As any business owner knows, entering into contracts is a common-place occurrence.
Contracts can be verbal or written, involve a single event or have a re-occurring aspect. They can arise out of a handshake or be agreed to on the back of a napkin. (The latter is how Leo Messi’s soccer career began. The head of the Barcelona team was so impressed with the 14-year-old soccer star, he signed him on the spot — and the only thing to write on was a napkin.)
But anyone entering into a contract should be sure that they understand every part of the contact — the fine print. Common provisions to be aware of include: agreeing to alternative dispute procedures, agreeing to waive the right to a jury, making a choice of law/agreeing to a specific venue, agreeing to pay the other side’s attorneys fee and waiving certain classes of damages.
Many contracts now require arbitration and/or waive the right to a jury. Neither of these is necessarily bad, but before you agree to these kinds of provisions, you should understand the consequences. Agreeing to arbitrate a matter means that you waive your right to the court system. There are exceptions too broad for this article, but it means that you agree to have the dispute heard by a private decision maker, not the traditional court system. This may or may not be less expensive or faster — there is no consensus. It does mean that one or more of the parties will have to pay the fees for the arbiter up front. It is also a good idea to agree, in the contract, to the procedure that will be used for discovery and use of evidence. Remember, it’s important to note that when you choose arbitration, you are giving up the right to have the arbitration reviewed, and you are likely giving up your right to appeal the decisions. Under Colorado law, there are a limited number of grounds to appeal a decision. You give away substantial ability to appeal a decision by submitting a matter to arbitration, and a district court judge won’t touch most decisions.
Close to agreeing to submit a dispute to arbitration is the agreement to waive a jury trial. While you would still have access to the courts if you waive the jury, a judge would hear and decide on the matter. Again, this could be good or bad, depending on the nature of the dispute, the parties and the likelihood that jury would be beneficial.
Another common provision is the choice of law/venue provisions. What these do is to have the parties agree — up front — as to which state’s laws will govern and where the dispute must be resolved. State laws vary, so this also may be good or bad. State protection affording parties with issues such as employee rights or rights to offsets in personal guarantees vary greatly, so this may have a dramatic effect on the desirability to enter into the contract.
Attorney fee provisions are also common. There are unilateral provisions (one side is entitled, but the other is not) and prevailing party provisions (which party substantially prevailed). Often in leases, the negotiation begins with the landlords having a unilateral provision in their favor. Be aware of what you are agreeing to before you sign.
Finally, there are provisions that seek to limit the types of damages that a party can seek in the event of a claim of a breach of contract. Damages in a breach-of-contract action include consequential damages, which means damages that were caused and that were foreseeable at the time that the parties entered into the agreement. Other limitations or attempts to limit damages include contract provisions that state that only items covered by insurance are allowed as damages. These provisions are often challenged, which in and of itself requires additional expense to litigate. Again, be aware of all the contingencies as you sign the contract.
As business owners, we enter into contracts frequently, but it is important to know what you are agreeing to — and whether the terms are favorable. We all know what is in the large print: The trick is to be aware of what is in the fine print.
M. James Zendejas is a partner at the law firm Stinar Zendejas & Gaithe LLC. His phone number is 719-635-4200.