by Justin D. Jacobson
The contract is the cornerstone of the business transaction. In all but the simplest of transactions, a solid contract is essential to protect your legal rights. On the other hand, a bad contract can hit you right on the bottom line.
A contract serves two primary functions. First, it serves as a guide for the parties’ conduct. It defines what’s expected. How many widgets are you selling? What flooring material are you installing in the office building? When is payment due? Second, it provides the foundation for any action to recover past due accounts. Typically, businesses are good at drafting contracts that serve the first function, but they aren’t as good at dealing with the second function or, worse, they ignore it altogether. This paper addresses a handful of core contract terms that serve that second function and improve overall recovery in the event of default.
According to Cortera, a leading commercial credit firm that tracks business transactions, approximately 18% of all payments become past due.¹ Florida leads the way with a past due rate of roughly 24%. Some of this is eventually paid, but some simply turns into bad debt. When you turn your bad debt over to a recovery law firm, such as LAWCRAFT, the quality of your contract impacts how much of that bad debt can ultimately be recovered. A recent survey by the International Association for Contract and Commercial Management found average losses of nearly 15% of annual revenue due to bad contracts.
When was the last time you looked at your contract? What is it costing you? A thorough review of your contract by an experienced attorney can ensure that you’re maximizing your bad debt recovery. In the interim, even a few small changes can help. Following are a few of the more basic and effective terms you can include or modify in your contract, with a brief discussion and sample of each. You’ll notice that, at LAWCRAFT, we avoid legalese and draft all contracts in plain language.
Venue: Normally a lawsuit on a contract must be filed where the defendant resides or where the breach of contract occurs, e.g., where payment was due. This location might be inconvenient, making the lawsuit untenable. However, the parties can contract for a specific venue, presumably the county where you are located. A venue clause reduces your risk of getting sued by making it more inconvenient to the adverse party and reduces your costs when forced to litigate. Besides ensuring that the lawsuit is in a reasonable location, repeatedly using the same court provides important information about how a judge might rule on a particular issue. It might even provide an unstated advantage if you appear honest and reasonable in front of the same judge over and over.
SAMPLE: Any dispute between the parties to this contract shall be governed by Florida law, and shall be decided solely in state court in Plantation in Broward County, Florida.³
Head of Family Waiver: The best way to collect a judgment is through garnishment. However, if you obtain a judgment against an individual, that process becomes more challenging due to Florida’s significant head-of-family exemption outlined in Florida Statutes §222.11. On the basis of this exemption, Florida has an undeserved reputation for being a difficult state in which to garnish. In truth, the exemption isn’t as broad as some believe. More importantly, it can be waived. The Florida legislature recently modified the statute, requiring a specific format for such a waiver. If your contract already has a waiver but you haven’t updated it recently, it’s probably no longer effective.
SAMPLE: IF YOU PROVIDE MORE THAN ONE-HALF OF THE SUPPORT FOR A CHILD OR OTHER DEPENDENT, ALL OR PART OF YOUR INCOME IS EXEMPT FROM GARNISHMENT UNDER FLORIDA LAW. YOU CAN WAIVE THIS PROTECTION ONLY BY SIGNING THIS DOCUMENT. BY SIGNING BELOW, YOU AGREE TO WAIVE THE PROTECTION FROM GARNISHMENT.
______________________________________
(Consumer’s Signature) (Date Signed)
I have fully explained this document to the consumer.
______________________________________
(Creditor’s Signature) (Date Signed)
Attorneys’ Fees: Including an attorney fee provision doesn’t just help the attorney. It can increase the chance of collection before the attorney ever sees the claim. Think of it not as a way of compensating the attorney, but as leverage. Your dunning letter becomes twice as effective by adding one simple sentence: “If we are required to forward your claim to an attorney, you will also be responsible for the attorney’s fees.” Similarly, we use a fee provision to encourage early settlement.
SAMPLE: You agree to pay all costs of collection to enforce this agreement, including reasonable attorney fees and all costs and fees related to any appeal.
Interest: Like attorneys’ fees, maximizing the amount of interest you can assess increases your chance of collection by providing leverage for early settlement. Some creditors avoid setting an interest rate with the idea that it might turn away customers. However, you can set an interest rate that applies only in the event of default to minimize that possibility. In setting an interest rate, some creditors simply set a fixed rate (often 1.5% per month, which is coincidentally Florida’s current maximum legal rate). However, interest is subject to usury laws. A problem might arise if the applicable law is amended or if another jurisdiction’s law is determined to apply. Rather than a fixed rate, we recommend stating that interest will be charged at the maximum legal rate.
SAMPLE: All unpaid amounts due under this agreement shall bear interest at the maximum legal rate.
Waiver of Jury Trial: Not all contract terms are about offense. Sometimes, you have to play a little defense too. We recommend a waiver of jury trial because a jury might rule against a creditor if they feel sympathy for the debtor. Beyond this tactical reason, jury trials are simply more inconvenient. They make trial more difficult to schedule, take longer, and require more preparation. There’s no real upside to a jury trial, so it’s a good idea to eliminate the possibility.
SAMPLE: The parties agree to waive any right to jury trial in any action arising from this agreement.
It’s important to keep in mind that law is not a one-size-fits-all enterprise. Some of these contract provisions might not be relevant to your particular interests, or they might need to be modified appropriately, or there might be something even more important to your interests not discussed in this paper. The takeaway is that careful review of your contract by an attorney is important and can put dollars in your pocket.
At LAWCRAFT, we review our partners’ contracts as a free service. If you would like us to take a look at your contract, e-mail me at justin@lawcraftfirm.com and mention this paper.
References
1. http://www.cortera.com/market-trends/
2. http://www.thomasnet.com/journals/procurement/bad-contracts-cost-companies-good-money/
3. Note that this sample clause contains a choice-of-law provision too, which can also be beneficial.
4 Per Fla. Stat. §222.11(2)(b), the waiver must be in the same language as the contract, must be contained in a separate document attached to the contract, and must be in at least 14-point type. Note the ALL CAPS; note the requirement to explain the waiver.
Justin D. Jacobson is the managing partner of the LAWCRAFT firm.
He is a graduate of Princeton University and the Duke University
School of Law and has been practicing since 1995. Justin lives in
Plantation, Florida with his wife and two daughters. Justin is an
award-winning game designer and accomplished home chef.
Disclaimer: This CRAFTpaper is intended for informational purposes
only. It is not intended as legal advice and does not create an
attorney-client relationship between the firm and the reader.
Download “5 Contract Terms To Improve Your Bottom Line” in pdf format.