Important Contract Terms for Every Small Business
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Every small business should have a written contract, whether it is with its customers, vendors, or suppliers. While every business is different, and this may apply to some industries more than others, it is important for small businesses to evaluate when or how a dispute could arise and whether they are protected if that happens. As a litigation attorney, I am constantly presented with disputes and come to find out that the small business did not have a written contract in place. Not having a written contract can make the dispute harder to resolve and more costly for the business.
While many businesses do not want to invest the initial cost for preparing a contract, spending a little money on the frontend can save a lot of money on the backend when a dispute arises. As with most things, it is important for small businesses to be proactive rather than reactive. Additionally, it is important to remember that even a short contract is usually better than no contract at all. Also, not every business needs a contract that’s a Cadillac, a Kia may be just fine to accomplish the business’s goal and price point.
I wrote a series on this topic a few years ago (see below) and I want to refresh that topic because it is extremely important especially for small businesses and those who do not have the means to get involved in protracted litigation. This article focuses on contract provisions from the perspective of litigation and protecting the small business in the event that a dispute occurs or litigation becomes necessary.
Three Critical Small Business Contract Provisions from a Litigation Perspective
In 2019, I authored a 4-part series on the three contract provisions a small business cannot live without. That series, and those provisions, still hold true today. Every small business should have a contract that includes the following provisions: 1) the right to recovery attorneys’ fees; 2) the right to recover interest at the highest rate permitted by law; and 3) an exclusive venue provision.
Attorneys’ Fees Provisions
The ability to recovery attorneys’ fees can be critical for small businesses. In Florida, a party can only recover attorneys’ fees if there is a contract that gives the party the right to recover attorneys’ fees or if a statute provides for the recovery of attorneys’ fees. Thus, in a typical situation for a small business that has not received payment for its services, the only way to recover attorneys’ fees is by having a contract that provides the right to recover attorneys’ fees. If the cost of litigation would exceed the amount in controversy, it would be cost prohibitive for the small business to file a lawsuit to recover the money due unless there is a contractual attorneys’ fees provision. As such,
The following article provides greater insight into the purpose of attorneys’ fees provisions, the types of attorneys’ fees provisions to consider, and legal authority to support attorneys’ fees provisions: Three Contract Provisions A Small Business Cannot Live Without: Attorneys’ Fees Provisions (jimersonfirm.com)
Interest Rate Provisions
From a litigation perspective, including an interest rate in a small business contract is also extremely important. When I wrote about interest rate provisions in 2019, the Florida judgment interest rate was 6.77%. Currently, the Florida judgment interest rate is 4.34%. However, small businesses have the ability to include a provision in their contracts that would allow them to recover the maximum interest rate permitted by law, which is 18%. This can be significant for those businesses who have to endure an unpaid receivable for a long period of time. It also shifts risk and exposure to the other party who may be subject to paying 18% interest and result in an early resolution of a dispute. Including an 18% interest provision into a small business contract can really add value in the event that a dispute arises.
The following article provides greater insight into the purpose of contractual interest rate provisions, the types of interest rate provisions to consider, and legal authority to support contractual interest rate provisions: Three Contract Provisions A Small Business Cannot Live Without: Contractual Provisions (jimersonfirm.com)
Exclusive Venue Provisions
Another key provision from a litigation perspective is including an exclusive venue provision. In the event of litigation, this provision will allow the small business to file a lawsuit where the small business chooses. For a small business that does business with customers located in other parts of the state or the country, instead of the small business having to file suit far away from the business’s location (and potentially hiring lawyers in other parts of the state or country), the small business can keep the lawsuit in its backyard and control the expense and potential exposure.
The following article provides greater insight into the purpose of exclusive venue provisions, the types of venue provisions to consider, and legal authority to support venue provisions: Why An Exclusive Venue Provision (Forum Selection Clause) Is Vital For Small Business Contracts In Florida (jimersonfirm.com)
Additional Terms to Consider
The above three contract provisions are important from a litigation perspective in the event that a lawsuit becomes necessary. In addition to those terms addressed above, small businesses should include additional terms and considerations to protect its interests. This is certainly not an exclusive list and will vary depending on the type of business, the type of contract and the relationship between the parties. A few additional contract provisions to consider are as follows:
- Identification of the Parties: The parties to the contract should be clearly identified including the names of the businesses or individuals and their contact information.
- Scope of Work/Services: The terms of what is being provided, including the services or scope of work should be sufficiently detailed to explain the scope (or limitations thereof) and to avoid any ambiguity.
- Integration/Merger Clause: An integration/merge clause allows some or all prior agreements or understandings to be merged into the written contract. This clarifies expectations and prevents ambiguity.
- Length of Term/Termination Clause: Depending on the type of contract or scope to be provided, it may be important to state the length of the contract or when and how the contract may be terminated. Alternatively, if a business wants the contract to auto-renew, an auto-renewal provision should be included.
- Defaults: Default provisions clarify when and what constitutes a default of the contract and whether the parties have an opportunity to cure the default and the timeframe associated therewith.
- Insurance: Insurance provisions identify which party is required to obtain insurance and whether the other contracting party must be included as an additional insured on an insurance policy.
- Assignment: An assignment provision allows one party to agree to assign their rights or responsibilities to a third party.
- Dispute Resolution: There are different types of dispute resolution provisions. For example, parties may agree to binding arbitration or they may agree to pre-suit mediation as a way to potentially avoid litigation altogether.
In the end, it is important for small businesses to have a properly drafted contract to protect their interests and limit their exposure. A little investment upfront can save significant litigation costs down the road. I would highly suggest that all small business owners consult with a competent attorney to ensure they have a properly prepared contract suited for their business needs.
About the Author: Austin T. Hamilton, Esq. is board certified in business litigation by the Florida Bar and has extensive contract litigation experience on behalf of small businesses. Austin advises small businesses in various industries throughout the State of Florida.