The term of a contract is set forth in two ways. You typically remain under contract to a label for a minimum amount of albums or a minimum amount of years, whichever is the greater. The number of albums stipulated in a recording contract are an obligation on your part but merely an option for the label. This means the label can exercise the option to release further albums. Without a defined term, the label has a right to your recordings for as long as it wants.
The definitions section of a contract precedes the body of the contract. It sets out the meaning of the important terms referred to in the contract. This section is a must-have; otherwise, your contract may be worded so ambiguously that you couldn't understand it, let alone enforce it. Typical phrases and words that are subject to definition include "perform," "record," "commercial standard," "release," "territory" and "representative."
Your payments are delivered in royalties, which are essentially a percentage of profits after cost. Royalty rates can be anywhere from 5 percent for a new artist to more than 50 percent for a megastar. The royalty rate reflects the amount of investment required to "break" you as an act and also how much the label wants you. If your royalty rate isn't clearly set out in the contract, then it will be impossible for you to know if you are being paid the right amount.
Both you and the label will have a clause setting out the circumstances under which the contract may be terminated. Your clause must entitle you to terminate the contract if the label fails to meet its contractual obligations, goes out of business or breaks the law. For example, a label boss convicted of bribing radio DJs should be grounds for terminating the contract.