Three Vital Small Business Contract Provisions That You Cannot Live Without – From a Florida Litigator’s Perspective
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A large part of my practice involves litigating contract disputes on behalf of small businesses. I frequently receive inquiries from small businesses that are looking to enforce their contracts. More times than not, the small business has a poorly drafted contract that was either drafted by the small business itself or was downloaded from an internet website such as NOLO or rocketlawyer.com. I have found that most small businesses do not fully understand the importance of having a well-drafted contract. While having a well-drafted contract includes an upfront cost, having a well-drafted contract can save significant litigation costs down the road. From a Florida litigator’s perspective, this article identifies three critical small business contract provisions including 1. an exclusive venue provision; 2. an attorneys’ fees provision; and 3., a contractual interest provision (prejudgment and postjudgment interest). This introductory article is the first in a four-part blog series that will dive deep into each of these vital small business contract provisions.
Exclusive venue provisions to include in every small business contract
The first provision that every small business contract should include is an exclusive venue provision. Venue simply means the location for which a dispute will take place. Venue provisions are also commonly referred to as forum selection clauses. While this provision may seem insignificant, for a small business that needs to file a lawsuit to enforce its contract, this is one of the most significant provisions in the contract. An exclusive venue provision is especially significant for a small business that provides materials or services to clients located in multiple counties throughout the state of Florida (or other states). The failure to have a properly drafted venue provision could render a small business’s collections efforts cost prohibitive.
Take the following example. Assume the small business is located in Jacksonville, Florida (Duval County). The small business enters into a contract in Marion County to provide labor and materials to a client located in Marion County. If the client refuses to pay for the labor and materials provided, under these facts, the small business would likely have to file a lawsuit in Marion County to collect the outstanding balance. To go one step further, assume the small business has to sue three clients to collect outstanding balances and each of those clients are located in different counties. In order to collect these outstanding balances, the small business would likely have to file a lawsuit in each of the three counties. In that case, the small business would have two choices. It could either hire three separate attorneys (one located in each of the three counties) to prosecute the lawsuits, or it could pay one attorney to travel to three different counties to prosecute the lawsuits. Either way, this will likely increase the small business’s collection costs and overall attorneys’ fees. However, if the small business contract includes a provision providing that the exclusive venue for all disputes relating to the contract is Duval County, then the small business could hire one attorney to file each of the three lawsuits in Duval County. Overall, this would save a substantial amount of attorneys’ fees and costs. This makes the small business’s collections efforts more manageable.
Part 2 of this blog series dives deeper into how to properly draft an enforceable exclusive venue provision.
Attorneys’ fees provisions to include in every small business contract
The second important provision for all small business contracts is an attorneys’ fees provision. In the state of Florida, attorneys’ fees are only recoverable based upon a contractual agreement or based upon a statute.
Take the following example. Assume a small business provides materials or services to a client and the client owes the small business $6,000.00. If the small business contract does not have a provision in its contract allowing for the recovery of attorneys’ fees, the overall cost to prosecute a lawsuit to recover the $6,000.00 could potentially exceed the amount ultimately awarded in a judgment to the small business. This may prevent the small business from recovering the outstanding balance and the small business may be forced to write off the debt.
On the other hand, if the small business contract includes an attorneys’ fees provision, then after the small business prevails in obtaining a judgment for the unpaid principal balance, the small business would also likely be entitled to recover its reasonable attorneys’ fees and costs incurred in collecting the outstanding balance. This gives the small business great incentive to file a lawsuit to recover the full amount due, plus costs and attorneys’ fees.
Part 3 of this blog series dives deeper into the different types of attorneys’ fees provisions.
Interest provisions to include in every small business contract
The third important contract provision for all small business contracts is the recovery of interest in excess of the statutory limit. While the interest rate set by the State of Florida has continued to rise every quarter over the past two years, the interest rate is currently 6.77% per annum. Florida law allows a business to charge a maximum interest of 18% per annum simple interest on outstanding balances. Eighteen percent interest is almost three times the current statutory interest rate.
For example, if a small business contract does not address the interest that the small business can charge a customer who fails to timely pay an invoice, and the small business decides to sue that customer to recover the outstanding balance, the most prejudgment interest that the small business would be entitled to recover would be the statutory rate (i.e., currently 6.77% per annum). However, if the small business contract included a provision that allows the small business to recover the maximum interest permitted by law, as it currently stands, the small business would be entitled to recover interest at 18% per annum.
By way of example, if the small business is owed $10,000.00 and obtains a judgment for the full principal amount exactly one year after the obligation was due, the principal amount plus prejudgment interest that the small business would be entitled to recover would be $11,800.00, applying 18% per annum (as opposed to only being able to recover $10,677.00 applying the statutory interest rate of 6.77% per annum). To further emphasize the significance, assume the outstanding principal amount owed is $100,000.00 and the small business obtains a final judgment exactly one year after the obligation was due. Under that scenario, the small business would be entitled to recover $118,000.00 (applying 18% interest per annum) as opposed to only being entitled to recover $106,770.00 (applying the statutory interest rate of 6.77% per annum).
The benefit of including an 18% interest provision in a small business contract is significant. Part 4 of this blog series analyzes both prejudgment and postjudgment contractual interest provisions.
Conclusion on small business contract provisions
In closing, I cannot stress how important it is for a small business to have a properly drafted contract. A little investment upfront can save a lot of money down the road. If nothing else, every small business contract should have an exclusive venue provision, a contractual interest provision (prejudgment and postjudgment interest), and an attorneys’ fees provision.
Read other blogs from this series: