Contracts 101 Featured

6:32am EDT May 25, 2004
What happens if a business transaction or relationship turns sour? Without specific and correctly drafted contract terms, you may find yourself in a weaker position during a dispute.

Following are some basic issues to consider as you negotiate contracts.

 

Attorneys' fees provisions

Indiana follows the American Rule when it comes to recovery of attorneys' fees in litigation. Unless a statute or contract specifically provides for the recovery of attorneys' fees, each party to the litigation pays its own fees.

For the opportunity to recover fees, this provision must be in the contract. And, even though a contract may provide for one party to recover its attorneys' fees in litigation, in order to do so, that party also must be the prevailing party in the dispute.

Forum selection provisions

With so many opportunities in today's global economy to engage in interstate and international commerce, businesses have legitimate concerns about where disputes with customers or clients will be litigated.

There are many valid reasons for including forum selection provisions in contracts to try to control where litigation must be initiated if a dispute arises. As a general rule, courts favor forum selection provisions; as long as it is freely bargained for in the negotiation of the contract, barring other factors that would render it void, forum selection provisions are routinely upheld.

 

Liquidated damages provisions

Liquidated damages provisions are a contractually agreed upon method of stipulating a damage amount when the damages from a breach of contract would be difficult to ascertain.

Liquidated damages provisions are enforceable as long as the stipulated amount bears some relationship to the loss likely suffered by the nonbreaching party. If such a relationship cannot be established, the liquidated damage provision may be deemed a penalty and might not be enforced by a court.

For obvious reasons, a liquidated damages provision should not be referred to as a penalty.

 

Mandatory mediation provisions

Mediation is a dispute resolution method in which a neutral party helps negotiate a settlement among disputing entities.

Although mediation is not binding, its growing popularity is evident by the fact that more and more contracts have provisions that require mediation prior to the initiation of litigation. However, some contracts with mandatory mediation clauses fail to set forth specific guidelines about the procedures for mediation.

This results in the parties litigating how they should mediate, which defeats the whole purpose of the provision.

 

Length of a contract and termination

It is imperative that a contract have a term specifying the length or duration of the contract. Without a specific term, it is likely that either party to the contract can terminate it for any reason, at any time.

It is also important to provide that the contract can be terminated upon the other party's breach. Without such a provision, it is often more difficult to terminate the contract.

 

Contracts for the sale of goods

If a contract for the sale of goods does not address a certain issue, Indiana's Uniform Commercial Code will likely provide the gap fillers for those issues. The UCC also requires parties to a contract for the sale of goods to act in good faith. If a contract is not for the sale of goods, Indiana common law generally does not impose a duty of good faith on the parties.

Careful drafting of these types of provisions should leave fewer issues to chance and help prepare for the possibility of disputes. Cathy Elliott is a partner in the Bose McKinney & Evans Litigation Group, where she represents clients in a wide variety of business litigation matters, many of which involve contract disputes. Reach her at (317) 684-5248 or celliott@boselaw.com. Sam Laurin is a partner and co-chair of the Litigation Group at Bose McKinney & Evans. His practice includes litigating contract disputes and negotiating construction contracts on behalf of private and public owners as well as general contractors. Reach him at (317) 684-5185 or slaurin@boselaw.com. The information in this article should not be construed as legal advice.