should get legal advice and a proper contract.

    A type of contract, which I use, and which is probably best for most one-time design work, is called a Memorandum of Agreement (MOA) also known as a Memorandum of Understanding (MOU). These titles are interchangeable and the use of the term “Agreement” or “Understanding” has no legal significance. Often, you, or your client, will submit an MOA that is, in essence, only the statement of work. The best use of this document is to modify it to serve as the statement of work for the more formal contract document if you decide to go that route.

    Using an MOA seems to be an attractive option for most graphic design work because it is straight-forward and simple without the complicating and quarrelsome standard terms, and conditions and all the legal whereas and wherefores and party of the first part, etc.

    But, a word of caution: There are some problems that could arise in using an MOA. The MOA lacks the standard terms and conditions that protect both parties during the performance of the work. At a minimum, an MOA fails to include the legal terms and conditions. Failure to include these provisions will likely jeopardize the funding and in the worst case scenario, may jeopardize the design project.

    If you want me to, I can give you sort of a basic run down of the clauses that should be in a Memorandum of Understanding. But, you probably already know that it should contain the parties involved (names and addresses); a detailed description of the work (based on what you, and the client, have set as the parameters of the work also called the "purpose" clause); a funding clause (how you expect to be paid); and an indemnification clause (what happens if one party or the other breaches the contract?). Close the MOU with a place for signatories to the document and exchange signed copies. Simple.

    Like I said, probably best for simple, straightforward, one-time jobs. More involved jobs, my advice: get a proper contract which has a lot more protective clauses and provisos. Or, check out the many legal sites on the web that have sample contracts.
    Olden
  2. Borpean

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    Very good information Olden. Thanks for sharing.

    It might be extreme or confusing for the novice freelancer but it is important. Nothing worse than getting burned. It happens.

    If more info is needed or if you can't find what to look for on the web, a couple of books are useful if one is to tackle the world of freelance...

    Business and Legal Forms for Designers with actual forms: http://www.amazon.com/Business-Lega...=sr_1_2?ie=UTF8&s=books&qid=1206478264&sr=1-2

    Pricing & Ethical Guidelines: http://www.amazon.com/gp/product/09...mp=1789&creative=9325&creativeASIN=0932102131

    :image16-1:
  3. OldenGray

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  4. turnkeysetup

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    As someone being online for over 23 years and developing sites for over 15 years I know all too well what it is to be burnt.

    Personally I stay away from contracts and I instead require a deposit on any site before work is started. I will provide the cleint in detail exactly what I will build so he/she fully understands what is to be built and for how much.

    We agree on the functions, then deposit is made. Work starts and client has access to the development server to see the work and test as the site is built. During the building process payment are made based on % complete.

    Once site is done and fully tested by myself and client then final payment made and site is installed on the clients server. Then I offer full lifetime support on my work.

    This way of doing business has worked for many years with no problems or issues.

    James
  5. laughingbird

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    Interesting James.
    thanks for sharing.

    So, once you collect the initial payment - without a contract, how does your client know you're not going to stiff him? (Lol, not you personally, but you in general).

    For me, a contract has always provided the physical handshake needed in today's virtual world.

    You've been online since 1985?
    I started with AOL way back in 1993 - but online wise, that's as far back as I go.
  6. turnkeysetup

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    Well I personally deal with my clients and give them access to what is being built and they can see it and test it.

    Normally my deposits are by western union and not paypal so my client is given my personal information, so he/she knows who they are dealing with.

    Besides that I have a very good reputation on several freelance sites.

    Yeah I was online when it cost $3.99 a minute and browsers and domain names did not even exist then. Mainly was just news and some text based games and such back then.

    I was on AOL 2.6 for Mac back in 1995 with a Macintosh Perfoma 6116 Power PC and beta tested AOL 3.0 then got bored with AOL and left it .. :image10-1:

    James
  7. Borpean

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    Interesting James. Everyone will have their preference, but the key thing is to always protect yourself!

