Your Liability Can Have Limits #3
We’ve talked about 2 ways people limit liability in a contract (waiver of consequential damages and limitation of liability provisions). Another way you or someone you’re negotiating against can limit contractual liability is by including a provision that limits the time in which a party can bring a claim under the contract—i.e. shortening the statute of limitations that otherwise would apply. I know that sounds great, but: “what’s a statute of limitations”? A statute of limitations is essentially a law which establishes the maximum time after an event has occurred within which a party may commence legal proceedings. That is to say, a statute of limitations is a law that basically tells people how long they have to file suit. Statutes of limitations can vary depending on the type of claim or issue at hand. For example, in the State of Tennessee, the default statute of limitations for breach of contract claims is 6 years, meaning if 6 years has passed since the other party breached your contract, you probably can’t sue him or her for breach of contract (unless your contract says otherwise). The Tennessee Code sets forth statutes of limitations for many types of actions, including defamation, injury to personal property, products liability, medical malpractice, and the list goes on. Not only is it important to know the statute of limitation which may apply to your potential legal claims in any given situation, you should remember that you can often limit these statutory limitations contractually. It is common for contracts to include a provision that shortens the default statute of limitations to 3 years, 2 years or even 1 year. I’ve even seen a contract that attempted to limit the period to 3 months (!). Statute of limitation provisions are often placed at the back of the contract in a “governing law,” “dispute resolution” or “miscellaneous” section. A shorter statute of limitations can really take you for surprise if you dilly-dally or delay your decision concerning whether to file a claim. Obviously, if you are providing the good or service, you’d probably want the period to be shorter, and if you’re the one buying the good or service, you’d probably want the period to be longer. If your contract doesn’t say anything about it, don’t worry: the statutory default of 6 years would kick in. Don’t be afraid of these limitations, though, because, if used correctly, they can really help both parties understand and manage their respective risks under the contract. While there may be a way to argue around the statute of limitations provision in your contract, this is one reason why you should always read the fine print carefully (*or have an attorney review your contract and advise you concerning liability matters). If possible, you want to avoid having to hire an attorney to argue why your contract provisions should be...
Read MoreYour Liability Can Have Limits #2
Last time we discussed limitation of liability provisions and how they can be used by you or your vendors, suppliers and other independent contractors to limit, reduce or otherwise control liability under a contract. Another way contracting parties can limit liability is by including a Waiver Of Consequential Damages provision. While this provision can be part of an overall limitation of liability provision, it is often set apart as its own provision. Without getting into a detailed discussion on what types of damages constitute consequential damages (this is an entirely separate blog discussion that will come later), we can use the most classic example of consequential damages: lost profits as the focus of our discussion. When you are providing goods or services to a client, you may want to consider including a waiver of consequential damages provision in order to better protect yourself in the event your client later claims that you breached the contract (or a warranty) and that caused them to lose profits or incur other consequential damages. Conversely, if you are buying goods or services, you will want to look very closely at any waiver language to see if your suppliers, vendors or independent contractors are attempting to waive responsibility for any consequential damages, including lost profits, that you may suffer as a result of their breach. Depending on the distribution of bargaining power between you and the other contracting party, you may not be able to negotiate this issue, but here are 2 things to consider about waivers of consequential damages: (1) If you are faced with a supplier, vendor or independent contractor who wants you to agree to a waiver of consequential damages, you will at least want to try to make sure the waiver is MUTUAL (i.e. applies equally to both parties). (2) Although we will have to discuss the scope of consequential and other damages at a later date, it is important for you to understand your level of exposure to damages in general, including consequential damages like lost profits, should your suppliers, vendors or independent contractors breach. It could be that whatever you’re buying from them wouldn’t really impact your business in a way that concerns you enough to put up a big fight about including this waiver language. So, know and understand the types of damages you may suffer from a supplier’s breach. (e.g. There is a huge difference between suffering from some losses resulting from additional rental fees should your supplier be late in a delivery of purchased goods vs. losses resulting from a complete shutdown of operations). Please contact an attorney if you’re ever faced with the decision of whether and how to waive or limit consequential damages in your contracts–there are many more considerations and this discussion only skims the...
