Beck, Jonson & Nolan, PC
Tips on Business Contracts
Business contracts, particularly simple ones, often serve their fundamental purpose without addressing other issues which may arise when a problem or dispute develops. Here are a few examples of issues that may deserve mention when formulating or entering a simple business contract:
•Ø Damages For Nonperformance. One party may suffer severe losses or inconvenience if the other party does not fully perform on time. Periodic assessment of late charges, expressed in the contract, spurs timely performance and serves to compensate for such losses. If the amount of your losses or damages would be very difficult to quantify and prove, you should consider establishing "liquidated damages" as part of the contract. Liquidated damages should be based upon a reasonable estimate of anticipated loss, not merely a penalty for nonperformance or late performance.
•Ø Attorney Fees and Venue. Colorado law generally does not permit the prevailing party in a legal dispute to recover attorney fees unless the parties' agreement provides for such recovery. (Exceptions apply in only a few specific kinds of disputes.) The county or state where a legal dispute is to be resolved can be specified in a contract. Preserve your "home court advantage" if you have one.
•Ø Interest. Late payments normally accrue interest at only 8% per annum unless you expressly agree to be different rate. An agreement on interest can be expressed in a contract, or it can be inferred from a series of invoices, which expresses a standard interest rate and does not draw any objection from the customer during the course of the relationship.
•Ø Lien Protection. If you contract for materials or services which will improve a building or other real estate, be aware of the potential for mechanic's liens. Terms requiring a contractor to resolve or defend against mechanic's lien claims only protect an owner to the extent of that contractor's future integrity and financial ability. Therefore, the owner of the real estate should establish a system to monitor the payment of subcontractors' suppliers and individual laborers to the extent practical.
On projects involving improvement to real estate, contractors and subcontractors have a legal duty to use their revenue from the project to pay subcontractors, suppliers and laborers on the same project. Diverting that revenue to pay unrelated expenses can result in personal and criminal liability if subcontractors, suppliers or laborers on the project are left unpaid. Separate bank accounts for each project are not required, but the contractor or subcon-tractor is responsible as a trustee for keeping separate project account records.
•Ø Insurance. Requiring your subcontractors to carry their own worker's compensation insurance does not auto-matically protect you from worker's compensation claims of their subcontractors or employees. You should determine who their carriers are and independently verify that their coverage is in place (at regular intervals for an extended project or relationship). Alternatively, specific language in your written agreement with the subcontractor can now provide you with additional protection against unexpected liability for the subcontractor's injury.
•Ø Arbitration. Some people prefer to resolve contract disputes through a private arbitrator or mediator, rather than through the court system. Such a procedure, if it becomes necessary, can be required by the contract's terms. If you do not prefer arbitration, beware of a mandatory arbitration clause. Arbitration avoids congested court dockets, so it may conclude sooner than a lawsuit. Arbitration can be just as expensive as a court battle after payment of arbitrator fees and other expenses.
If you wish to know more about these points, contact Thomas A. Nolan, at Beck, Jonson & Nolan, 300 Union Blvd., Suite 300, Lakewood, Colorado 80228, Telephone: (303) 278-3078 or Fax: (303) 278-1778. You can also contact Mr. Nolan by e-mail at firstname.lastname@example.org.