Control Contract Disputes through the Use of Key Contract Terms

by Mark E. Merlanti, Esq.

In negotiating contracts, clients typically focus on the price and or services, whether they are the party providing or receiving the goods or services.  In the event of a dispute, the inclusion of certain contract terms, which many clients forget or are not aware of, may provide an advantage, particularly to the seller.  The following contract clauses should be considered for inclusion in any contract:

            Mediation—a non-binding process where the parties and their counsel meet with a trained facilitator in an attempt to resolve the dispute.  The resolution may be creative, include terms which a court could not order and may preserve and improve the relationship.

            Arbitration—a non-court binding trial process involving the presentation of evidence through witnesses and documents.  The arbitrator is typically an experienced attorney who is familiar with the subject industry.  The dispute may be resolved more quickly than through the court process and there is typically no right of appeal.

            Attorney fees—the contract can provide that in the event of a dispute, your company may recover attorney fees from the court or arbitrator.  Attorney fee clauses often indicate that the “prevailing party” may recover attorney fees, as opposed to simply the party that drafted the contract.  In the absence of an attorney fee provision, courts rarely award attorney fees to the prevailing party.

            Liquidated damages—a contract provision which states that in the event of a breach by the seller, the buyer’s damages are limited to a specific amount.  To be enforceable, these clauses must be carefully drafted.

            Warranties—in cases involving the sale of goods, Michigan’s Uniform Commercial Code imposes standard warranties.  These warranties may be limited if stated prominently in the parties’ written contract.  A contract for services may also include a warranty term.

            Remedies—similar to the limitation of warranties, certain remedies which are statutorily provided to a buyer of goods may be “limited” by the seller, if done so properly and prominently in the written contract.  For example, “consequential damages” such as “lost profits” of an aggrieved purchaser may be excluded.

 

            Entire Agreement—the contract should indicate that it constitutes the parties’ “entire agreement” and that it may only be modified by a subsequent signed document.  In the absence of such a clause, a party may claim that the contract includes additional terms discussed orally, despite the fact that they are not included in the written contract.

            Non-Waiver—similar to the “entire agreement” clause, the contract should indicate that the obligations of a party only may be waived if done so expressly in writing.  Recent Michigan case law has addressed this issue, making it more difficult for a party to claim that an obligation was waived. 

            Michigan Law—the contract should indicate that it is governed by Michigan law.  This is particularly important when one party is not from the State of Michigan or if the contract will not be performed in Michigan.

            Properly identify the parties—the contract should properly identify the “composition” of your company and that of the other party (e.g.—corporation, LLC, etc.).  This is accomplished through the use of the company’s full/official registered name in the contract, which should be signed by authorized parties who include their “title” with their signature.  If a corporate or LLC entity does not properly identify itself in a contract, the principals of that entity may be personally liable in the event of a breach of the contract.  This is particularly important when your company is the provider of the services and the contract is drafted by the other party.

            Personal Guaranty—an agreement where an individual, typically the owner of a company, agrees to personally make payment of his company’s obligations to the other party.  Companies who sell goods or services on credit terms, often require personal guarantees from their corporate customers, particularly new customers.

            Interest—a provision which requires a buyer to pay interest on unpaid invoices.  Although commonly referenced in invoices, such provisions may not be enforceable if they were not part of the parties’ contract.

            Adding these terms to your contracts provide many advantages, including limiting the scope of damages, determining the forum in which disputes are resolved, defining warranties and remedies and requiring the other party to pay your attorney fees.  These terms can be incorporated into your “form” documents and may be the topic of negotiation when you are presented with a “form contract” from the other party.