First question: The code goes IN the theme style.css. I usually add to the bottom of the stylesheet. Just so I remember at a later date what the code does, I usually add a comment such as /* added by (your name) on 13 Nov 2012 to blah, blah, blah */ and this at the end /* end of added code */. WHAT you add doesn't matter, but you must add the comment between /* and */. After you make the change to the stylesheet, click the blue 'Update file' button.
Second question: Yes, you need to substitute something for (your form). We'll make it simple, use 'contact-us'. Then, add
<div class = "contact-us"> at the top of the form code, and
</div> at the very bottom. This lets you add the (possibly) unique formatting to a specific form in the case where you have more than one form. If you have 10 forms, you can uniquely identify each them and therefore format each form however you want.
Question three: 'label' refers to the text that preceeds the input field on the form. In this example: <label>Name
[text* contact-Name]</label>, the label is Name (what is outside the  symbols and can be whatever you want. What is inside the  symbols is the field name of what is entered.
Hope this helps.