July 30, 2015
Handling commercial litigation in Pennsylvania and New Jersey, I see a lot of “contracts” between small businesses and their customers. They come in various forms, ranging from traditional written agreements signed by the customer and the business, to handwritten quotes accepted by the customer verbally. Unfortunately many of these contract forms have flaws that fail to adequately protect the business in the event of a dispute with a problem customer.
Your business’ contract forms likely identify the basic terms of the customer’s purchase, e.g., the products or materials, the work to be performed, the time for payment. However, do they also include terms that help the business enforce the contract against non-paying or unreasonable customer?
For example, a party in litigation cannot recover attorney’s fees from the other party unless provided in the contract or permitted by a statute applicable to the dispute. Therefore it is important to have a properly written provision allowing the business to recover attorney’s fees in any litigation to enforce the contract, so that the litigation costs do not swallow up the eventual amount recovered from the non-paying customer. Similarly, having enforceable interest and late fee provisions in the contract can also significantly increase the potential recovery and, in turn, improve the business’ position when negotiating with the customer to obtain payment.
In certain industries, the law requires specific provisions in the contract with the customer. For example, the Pennsylvania Home Improvement Consumer Protection Act establishes numerous requirements for home improvement contracts, which include an extensive list of residential home improvements in excess of $500. The Act provides that a home improvement contract is not valid and enforceable against the homeowner unless the contract is in writing, is signed by both parties, and contains nine other categories of information listed in the Act. Failure to comply with the Act potentially exposes the home improvement contractor to liability under the Pennsylvania Unfair Trade Practices and Consumer Protection Law, which allows the customer to recover triple damages and attorney’s fees for certain violations. These potential consequences compel home improvement contractors of all kinds to bring their contracts into compliance with the Act. And this is just a snapshot of the requirements in one industry in one State. The requirements across all industries and jurisdictions are obviously too lengthy to discuss in this brief post.
Understandably, it is enticing for startups and small businesses to prepare their own contract forms to save the cost of having an attorney prepare them. However, spending the money to have an attorney prepare a rock solid, legally compliant contract can often result in significant savings down the road, when the business is inevitably faced with a difficult customer trying to avoid payment or cancel a valid contract.
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The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.