The purpose of a contract is to provide the basic structure within which individuals can freely enter into an agreement. Contracts are meant to be legally binding and enforceable in a court of law, so it is very important to understand a contract before you sign it. There are three things to look at first when reviewing a contract: total liability, attorney fees clause, and venue. When considering all three of these together, you can begin to form an opinion regarding whether it makes sense financially to pursue someone in a lawsuit.
TOTAL LIABILITY
Total liability is probably an obvious thing to look for. You should be aware of how much liability is in your contract, whether you break the contract or you sue someone else for breaking it. For example, a lease for $1,000/month with 10 months remaining is total liability of $10,000.
ATTORNEY FEES CLAUSE
An attorney fees clause defines who will pay the attorney fees if there is a litigation or contract dispute. Often, this clause states that the prevailing party will win their attorney fees. It is important to look for this clause because if it is going to cost $15,000 to win a $10,000 case, and this clause is not in the contract, it may not make sense to file that lawsuit. On the other hand, if you do not think that you are going to win and there is an attorney fees clause, you are actually looking at almost double the liability. In that case, you should be a little more motivated to settle.
VENUE
The third thing that often comes up in a contract is the venue. This clause defines the location of where a lawsuit must be filed. This is important because it could be in an entirely different state than you are located. We see this all the time. There are a lot of people who do not have attorneys review their contracts before signing, and they end up with a lawsuit being filed half way across the country where they don’t know anyone, much less an attorney. Home field advantage is a real consideration.
BONUS: MEDIATION v. LITIGATION CLAUSE
One additional consideration is to keep your eyes out for a dispute resolution clause. This sets out the process for the resolution of disputes if they were to arise. This clause might say that you are required to go through arbitration instead of litigation if there is a dispute. Arbitration is a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more arbitrators. Arbitration can be binding or non-binding. Binding arbitration means that the parties are bound by the decision. Non-binding is less efficient as it means that either party can disregard the arbitrator’s decision and file suit. This is usually much cheaper and faster than litigation.
If you are negotiating a contract, give us a call before anything is set in stone!
Like we always say, “If you think you need an attorney, you probably do.”