Business Legal Tips

Business Legal Tips

Improving a Service Contract to Reduce the Risk of Litigation

Mark Bross February 11, 2018

Does your Massachusetts business provide services to business customers?  Does it use a written contract?  Is the contract minimizing your risks of getting sued?  Here are some helpful tips for improving a service contract to reduce the risk of litigation!

Contract Formation Basics

An important way to reduce the risk of litigation risk is by ensuring that the basic elements of contract formation are clear.

To have an enforceable contract in Massachusetts, you should have:

      1. An offer of services from one party (or parties)
      2. An acceptance of the services by the other party (or parties)
      3. An exchange of consideration where each party gives up something of value or promises to give up something of value.

See Quinn v. State Ethics Comm’n, 401 Mass. 210, 216 (1987). Generally speaking, without all three elements you will not have an enforceable contract in Massachusetts, or any other state.  To reduce the risk of litigation, all of the required elements for contract formation should be clearly stated in a written document that is signed by both parties.

Offer of Services

An offer is an expression of willingness to enter into a contract with the intent that if the other party accepts the offer, there is a contract.  Offers can be made orally or in writing or even by your conduct.  To make an effective offer, it must be clear:

      1. Who is offering to provide services
      2. What services are being offered
      3. Who is receiving the services; and
      4. When and where are the services being provided

All of this information should be provided with reasonable definiteness and clarity.  To take a simple example, if your child walks to a neighbor’s house with a snow shovel, and says “Shovel your walk for $20.00?”, there is no doubt about what services are being offered, who is providing the services, and when and where the services will be provided.

Offers to provide business services and your written contracts should contain the same types of information with similar definiteness.  For example, if your company offers to provide web design services to another business, your written contract should identify:  (i) the exact parties involved; (ii) the website involved; (iii) the specific web design services that are being offered; and (iv) when the services will be provided.

Provide as much detail and be as clear as possible.  A good practice to manage the length of the written contract is to use a separate project proposal or estimate with details of the services being offered and their cost.  The estimate or proposal should be specifically identified in the written contract and the contract should state that the estimate is incorporated by reference into the contract.

Acceptance of Services

Acceptance of an offer is the other party’s expression of willingness or desire to assent to the terms of your proposed  offer.  To have a binding contract, the other party must accept and agree to all of the terms in your offer.  Otherwise there is no binding contract but the parties are still engaging in negotiation.

Acceptance occurs when the other party responds as requested in the offer.  In the snow shoveling offer, for example, my neighbor can accept your offer by saying “Sure” or “O.k.”   The same should hold true with respect to business offers, and your written contract should make it clear how the other party can accept your offer of services.   This is usually accomplished by requiring an authorized representative of the other party to sign and agree to the terms and conditions of the written contract that includes (or refers to)  an adequate description of the services that your business is offering to provide.

Consideration

Consideration is something that is given or promised to be given by the other party in exchange for your offer of services.  Presumably, this is a promise to pay your business for the services that are being provided.   Your contract should state exactly how much your business will be paid, when your business will be paid and what happens if your business isn’t timely paid for its services.  Ideally, your written contract should also state what methods of payment you are willing to accept,  such as cash, credit card, Paypal, check, or any other method.

Be specific and clear!    Don’t leave the most important part of the contract unstated or you will cause collection headaches for your business down the road

Required Mediation Clause

Another way to to reduce the risk of litigation is to have a required mediation clause like the following:

“If any dispute arises out of or relates to the termination, interpretation, performance, or breach of this Contract (the “Dispute”), the parties expressly agree that as a condition precedent to initiating litigation, the parties shall make a good faith effort to resolve the Dispute by mediation administered by the ___________[Choose a mediation service provider].  Each side shall bear an equal share of the mediation costs unless the parties agree otherwise.”

This clause is likely enforceable once a mediation service provider is chosen. See e.g. Massachusetts Highway Dep’t v. Perini Corp., 83 Mass. App. Ct. 96, 104 (2013).   The benefits of using this clause (or a similar clauses ) is that it provides the parties one last opportunity to try and resolve the dispute in good faith before resorting to costly litigation.  In many cases, this will be enough and a good mediator can help the parties resolve their dispute.

Using a required mediation clause, however, has risks.  One risk is that the dispute cannot be resolved by mediation and both parties know beforehand that the mediation will be fruitless!  Another risk is that the wrongdoing party refuses to participate in the mediation process in an attempt to prevent any litigation over the dispute.   Both risks can be effectively managed by effective contract drafting, so consult with an attorney about whether to use a required mediation clause in your contract and the best way to draft this clause.

