In these trying times of COVID-19, many of us are taking time to reflect upon the things that are most critical to our bottom line. Whether you are a provider of goods and/or services, adding the four (4) simple provisions below to your standard contract(s) could easily save you six figures in the event of a business dispute or litigation.
The best time to reduce litigation costs, or to prevent litigation entirely, is now – before the litigation starts. The following four (4) contractual provisions will help you do so:
1. A Limitation of Liability Provision. This provision can limit your company’s liability to a maximum of the fee already paid to your company by your customer for goods or services purchased, while also limiting the time within which your customer can assert such a claim.
Liability limitations have become commonplace in commercial contracts, and are increasingly found in consumer contracts, as well. Indeed, many industries could not have thrived and survived without them. An example is the home and building inspection industry. One generally hires an inspection company to inspect a potential real estate purchase shortly after signing a purchase contract, and the purchase remains contingent upon a satisfactory inspection. Almost all inspection contracts now include a limitation of liability provision that limits the inspection company’s liability to the actual cost paid for the inspection. Without such a contractual limitation of liability provision, most of these inspection companies would have gone out of business long ago.
To illustrate: an inspection company generally charges $1,000.00 to inspect a residential property. Without a contractual limitation of liability, if that inspection company failed to recognize a major home defect during that inspection, and the customer consequently purchased the property, but later discovered that the cost of repair for that undetected defect was $50,000.00, then the liability for the inspection company’s oversight would be the actual repair cost of $50,000.00 (or 50 times the cost of the inspection). How long could a company survive under such circumstances?
A limitation of liability provision can: (a) legally exclude your liability for special, incidental or consequential damages, including, but not limited to loss of revenue, profits, or goodwill, use of capital or property, as well as damages for claims by third parties against your customer, and damages based upon tort, strict liability, or breach of warranty; and also (b) mandate that your customer must submit any claim(s), in writing, within a specific period of time (generally one year), or lose its claim entirely.
Not only can this provision save you significant sums of money in the event of a business dispute or litigation, but it can also quantify your maximum exposure, and give you some certainty as to when any valid claims will legally expire.
2. An Indemnification Provision. An indemnification provision obligates your customer to indemnify your company and hold it (and its officers, directors, agents, employees, contractors and subcontractors) harmless against any and all claims, causes of action, or attorneys’ fees that your company suffers as a result of your customer’s acts, operations, or contractual responsibilities.
This provision will protect your company against third party claims, and is also likely to dissuade your customer from suing you in the event that it is sued by a third party.
3. An Attorney Fee Shifting Provision. An attorney fee shifting provision provides that, in the event of a dispute, either (a) your customer pays your legal fees, or (b) the prevailing party in any litigation between you pays the other’s legal fees. Whether you end up with (a) or (b) will depend upon the strength of your bargaining position, and how carefully your customer reviews your terms and conditions.
In either event, this provision tends to dissuade frivolous and unfounded litigation entirely, and can save you thousands of dollars if litigation is ultimately commenced.
4. A Provision for Interest Upon Non-Payment. This provision requires your customer to pay you interest on goods and services that are NOT paid for within a specified period of time.
If you are forced to sue your client for non-payment, this provision will obligate your client to pay interest on the amount outstanding during the entire period of time in which a lawsuit is pending, or until the amount outstanding is paid. This is likely to prevent prolonged litigation by a customer, as its interest costs will continue to increase each day that the litigation continues.
While many states do statutorily provide pre-judgment interest for the prevailing party in breach of contract litigation, such pre-judgment interest rates are typically very low. By including this provision in your contract, and specifying a particular higher interest rate, you can substantially increase the interest that you will receive once you prevail or amicably resolve the matter (the maximum interest rate you may charge will generally be dictated by the market and/or capped by state usury laws).
As you have probably experienced, once a contract is signed, the parties rarely look at it again unless there is an issue. Including the above provisions in your standard contract, up front, will often deter litigation altogether when an issue arises. In the event that it doesn’t, it will certainly save you immense time, money, and aggravation.
I caution all of my clients that they need litigation about as much as they need COVID-19… but if you are forced into litigation against your will, you need contractual protections that will save you time and money, and are likely to resolve the litigation quickly. Although this may seem obvious, I continue to be shocked by the number of contracts that are sent to me, which fail to contain these, and many other, simple provisions that could save you tremendous amounts of time, money, and aggravation in the event of a business dispute or litigation.
While we are all sheltering in place, it is a great time to review your standard forms and contracts. If you would like me to review your current contracts to ensure that they include the above provisions (and a venue clause, which will keep any necessary litigation close to home, or in a legally favorable jurisdiction), please call or send me an email.
Of course, the enforceability of any of these provisions may be affected by the state and jurisdiction in which your company is located.
I look forward to hearing from you soon, and please, stay safe.
Michael Pomerantz, Founding Partner
Brown, Udell, Pomerantz & Delrahim, LTD.
Office: 312.475.9900 ext. 211
Mpomerantz@bupdlaw.com