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Note: Much of the following information comes from Damon Knight's "Short Story Agreements: A Checklist" and I wanted to acknowledge his excellent suggestions. Also, as noted elsewhere, I strongly urge you to join professional writer's organizations, which can offer a wealth of information about contracts for short stories and novels.
A disclaimer: the following is offered as a service to short story writers, but I take no responsibility for any changes you make to a writing contract. I can tell you that I regularly made the changes listed below in my contracts and did so without incident. Furthermore, I created this article as a general guide, and do not have the time or inclination to answer questions about specific contracts, so please refrain from emailing me questions. Thanks.
Basically, when you sell a short story to a magazine or short story anthology, you will be asked to sign a contract, which is a legally binding written agreement between you and the publisher about how your story will be used, and which outlines the rights and responsibilities of both parties.
Your initial temptation, especially if you're a newer writer, will be to excitedly sign the contract after a quick read and send it back off to the publisher, unchanged. But wait! Take a deep breath and realize that short story contracts, like novel contracts, are often written to the publisher's advantage, and not to the writer's. It's up to you, upon receiving the contract, to balance things out so your interests are provided for. It's vitally important to read the contract carefully, understand what the individual clauses mean, and change any clauses which can be detrimental to you.
A quick aside about the small press: many small press publications will not send you a contract when they offer to buy your story. It's in your best interest to have a contract with the publisher, so I would advise drawing up a contract yourself if you deal with the small press. This is an ideal situation, since you can draft your contract to be writer-friendly, and potentially avoid some of the pitfalls of the small press, as well.
Memorize the phrase above. Even if this is your first short story sale, you can make changes on your contract, and you should. You might think that making changes on your contract will anger the publisher and make him decide to not accept your story for publication. If this does happen, it's very rare, and most reputable publishers will not balk at the changes suggested in this article. In fact, they expect professional writers to negotiate, and it's a fact that most, if not all, pro writers negotiate their contracts to some degree or another. Even if you don't consider yourself a pro, you should be doing it as well. You don't have to have "clout" to negotiate; you just need to have some knowlege of what needs to be changed in a contract.
If a publisher does reject your story based on reasonable changes you make in the contract, and you belong to a professional writer's organization, you should immediately report this to the Grievance Committee of the organization you belong to, as it is unacceptable behavior on the part of the publisher in question, and some sort of action should be taken.
How do you alter a contract? If you're simply striking through a clause, you just draw a line through it and add your initials in the margin. For more complicated changes, such as rewording a clause, you need a rider. This is simply a typewritten page attached to the contract which lists your changes to the contract. At the beginning of your rider you should type the date, along with the following language:
You will need to alter the following clauses in your short story contract, if they exist:
Warranty It's appropriate for you to warrant that the story is original, has not been previously published (if it hasn't), and that you have the right to sell it. If the publisher asks you to warrant that the story is not libelous, add the words "to the best of his knowledge" to the clause.
Strike out anything more elaborate than this, such as "does not defame or violate the rights of privacy or publicity or any other rights of any person or entity" or "and does not infringe upon any copyright, trademark or other proprietary rights".
Indemnity This is a very dangerous clause, and is sometimes found in the same clause with the warranty, as if they were inseparable, but they are not. What it says, essentially, is that if a lawsuit arises from the printing of your story, that you indemnify and hold harmless the publisher of the story. Which means that if someone decides to sue the publisher, alleging that your story is plagiarism, libel or otherwise objectionable, you are agreeeing to pay for any and all expenses incurred in a lawsuit, even if it's frivolous, and even if you are not found guilty in any way. This can amount to tens of thousands of dollars, and while it rarely happens, do you really want to risk that for a story that earned you a couple of hundred bucks?
Try to get rid of any indemnity clause in a short-fiction contract. If you can't do that, strike out "or alleged breach" anywhere it occurs. Strike out "claim, demand" and similar language. The only event you should indemnify the publisher for is a "judgment finally sustained" (meaning that you don't pay until the lawsuit is decided against you, after all appeals)--if this language isn't present you should add it. In the long run, it's better to refuse to sign any indemnity clause at all in a short-fiction contract. I strike through indemnity clauses and put a note to see the rider, where I state, "The Author does not agree to indemnify the Publisher."