Breach Forgiveness Provisions

Other helpful provisions that can reduce the risk of litigation are clauses that I call breach forgiveness provisions.  These are clauses where a non-breaching party forgives a breaching party when certain conditions are met. There are two common breach forgiveness clauses:  Opportunity to Cure Clauses  and Force Majeure clauses.

Opportunity to Cure Clause

An opportunity to cure clause is a clause like the following:

“In the event that either party shall allege or otherwise assert that that the other party has breached any warranty, covenant or other obligation under this Agreement (including satisfaction of any conditions precedent as set forth in the Agreement), the non-breaching party shall provide the alleged breaching party with written notice specifying in reasonable detail the nature of such alleged breach of failure of condition.   The alleged breaching party shall have twenty (20) calendar days from the date of receipt of such notice to cure the breach (if such breach is capable of being cured)”

Massachusetts courts will enforce opportunity to cure clauses.  See Balles v. Babcock Power, Inc. 476 Mass. 565 (2017).  By including this clause,  your contract will require each party to provide notice of any suspected breach and allow the alleged breaching party to fix the problem.

Use of an opportunity to cure clause has risks.  One risk is that it provides the parties with an opportunity to cure any breach.  Some breaches are so egregious that you may not want the other party to have an opportunity to fix the problem.   For example, if you hired a SEO company to increase website traffic for your business but their actions caused a precipitous drop in traffic, you may not want to give the SEO company another opportunity.

Another risk is that this clause does not excuse the non-breaching party’s duty to perform under the contract.  So even if the non-breaching party has sent a written breach notice to the alleged breaching party, the non-breaching party may still have to pay the alleged breaching party for its services.  Under Massachusetts common law, a party has an excuse for not performing under a contract when the other party materially breaches the contract, which is a breach of “an essential  and inducing feature of the contract.”  Lease-It Inc. v. Massachusetts Port Authority,  33 Mass. App. Ct. 391, 396 (1992).  Be careful!  Determining whether a suspected breach is material can be tricky and you don’t want to stop performing under the contract unless the other party’s breach is material.   Consult with an attorney before you stop not performing under a contract. Otherwise, you might also be potentially liable for breach of contract and may be receiving your own breach notification notice!

Both risks can be managed by careful drafting.  Consult with an attorney  with experience drafting these clauses for help managing these and other risks.

Force Majeure Clause

A force majeure clause is a clause like the following: :

“The parties agree that neither party will be liable for any inconvenience, loss, liability or damage resulting from any failure to perform under this Agreement, directly or indirectly caused by circumstances beyond either parties control”

This clause, or a similar clause, is likely enforceable and excuses a party’s non-performance that results from unforeseen and uncontrollable event.  See e.g.  Cooper v. Charter Commc’ns, Inc. 945 F.Supp. 2d 233, 242 (D. Mass. 2013).  For example, if your business is supposed to provide office design and installation services by a certain date, but was unable to complete the project because of a blizzard, its non-performance would likely be excused.

These clauses should be drafted carefully so as not to excuse all instances of non-performance by the other party.  A common problem is for the breaching party to claim that a breach resulted from a supplier’s failure to timely deliver a critical part, which is claimed to be outside the control of the breaching party.  This problem can be resolved by carefully drafting and adequately specifying what events will qualify as triggering events and which events will not.  Consult with an attorney with experience drafting these clauses for help identifying appropriate events and choosing the right language.

Attorneys’ Fees and Costs

Another clause that can be helpful to prevent litigation is a clause like the following:

“If attorneys’  fees or other costs are incurred to secure the performance of any obligation under this Agreement, or to establish damages for the breach thereof or to obtain any appropriate relief, whether by way of prosecution or defense, the prevailing party will be entitled to recover reasonable attorneys’ fees and costs incurred in connection therewith.”

By including a clause like the foregoing, you will ensure that a prevailing party in any lawsuit will be able to recover attorneys fees and costs from the non-prevailing party.  See e.g. Farmer & Flier Assocs v. Guilford Transp. Indus., Inc., 82 Mass. App. Ct. 1102 (2012).  This will cause either party to think twice before filing a lawsuit since the costs of losing can be high!

Each tip above can help improve a service contract to reduce the risk of litigation when part of a well-drafted contract.  If your business needs help drafting a service contract to reduce litigation risk, or want someone to evaluate your current contract,  contact my office today.  Use the Contact Form on my website or call me to schedule a free initial consultation.