In this week's Freedom Friday blog and email newsletter, I'm going to answer a question I wish more of my contract drafting clients asked me, and that is, “How can my contract prevent a lawsuit?” Many small business owners automatically think that having a written contract will prevent a lawsuit, and to some extent, that's true. However, it's not entirely true, because I see breach of contract lawsuits all the time where there was, in fact, a written contract. Sometimes, even when you have a written contract, a lawsuit is necessary. For example, the number one reason why I file lawsuit for breach of contract is goods or services were provided but the purchaser simply did not pay. When you are needing to collect on a debt due to a written contract, a lawsuit may be very necessary.
However, some lawsuits are frivolous, and in more complex cases, you can still have a bona fide lawsuit going one way or the other on the basis of other claims, like fraud, or other claims. In fact, sometimes you might have a lawsuit when the purchaser did pay for certain goods or services, the goods or services were provided, but the purchaser was still not satisfied and decides to sue anyways. How can you protect your business from those kinds of situations? The answer is that there are certain types of clauses you can place in your contract which can prevent a lawsuit, and that's how your contract can really prevent a lawsuit. In today's Freedom Friday blog and email newsletter, I want to give you the top three (3) clauses you can place in your contract which can prevent a lawsuit against your small business:
The first type of clause you can put in your contract to prevent a lawsuit is a specific damages clause. This clause would say that if you breach the contract and are found liable in court then you would automatically be liable for a set amount of specific damages. This type of clause isn't appropriate in all contracts, and even then won't prevent all lawsuits but it will discourage a party from breaching the contract, and that will prevent a lawsuit. These clauses will provide, for example, that if the contract is breached, the liable party must pay a set amount of money, maybe $30,000.00 or $100,000 or some other amount. A stiff penalty for breaking a contract will discourage parties from breaking a contract and will reduce the potential for lawsuits.
The second type of clause you can put in your contract to prevent a lawsuit is an attorney fees clause. This clause would say that the prevailing party in a lawsuit concerning the breach of contract would be entitled to a judgment of attorney fees against the losing party. Not only does an attorney fees clause discourage a party from breaching a contract, but it also discourages either party from filing a breach of contract lawsuit, because if you lose, then the other party is entitled to a judgment of attorney fees. The amount of fees can range from $2,500 in a simple case to thousands of dollars. This is why it is always wise to consult with an attorney before filing a lawsuit and weighing the risks of attorney fees. Maybe if you have a rock-solid case filing a lawsuit is worth the risk if you're that confident. But an attorney fees clause will discourage the filing of a frivolous lawsuit which could hurt your small business.
The third type of clause you can put in your contract to prevent a lawsuit, and this one is the most important one, is an integration clause. An integration clause is also called an entire agreement clause, or a merger clause. An integration clause provides that the terms of the contract are the complete, final, and “entire” agreement between the parties. As such, any prior agreements or negotiations which would conflict with the final terms covered by the integration clause, either written or verbal, cannot be considered as evidence in the event of a contract dispute. An integration clause is crucial to many contracts, because not only will it prevent lawsuits, but certain types of lawsuits won't be successful, even if they allege fraudulent inducement. For that reason, the clause needs to be specific and needs to conform to law.
If your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth, please contact me at [email protected] to schedule a FREE strategy session.
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