The Two Most Important Things in Your Contract

Via Wikimedia Commons

(A version of this article previously appeared in the Valley Business Front.)

After five minutes of talking to the guy it was clear that he was in the right, but that he was still out of luck.

He’d signed a contract with a New York company and paid them $4000 to develop a web site for his local small business.  A year later, they had only done about a third of the work they were supposed to, and even that they’d done poorly.

“Can I sue them?” he asked.

“Well sure, but look at this paragraph here,” I said, pointing at the contract.  The first pages of the contract had all sorts of details about the web-site-that-never-was: the code the New Yorkers were supposed to write, the copy they were supposed to write, the color scheme they were supposed to use.  None of it mattered.  The only important paragraph was on page four, and it read:

Section 13 — Disputes.  All disputes related to this agreement will be subject to exclusive jurisdiction and venue in the courts of New York, New York.

“You see,” I said, “they’ve breached the contract for sure, but to get your money back you have to go all the way to New York.  You’d have to hire a lawyer there, and you’d have to travel there to testify.  It could easily cost you $5000, or $10,000, or more.  It just doesn’t make sense to do that for a $4000 contract.”

“OK, right, that’s expensive,” he said.  “But wait — if I win, then they have to pay my attorneys’ fees, don’t they?”

“Unfortunately, no,” I said.  “In a contract dispute, the winner only gets his or her attorneys’ fees paid if the contract says so.  There’s nothing in this contract about attorneys’ fees.”

“So what can I do?” he said.

“Nothing, really, unless you’re willing to lose even more money,” I said.

“Well then, dammit, I’m still going to go to New York to sue them!” he said.  “It’s the principle of the thing!  I just don’t like being ripped off!  I want justice!”

However, as it turned out, in the end the guy decided that “justice” was too expensive.  He had us write a nastygram to the web development firm, and when they still didn’t refund his money, he gave up.  So it goes.

In our legal system, a businessperson can only get as much “justice” as he or she is able to pay for.  In my experience, a lot of businesspeople don’t realize this.  They may spend a lot of time negotiating a contract, but then just assume that if the other side breaches the contract, the contract somehow will magically enforce itself.

For this reason, I often say that the two most important things in any contract are in the “Disputes” paragraph, which details how any arguments are to be resolved.  A good “Disputes” paragraph will make sure that (1) any lawsuits are handled in your own back yard, and (2) when you win the lawsuit, you can get back your attorneys’ fees in addition to whatever other money you were owed.  Indeed, when the other side realizes that his breach is going to require him to pay your attorneys’ fees in addition to whatever damages he’s caused you, he may just decide to settle right then and there.

The “Disputes” paragraph is of course “boilerplate,” which a lot of people seem to think is unimportant.  But if your contract’s boilerplate is bad for you, then none of the other provisions in the contract may do you any good.

That’s why I always read the boilerplate.  So should you.  Otherwise you may find that the contract you negotiated so carefully is actually just a worthless piece of paper.

Note: facts have been changed to preserve confidentiality.  Oh, and this isn’t legal advice.  Please consult an attorney before revising your contracts, etc.