In this four-part series, Making Contracts Work for You, I will discuss various ways that you can strengthen your commercial contracts, so that in the case of a dispute, your contract works on your behalf.
Many people and businesses use self-written business forms as contracts and rely on handshakes to seal a deal. When a dispute arises from said deal, many of these people or business later turn to attorneys for a review of said contract. Having an attorney review the contract will often reveal shortcomings, and then the second-guessing of the agreement then begins.
A few simple, but well-defined boilerplate terms can make your standardized commercial agreement an advantage for you in the case of a dispute, or at least keep the playing field level. In many cases, a court cannot rescue you unless you give it the ammunition to do so. It makes great sense to improve your leverage and chances of collection, and perhaps even ward off disputes, by improving your standard contract forms with the simple tools mentioned below.
Here are some of the provisions that can make or break your success in a lawsuit that arises from your contract:
- Attorney’s Fees Clause — language that says the winner also gets his attorney’s fees recovered.
Why? Under the “American Rule” you generally cannot recover attorney’s fees in most states, unless you have a right to attorney’s fees in your contract or under a special statutory remedy. You want an attorney’s fee clause that is properly drafted.
- Clear Payment Deadlines and Interest Provisions — terms that state when payment or performance is due and the consequences for delay.
Why? Disputes can take a long time to resolve. The accrual of interest can become a powerful bargaining chip, and a significant item of recovery. Interest compensates you for the loss of use of your money, and, to some degree, the loss of your own time devoted to the case. Allowable interest rates vary according to the applicable state law. If you want to charge “compound interest” — in other words, interest on interest — this must be explicitly stated in the agreement. Otherwise, only simple interest will accrue on the principal sum due. Typically, we see contracts with no interest rate stated; the interest rate only appears in invoices. The interest rate(s) should be agreed upon, up-front, in the contract.
- Choice of Law, Consent to Jurisdiction, and Venue — where a lawsuit must be filed and what law will apply.
Why? Cases can be won or lost based purely on the financial burden caused by the location of the lawsuit or arbitration hearing. You want to be in your own home “court,” spending nights at home with your family, trying the case with your favorite lawyer.
- Correct Naming of the Parties and Authorized Signatures — are you actually signing a contract with the party you think you are dealing with?
Why?Some level of due diligence is always appropriate. If you are doing business with a corporation or other entity, you want your contract signed by a properly authorized representative with the corporate name properly stated. You would be surprised how often this is overlooked. Are you dealing with the true property owner, or his uncle who just got out of jail? There is a wealth of publicly available data available on the Internet to verify the correct names of corporations and the true owners of property, businesses, etc., so you can ensure you have the correct, authorized signatures.
- Personal Guaranties – an additional source of payment if the contracting party defaults; usually a person with money, property or both.
Why? It doesn’t take much for an unscrupulous person to form a corporation or an LLC. If you do not have a solid track record of doing business with a business entity or trust, it may be appropriate to ask for a personal guaranty. Guaranties must be in writing to be enforceable; they can vary from a single sentence to multi-page guaranty agreements.
We are always happy to review our clients’ standard contracts and provide advice that will make your agreements stronger.