The Critical Clause

June 22, 2015

Everybody makes mistakes, but some mistakes are more serious than others. When I look back on twenty-seven years of counseling folks, the most serious common commercial mistake I see is a contractor getting in deep without a contract. This can be such a trap, because it’s against human nature to ask for a written contract at the early stage of the business relationship, when the work is about to begin and it seems unthinkable that either side would want to do the other party dirty. Then things go south and retroactively negotiating a contract becomes impossible.

There are all kinds of problems with doing business without a written contract, including that the parties may differ as to the scope of work, or mark up for components, or allocation of the obligation to insure for various risks, or in a thousand other ways. But day in and day out, the biggest problem with working without a contract if that is if you have to sue to collect your payment, you can’t get your attorney’s fees.

Suppose you are an electronics shop and you are owed fifteen grand for work done on a yacht, including expensive gear you paid for. Mr. Bigshot has run out of money and he won’t pay. He hires a lawyer from a big firm and they dig in. Remember, it’s very often easier to defend a lawsuit than to prosecute one. All the defendant has to do is claim the work was badly done, maybe throw in some sort of counterclaim, and now the plaintiff has to really build a case. That takes lawyer time, and maybe even hired experts to testify that the work was good. If you don’t have a contract, the “American Rule” applies, and each side has to pay its own lawyer and experts. Taking a case up to trial can easily cost fifteen grand (or a lot more), and in the end you will either walk away, settle cheap, or go the whole way and win a victory that ends up costing you money. The defendant knows that and uses it to negotiate.

But suppose you have a one page contract that describes the work to be done, the rate of pay and a few other matters, and that contains these magic words: “If contractor must enforce its right to payment, customer shall pay contractor’s costs of collection, including attorney’s fees.”

Now the equation has changed. Now the customer knows that not only must he pay his own attorney, he must pay yours too, when he loses. Typically that clause leads to early settlement in an amount satisfactory to the contractor. There are many useful clauses one can put in a contract, any one of which could save your business, but the attorney’s fee provision clause is, in my experience, the most commonly crucial.

Remember, in this modern era an actual signature may not be required. In my practice I generally email a simple contract to a new client, and you’d better believe it’s got a collections clause. At the close of the email state: “If these terms are satisfactory to you, please respond accordingly to this email.” I then print out the email and the response, safeguard it in the file, and I’ve got my “signed” contract.”

I do this with every client – so should you.

Sometimes I prepare such a contract for a new client, finish the work set forth in that contract, and then a while later the client comes back for more services. Do I need a new contract? Sure, I suppose, but maybe I overlook it. However, if the original contract states, as mine does, “The terms of this contract apply to all future work I do for you, unless superseded by a new contact”, I’m covered either way. Neat.

A few years ago I represented a client who had to sue to enforce a settlement agreement. (He’d sued someone to enforce a loan, they settled with a payment provision, and the defendant refused to pay, claiming newly discovered evidence.) The settlement agreement said that if either party had to sue to enforce the agreement, the prevailing party would be awarded his attorney’s fees. There was also an arbitration clause, and we took the matter to arbitration, won, and were awarded some $18,000.00 in attorney’s fees and costs, everything we claimed. The defendant’s obligation to perform the original settlement agreement was secured by a mortgage, and a week after the award was granted we got the full amount, attorney’s fees and interest included. My client was not out of pocket a single dime, and he was very well satisfied with the outcome.

I could tell you plenty of stories with the opposite outcomes, where we struggled to efficiently prosecute a collections action against a lawyered-up defendant and no written contract.

I’ve got a nice one-page contract for the commercial boat builder or other contractor If you want one, call me and we can talk. I don’t give them away.

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I recently wrote a column on short-term rental contracts, and stated that my contract includes a clause in which the tenant holds the homeowner harmless for all harm, including that caused by the homeowner’s negligence. One reader contacted me and said that he though such a clause was objectionable and typified modern society’s inclination to avoid taking responsibility. I understand his point entirely, but my job as a lawyer is to represent my client’s interests, not to promote societal ideals. If the Legislature wants to make a law outlawing such “exculpation clauses”, the Legislature can do so.

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