    Thanks for sharing!
  8. turnkeysetup

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    Yes I agree.. and like I said I learned that the hard way, which is the reason why I do things the way I do now.

    Not to sound harsh but I do not take on every client that contacts me either and I do have 43 countries blocked from even accessing my servers. I have developed tens of thouands of sites and dealt with thousands of clients, so I can tell which clients are pretty much going to be a good honest client.

    In my business I firmly think trust and honesty are the first 2 things that should be established with a developer and client. Eventhough some may see a need for a contract, to me it is very cold and just screams dis-trust from the begining.

    James
  9. MasterDesign

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    I'm all for trusting people!
    but when it comes to doing business,
    working without some sort of legal agreement (aka contract)
    can
    set both parties up for getting what they signed for.....
    ......nothing!

    That's not only bad for business, you could even end up
    doing something like this and this, wich i'm sure James would agree,
    is even worse for business...

    MD
  10. turnkeysetup

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    And my point I know about being burnt, really has nothing to do with a contract. That is the reason why I do not take credit card payments any longer.

    Contract or not contract someone pays you through paypal with a credit card even on a virtual product 98% of the time they will still get a refund of their money.

    The government has given full power to the credit card company / bank to decide if they allow the chargeback or not. That contract means nothing to the credit card company, you have to go to court and sue for that and spend even more money.

    Now it is also a fact even if you sue there is still nothing that say you will get your money as no courts can force someone to pay you. You can spend more money and try for a lien on what someone owns but even that is limited on what you can put a lien on and still does not say you will get your money.

    Todd Ash as you point out is a known internet scammer and has done so to alot of people, no contract can protect you from such.

    James
  11. laughingbird

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    Wow.
    Nice detective work MD!

    This is eXACTLY why you need a contract.

    I disagree with you James... the two incidents that MD is pointing to above - could very easily have been stopped with a contract. If nothing else, both you and Todd Ash would have known what to expect up front. The contract could have contained some system requirements (explaining the need for a newer server to run your scripts). If Todd chose to ignore that line in the contract, he would have no leg to stand on. But nothing was written in print, and now you could both go to court and spend a lot of money defending yourselfs.

    So, who's right and who's wrong on the issues above?

    Check out both of MasterD's links he's pointing to above and post your comments below.

    This is a very interesting thread.

    Marc
  12. turnkeysetup

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    There is really nothing to go to court on, he used another persons credit card (misty clarke) is what it boils down to. No contract would protect you from that.

    Misty Clarke did the chargeback as it was her credit card, now with that said I do not think Misty Clarke even exist but thats just a personal opinion. Misty Clarke was supposed to be Todd Ash's assistant but I dealt with Todd Ash.

    So again a contract with Todd Ash would mean nothing, and as far as going to court $1,500 is not worth my time going to court and I would have to take Misty Clarke to court.

    I would also like to remind you that this was a purchase on a pre-existing script that was already built. I was not hired to build a site from the ground up. There is no company I know of that has you sign a contract to just make a purchase on a pre-existing script. Same goes for software, ebooks, or any other virtual product that is pre-existing.

    This is something Todd Ash has done to many people, sure he has been reported to the proper authorities and they are aware of what he does. There is also complaints with the BBB which actually mean nothing because he is not a licensed business as he claims.

    James
  13. MasterDesign

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    No i didn't, you do
    I don't know the man!

    thanx for sharing.
    MD
  14. turnkeysetup

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    You pointed it out by linking to my site, feel free to do some research on Todd Ash as you will find that he has run many websites, mostly link exchanges and ripped people out of $250+ a pop.

    My point is still the same though, no contract can protect you from that type of transaction. Big woop you sue, ok you just spent more money and still have no way to collect that money.

    Maybe doing a little research on paypal's own developer forum you can see how many thousands of people get ripped off by credit card charge-backs on virtual products. I am even sure Marc himself has had a good bit of charge-backs to deal with.

