This edition is all about contracts. The average American signs a lot of contracts in a lifetime, sometimes without giving them much thought. Contracts undoubtedly play an important role in both our business lives and our personal lives, and they can have major consequences in both arenas. We all know that for some products and services, the terms of the contract can’t be negotiated by the consumer; it’s “take it or leave it.” But for many services, and in many business relationships, the terms of a contract are up for negotiation. Those situations call for us to be aware, thoughtful, and actively engaged – and often get legal advice – before signing a contract.
Like a lot of topics in the law, contracts are hard to address in general terms in this kind of forum because the legal issues they raise are nuanced and dependent on the particular context, and because there are exceptions to many legal rules. Still, I think there are some helpful things to be said about contracts generally so that we become more thoughtful about what we’re signing, when, and why. This article will list a few principles of contract interpretation, offer some general cautions relating to contracts, and provide examples of specific issues to address in a contract.
Principles of Contract Interpretation
A good contract is written with a view not only to the parties but also to the person or people – a judge, a jury, an arbitrator, etc. – who will have to interpret and enforce the contract if the parties end up in a dispute. Florida’s courts use a set of principles to guide them in interpreting contracts. A review of that whole set of principles is beyond the scope of this article, but a few of them are worth considering.
As you would expect, the goal of Florida courts in contract cases is to find and enforce the intent of the parties. But generally speaking, courts determine intent by the wording of the contract itself, not communications between the parties or other things outside of the contract. In other words, courts are generally going to enforce what you wrote (or signed off on) in the contract, which might be different from what you thought or what you meant. So, the terms of your contract – especially the terms that are most important to you – should be spelled out as clearly as possible. This seems painfully obvious. But you may have noticed the common temptation – in the hurry of business and life, and in the effort to save time or save money on attorneys or other costs – to assume, “it’s okay, this other person/company knows what I mean or what I want.” But if we assume, and if we aren’t careful to express our intent clearly in the language of the contract, a court might not be able to get it right.
Another principle followed by Florida courts is giving effect to every provision in a contract. In other words, a court will assume everything in a contract is there on purpose and for a reason. This means a court will avoid treating any part of a contract as meaningless and will try to reconcile any conflict it finds among two or more provisions of the contract. So, we don’t want to include things that aren’t needed because they could have unintended consequences, and we don’t want to include provisions that appear to contradict each other because a court might be left trying to harmonize them and might do so in a way we didn’t intend or even consider.
Another principle deals with what’s not found in a contract. If a contract is silent on an issue that’s important to a dispute, the court may use the parties’ subsequent course of conduct to fill in the gaps in the contract. For a simple example, party A agrees to provide a service in exchange for monthly payments from party B, and the contract is silent as to what methods of payment are (not) acceptable. Party B begins making monthly payments in the form of checks, and party A accepts those checks for many months but then decides to insist on some other form of payment. Party A risks having a court rule that party A’s course of conduct – the repeated acceptance of checks – was effectively the same as a contract provision stating those checks would be an acceptable form of payment.
Are you seeing why attorneys spend so much time on contracts? We’re trying to be as thorough and clear as possible, in case there’s a dispute and the contract has to be interpreted by someone other than the parties who prepared it. With some of these basic principles in mind, let’s consider some general cautions about contracts and then some examples of important issues to spot in contracts.
General Cautions
A contract represents a commitment, and parties to a contract enter into a relationship of some sort, and so some contract warnings sound like relationship warnings. Here again, these may seem painfully obvious. But here again, consider the common pressures we feel and the common temptations to hurry and to make assumptions.
The more significant the commitment, the slower we should be when entering into it. Going into business with someone, for example, is a major commitment. Business partners share lots of information, responsibility, risk, reward, etc. with each other. The formation of a business between multiple owners (and the foundational contract among them, like the operating agreement of an LLC) is often compared to a marriage, and the breakup is often compared to a divorce. When a business breakup is contested, it can be ugly and expensive. And so, we should ask before signing that contract: How well do you know and trust the person who wants to go into business with you? Well enough to commit to them and join your resources, responsibilities, risks, etc. with theirs?
A law professor made the following point, and after working with lots of people and lots of contracts, I still think this simple point is worth repeating. The parties to a contract are more important than the contract. If the parties are good (i.e., trustworthy, etc.), it probably won’t matter very much what’s in the contract. (Because even if something in the contract is unclear, the parties will probably work with each other in good faith to resolve any dispute.) And if the parties are bad, it probably won’t matter very much what’s in the contract. (Because even if everything in the contract is clear, a bad party will probably breach the contract and then argue the contract means something other than what it says.) This is not to go back on the importance of contracts or to say the wording doesn’t really matter. The point, again, is to slow down long enough to consider: How well do you know and trust the other party?
Obviously, we can’t predict the future to know with certainty how the other party will behave. But in many situations, we can build in some time and a process for vetting the other party before negotiating and entering into a contract. That looks different in different contexts. In a consumer context, it might be as simple as reading through online reviews or asking a friend or family member about their experience with a particular business we’re thinking of hiring. In the context of potential business partners, hopefully the vetting process will involve much more time and effort.
Examples of Specific Issues to Address
Of course, the issues to be addressed in a contract depend on the particular business/relationship/context. But the following are examples of issues that are usually important to consider, regardless of the context. These issues can be and often are clearly addressed in a contract.
How long will the contract be in effect? It’s important to know long to expect your rights and obligations under the contract to continue.
Is termination or renewal automatic at some point in time? It’s important to know what will happen if you don’t take action at the end of the initial term (time period) of the contract, if there is one.
When and how can the contract be terminated? It’s important to know whether either party can terminate it and walk away at any time and for any reason (or for no reason at all), or only in the event of a breach by the other party or some other event. In addition to the events that may trigger termination, it’s important to know what kind of notice must be given to effect termination, when, and how.
What law governs? It’s important to know whether the contract and your relationship with the other party will be governed by the law of your home state or the law of some other state, for example. If it’s governed by the law of another state, legal advice or other legal services relating to the contract may need to come from an attorney licensed in that other state.
How must any dispute be handled? It’s important to know, for example, whether a party may sue in court to enforce the contract, whether a party must first initiate mediation, or whether all disputes are subject to arbitration. Mediation, arbitration, and other methods of resolving disputes outside of court are popular, and they’re commonly referred to as “alternative dispute resolution,” with the acronym “ADR.”
Where must any dispute be handled? It’s important to know where a lawsuit (or arbitration, etc.) may/must be initiated and to consider whether traveling to that location would be feasible for you.
In the event of a legal proceeding, is the prevailing party entitled to recover attorney’s fees? The general rule in Florida is no, unless a governing statute or the parties’ contract specifies that the prevailing party in a legal proceeding is entitled to an award of his/her/its attorney’s fees. In other words, if the contract is silent on the issue, a prevailing party might not be able to recover his/her/its attorney’s fees along with any other winnings.
Final Thoughts
Anytime we sign a contract, let’s be aware and appropriately cautious. And whenever the terms of a contract are up for negotiation, let’s also be actively engaged, thoughtful, and careful to express our intent. And when in doubt, seek legal advice.
