With much focus on provisions such as services, fees, and cancellation, you may be bleary-eyed by the time you reach the end of a contract. Yet often at the end of the contract are the “boilerplate” provisions which could be very costly. As such, it is critical to watch out for these clauses and know which issues to flag and to address in contract negotiations.
Prevailing Party Attorney’s Fees
In the United States, the general rule is that each party pays for its own attorney’s fees unless they agree otherwise in a contract. In contracts, the other party often will include language addressing the payment of attorney’s fees such as the following:
“In the event of any dispute involving this Agreement, the prevailing party is entitled to recover its attorney’s fees and costs from the non-prevailing party.”
While this language may seem innocuous, its effect is anything but innocuous. The provision, though softly worded, has a significant impact: the losing party pays the winning party’s attorney’s fees and costs in addition to paying its own attorney’s fees and costs. This provision often rears its head in settlement negotiations with the other side saying that they will be the winner and therefore if a settlement is not reached, the other side will be paying double the amount of attorneys.
Documents Incorporated by Reference
The contract is the contract and there’s nothing else you can be bound to – correct? That statement may in fact be false if there are provisions in a contract that incorporate other documents merely by referring to such documents by reference. Often, the language will be included as follows:
“The terms of this Contract, together with the policies and procedures of the Facility, shall constitute the parties’ entire agreement.”
Again, while this provision may appear innocuous on the surface, its impact can be costly. When I see this type of provision, I frequently will ask my client whether they have received a copy of the Facility’s policies and procedures. If they have not, I recommend they do so and ensure that they agree with all terms included in the document because simply by referring to the policies and procedures as indicated above, the client will be bound to its terms. If the client agrees with the terms, then the language can remain in the contract; however, they will want to modify the provision to state “the policies and procedures of the Facility as attached” so as to ensure they will not be bound to modifications to the provision.
Controlling Documents
While the parties work hard to ensure that the contract will fully address all issues that could arise, often it is necessary for the parties to later sign an addendum to the contract that modifies the contract provisions. It is anticipated that when these additional documents are signed, their terms will supersede and replace the terms of the contract, yet that may not in fact be the case if the contract includes the following provision:
“If there is any inconsistency between the terms of this Agreement and the terms of any addenda, the terms of this Agreement shall control.”
As such, this provision often will set up a battle of the documents. This is especially true if the addenda later state that if there is any inconsistency between the terms of this addendum and the terms of the Agreement, the terms of this addendum shall control. In order to avoid this battle, work to remove the provision noted above and include in any addendum, the language noted in this paragraph, which provides that the terms of the addendum will control.
Dispute Resolution
If disputes arise after the contract is signed, any dispute resolution provisions that may be hiding out in the contract’s fine print may prove costly.
While there are many ways to resolve a dispute, you may not know which method is the best for your organization. Is it litigation, mediation, or arbitration? While opinions on which method differ, one thing is certain: each method has its own advantages, disadvantages, and costs. It is important to review dispute resolution options with legal counsel before agreeing to them in the contract. Often the language in the contract makes the chosen dispute resolution provision the only way of resolving the dispute, such as the following:
“Any disputes arising out of the terms of this Agreement shall be resolved by arbitration according to the Commercial Rules of Arbitration of the American Arbitration Association. The determination of such arbitration shall be final and may be enforced by courts.”
The above provision makes arbitration the only option for resolving disputes so that the company is not able to pursue a claim in its local courts or submit the claim to mediation unless the other party agrees otherwise. The best way of managing these provisions is to seek direction from legal counsel before the contract is signed as to which dispute resolution method is the best for your business.
So, the next time you are eager to gloss over the fine print in the contract, stop and take time to focus on these important provisions. What may be included in them may be costly and waive any savings you are experiencing in the contract.
Barbara Dunn is an attorney and owner of Barbara Dunn Law PLLC, a law firm dedicated to representing nonprofit organizations on a variety of legal matters. She serves as general counsel to the National Wood Flooring Association. She can be reached at barbara@barbaradunnlaw.com or 312.825.3880. This article shall not be considered legal advice; readers are advised to consult their legal counsel.