    This is a fact of running a online business dealing with virtual products and there is no contract that can protect you. I would not want any newbies to get the wrong idea of contracts. If you do a contract then that is good for you, not everybody is going to run their business the same way.

    Just for information purposes though, if you have a contract with a client that lives in another country and even if your contract gives you the right to sue that client where you live. That contract can NOT force that client out of his country and into yours for the purposes of you filling papers to sue. There is no contract that can force the government to approve a passport to travel from one country to another.

    There is alot of information you are leaving out with this contract. Again it is fine that you do a contract but people should know it will not always protect you.

    It is my opinion that it builds dis-trust from the start. Course again I do not take on every client that contacts me either, I do choose who to do business with.

    James


  15. laughingbird

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    Hi James...

    With all due respect, a contract is mandatory in cases like yours. A contract between the both of you would have told Paypal that you provided the software/service, and Todd agreed to it.

    Here is a link from a notible site on credit card chargbacks.
    http://www.intelli-collect.com/creditcard_chargebacks.html

    I've snipped part of the important paragraph here below:

    ------
    If a product was purchased, the customer must return it before a chargeback can be initiated - at least if the customer used a Visa or Mastercard. (American Express seems to have more customer-friendly stipulations and does not require the product to be returned before a chargeback can transpire.) It is then up to the merchant how to proceed (i.e., to either grant or deny a refund).


    Disputes regarding a service fall in a very gray area.

    While it is mandatory that the customer attempt to work out an agreement with the merchant before attempting to charge back payment, such a conference may result in a stalemate.

    The almighty refund policy may help the merchant but if there are loopholes, the customer may very well be deemed victorious. And it should be clear that any 'ties' goes to the customer; if the merchant cannot provide conclusive evidence that services rendered were thorough and appropriate or if there exists reasonable doubt, Joe Q. Merchant will not only have lost time with the customer but his money.

    And if the customer asserts that services were not rendered at all, Joe needs to show evidence of his work to the processing bank or a contract that spells out that he intended to provide service on a future specified date. Again, any inconclusivity that Joe fulfilled his obligation or planned to will result in a thinner wallet for Joe.
  16. turnkeysetup

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    Marc,
    The problem is it is not a decision based upon paypal, it is up to the credit card company to issue a refund or not.

    Sure I provided proof that he got the software to paypal, I provided all emails and communications, I provided screenshots, I provided everything that you would to a court. Still though it is upto the credit card company if a refund is issued. There is nothing even paypal can do if the bank says "we want our money back".

    Paypal is charged the fees and then those fees are charged to us as I think you already know.

    The bottom line is no matter what you provide to the credit card company or paypal it is still by law the bank's decision to refund that money or not. As far as dealing with paypal, a merchant does not know who the bank or credit card company is and you can not deal with them you must go through paypal. Paypal then deals with the credit card company / bank.

    James

  17. MasterDesign

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    Sorry mate, wrong again.
    I'm only linking to your site (and his) on wich you "point out" that Todd Ash runs a scam... there's a difference.
    I do agree with most of what you're saying though.
    MD
  18. OldenGray