Rights granted Again, very important. You should grant only the rights the publisher can exercise. "First North American serial rights" or "First English-language serial rights" are common and acceptable. Some publishers want "nonexclusive foreign rights," and that's reasonable if the publisher expects to sell foreign editions of the magazine or anthology. If not, don't grant them. Don't sign away any rights which the publisher is trying acquire on speculation, such as film, telvision, dramatic and electronic rights and the like. Do not sign away rights in any other medium than print. Be especially careful to strike out such language as "in all formats and all media now in existence or hereafter known or devised".
Yous should always add the following to every short story contract you sign: "All rights not specifically granted in this contract are reserved to the Author, and any rights not specifically granted in this contract shall not be deemed to have been granted by implication."
Payment In magazine contracts this is usually a flat fee, and in anthology contracts it's usually an advance against a share of the book's royalties. The fee or advance should be payable on signing, not on or after publication. Make sure that if you have granted any rights other than first serial and nonexclusive foreign rights in the publisher's own foreign editions, the contract sets forth additional fees or royalties for such rights.
Most anthology agreements provide for an advance against a pro-rata share of a percentage (usually 50%) of all earnings. In other words, the anthologist gets half the pie, and the other half is divided up among the authors. Make sure the contract reads "a pro-rata share of 50% of all earnings," not just "a pro-rata share of earnings": that could mean anything.
Some contracts specify that the initial payment is an advance against all future earnings, or all earnings beyond the initial advance. This little change in the wording makes a big difference. It can be in the author's favor if the anthologist is paying out more than 50% of the publisher's advance to the authors. Otherwise the author loses by it.
Suppose, for instance, that the anthologist is being paid $5,000 by the publisher, in two instalments, one on signing of the contract, the other on delivery. The anthologist pays out 90% of the first installment of $2,500 in advances to the authors and keeps only $250 for himself. The second installment comes under the heading of "future earnings," and the anthologist pays 50% of that to the authors.
Now the authors have 45 + 25 = 70% of the total, and the anthologist has 5 + 25 = 30%.
On the other hand, suppose the anthologist pays out half of the $2,500 to authors, as an advance against future earnings. The second half (the future earnings) amounts to $2,500. The authors have already had their share of that, and the anthologist owes them nothing. Now the authors have 25 + 0 = 25%, and the anthologist has 25 + 50 = 75%.
Ask the anthologist what share he or she is taking. (This information should be in the contract, and if enough writers ask, eventually it will be.)
Publication This clause is usually missing, so it's important that you write it in as follows:
Editing If the printed clause grants the right to edit without the author's permission, strike it out and write in the following:
The following clauses found in contract "boilerplate" (standard contract language) are harmless unless otherwise noted:
No competing use The author agrees not to allow the story to appear elsewhere in any form until a period of time (usually a few months in the case of a magazine or a year or two in the case of an anthology) after it is published by the editor who is buying it. (This clause is harmless if there is a publication clause (see above) in the contract; otherwise it could tie the story up forever.)
Author's free copies Usually specifies two contributor's copies of the work. If it's not included, you might consider adding it.
Heirs and assigns Should state that the contract binds the heirs and assigns of both parties. Laws of a state Should state that the contract is governed by the laws of the state in which the publisher has its principal office, usually New York.
Given the changes listed above, and the nature of boilerplate contracts, you will almost always be adding a rider. I find that I always have to add an Editing clause, a Publication clause and the "All rights not specifically granted in this agreement are reserved to the Author" clause. You should, too, as these are all important things. If this is your first short story sale, the best way to ask for changes in a contract and the least likely to anger an editor, is to return the contract unsigned, with a letter listing the changes you would like. But afterwards, I'd say just alter the contract and add a rider. The editor will get in touch with you if further negotiations are required. The bottom line is that no editor or publisher will be looking out for your best interests; you have to do it yourself. So take a stand and do it!