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    I can see where TurnKey is coming from and the fact that it works for him at the present is fine and I'm not being critical of his methods; however, that's not to say that at some point his methods might not work. In fact, they may backfire. The legal system is full of cases where a so called "understanding" has erupted into litigation. I can remember back about 30 or so years ago when I initiated a lawsuit for breach of contract even though there was no actual paper contract. Stupid me! I sued a hardware company for leaving me holding the bag for about $15,000 in work I did to produce a tv media package. We had what you might call a "gentleman's agreement" or a verbal understanding and I received some funding upfront, just like TurnKey did (or does). That still did not relieve me of the fact that because the hardware company refused to pay me that I was not bound to pay the production company for their work. Actually, they couldn't pay anyone because they were going bankrupt at the time and were under bankruptcy court protection. So here we are at a quandary; I could opt to go to court and get whatever I could in the way of assets (maybe)which I could sell, pay legal fees at $200 per hour, and there would be no guarantee that I would win anything at all - as the lawyer bluntly told me. So, you see, it was an easy decision to make: I opted to shell out the $15g's from my own pocket. If I had a legal document, like a contract or memorandum of understanding, I could have been way up front in the lineup of creditors to collect some, if not all my money. After that experience, and for years afterwards, I like to have something on paper, preferably a standard contract, written by a lawyer, if I think there is going to be decent money involved and situations where I could get burned, fooled, cheated, lied to, misled, and otherwise left holding the bag. When money's involved, there aren't many friendships and nice-nice business relationships that can't go south real quick. That's why we have a legal system; to protect the little guy who has aspirations of becoming a big guy. Believe me, it's all well and good to be trusting and trusted, but go a little further and develop those business relationships based on BUSINESS. It's easier, early in a business relationship to tender a contract or exchange a friendly letter outlining your and the client's expectations and costs. So, you see, relationships change and financial situations change even faster; unexpectedly at times. The old CYA ("cover your a--") memo is very important when you are facing legal action.
    I've seen a lot of horror stories in my 50+ years in the advertising business; dealt with multi-million dollar budgets; seen what happens when BIG contracts are lost, and seen heads roll, too. Keep it real folks and do whatever it takes to get it in writing. Be a survivor.
    Olden
  19. turnkeysetup

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    Thank you OldenGray..

    What we have to remember here though is this, we are dealing with virtual products and/or a virtual service. We are also dealing with people in different states or even different countries.

    Now even if a contract states that you can sue the breaching party in your own state/county. There is no law or courts that can force that person to come to where you live. Ok so you file the papers and other party does not show and "Maybe" the judge will rule in your favor. Now what ? You still can not force the other party to pay you and if by chance you was even granted a lien of what the person owns, you still can not just take possession of that property. You will have to end up spending even more money to go where they are and file the proper papers.

    The bottom line is a simple $1,500 could end up costing you $5,000+ easy, and that is even with a contract and again no promises you will see a dime.

    This comes directly from a paypal certified developer and I will happen to agree when we are dealing with virtual goods / services online.

    ================================
    it may be worth looking at verifying that the customer is a real customer (telephone call or postal letter) before sending out the electronic goodness to them (but after taking their payment of course!). If you are up-front about this in the payment process, then they can't say they didn't expect it to actually happen.

    Of course, any major hurdles you put in the way of people willing to commit fraud (buy something then say they never did and create a chargeback) will also potentially turn off your non-fraudulent customers who could get annoyed with the strict anti-fraud measures that you may employ...

    This issue is all around risk of course - there is always a trade-off between the risk of a fraudulent customer vs. annoying 'good' customers, and you may need to be willing to lose some money to chargebacks in order to create enough other 'good' customer traffic to keep a profit rolling in.
    ================================

    James
  20. OldenGray

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    Very good stuff here. Thanks, James, for this great input into a very involved and intricate question. The whole issue of virtual products gives rise to a whole new set of legal issues. I certainly concur with James that you have to go to the source and sue in his/her county or country and that entails even more expense; plus you have the added problem of "local sympathy" to deal with. Plus, as James has indicated, even if you win a summary judgment, you still have to attach the assets which means locating them, wherever they might be. Best advice from brother James early on was to get the money first...if you can. But, even so, conducting business professionally with professional tools sends the message that you expect to be paid for what you do.
    Thanks, James, for all those excellent insights.
    Olden

    Good quote from James
    This issue is all around risk of course - there is always a trade-off between the risk of a fraudulent customer vs. annoying 'good' customers, and you may need to be willing to lose some money to chargebacks in order to create enough other 'good' customer traffic to keep a profit rolling in.

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