Read MoreYour Liability Can Have Limits
Everyone enters into agreements– not just entrepreneurs and people who own businesses. Therefore, everyone has contractual (and non-contractual) liability of some sort. But when you’re at the point of drafting or signing a contract, it is your chance to double-check exactly what you’re getting into and ask yourself what kind of exposure or other liability you may be subjecting yourself to after you sign. If you’re like most small businesses or entrepreneurs, you don’t have the time or resources to call an attorney every time you’re executing a contract to provide or buy your goods or services. While we would recommend that you always seek legal advice on the practical and legal effects of the terms of your contracts, there are things you can do on your own to help you limit your contractual liability and we’ll talk about one of those ways today: 1) Limitation of Liability Provision: A limitation of liability provision often includes language that states the maximum amount of damages a party may be liable for under certain circumstances. For example, a limitation of liability provision may state that under no circumstances shall a party’s liability exceed the value of the contract (or the amount of compensation paid under the agreement). While there are many ways to tweak this concept (including addressing different types of damages, like direct and indirect damages), this type of limitation of liability provision is very common and often very heavily negotiated. Liability can be limited to 100% of the contract value, 200% of the contract value or some pre-set amount of money (like $1 million). There are many ways to craft a limitation of liability scenario. So, pay attention when you’re buying something from someone who wants to limit his or her liability to the amount of money you’re paying, especially if you think your damages may exceed what you’ve paid them. If you sign off on this, you may make it harder on yourself later to claim (or completely prevent yourself from claiming altogether) damages in excess of that amount. Likewise, you may want to include limitation of liability language if you’re selling goods or services and you want to be able to limit your exposure to a pre-determined amount that you can predict. While there may be ways to argue around limitation of liability provisions, it can’t hurt to include one if your bargaining position allows you to limit your liability. Again, if you’re dealing with a sophisticated buyer or seller, they are going to zero-in on any limitation of liability provision, so be prepared to negotiate your position. Also– it never hurts to send an attorney a contract and just ask them to at least review the damages and liability provisions and explain the scope to you. At least that way you won’t be...
Read MoreIndemnification — Don’t Leave Home Without It
Suggestion – don’t bring up indemnification at a dinner party if you’re trying to break the ice. As most lawyers (and non-lawyers who even know what it is) know, it can be more of a conversation ender than a conversation starter. However, it is an important legal concept that parties should be aware of before entering into contractual relationships, and it’s really not as complicated as many people assume. Here’s a brief and general intro to indemnification. Why Does Indemnification Exist? Indemnification is a risk allocation tool, allowing the parties to know who will be responsible for what costs or liabilities in certain situations. What is it? Generally speaking, indemnification is an obligation by one party to compensate the other party or otherwise be responsible for certain costs and expenses. Indemnity is imposed either by law or contract. What costs are covered by an indemnity? Generally, an indemnification obligation requires the party providing indemnification to compensate the other party for any claims, losses, liabilities, etc. incurred by the other party and owed to a third party. Are There Limits to Indemnification? The general rule is that certain losses cannot be indemnified – for example, a party cannot be indemnified (i.e. recover from the other contracting party) for losses caused by its own willfull or intentional acts or omissions, its own use of the products that does not conform with the specifications or instructions, or its own bad faith failure to comply with the agreement. Why Is It Important to You? When you are entering into a contract, any reduction of your risk is a good thing. A proper indemnification provision allows you to ensure that if you are sued because of the other party’s acts or omissions, you can recover any costs or damages from the other party rather than be liable for them yourself. Again, this intro to indemnification is brief and there may be other considerations to take into account in your particular situation. Please contact an attorney if you have further questions or if you have a specific situation that you’re dealing...
Read MoreMaking Sure You Get Paid For Your Services
If your company performs services for a fee, you know first-hand how great it is and how much of a relief it is when you get paid….on time and in the correct amount, that is. While it is great when things work out and you can move onto the next project, it is unfortunately common for service providers to run into trouble when it’s time to collect for the services they’ve performed. Here are ways to help make sure you get paid for your services: (1) For any contract you enter into under which you agree to provide services for a fee, it is important for the contract to clearly set out the method and timing of payment, as well as any penalties that will be assessed if the payment is not made timely. (2) It is also very important that the contract contain a provision entitling you to recover your attorney fees and related expenses should you have to retain an attorney to help you collect what you are owed under the contract. Late fee penalties and attorney fees provisions in contracts provide strong incentives for the other party to pay you on time and in full. Including an attorney fees provision in a contract is especially important in situations where the contract fee for your services is relatively small. Without an attorney fees provision, the other party may simply refuse to pay you knowing that it will be cost prohibitive for you to sue them, i.e., you will end up spending as much or more on attorneys than the amount of contract fees you are actually owed without the ability to recover the attorney fees you incur in the process. (3) It also important that you always invoice the other party per the time intervals for payment set forth in the contract (e.g., if the contract provides that you are to be paid every month, you should submit an invoice every month). In addition to clearly setting forth the fee amount due and due date for payment, your invoices should also note the late fee penalties that will accrue if payment is not timely made as per the contract as well as your right to recover your attorney fees and expenses if you retain legal counsel to assist you in collecting the amounts due. These simple steps will provide you with a first line of protection against the other party to the contract not paying you for your services on time and/or in full. Remember though, before you sign any contract, you should always consider having your attorney review it to make sure you are properly...
Read MoreBest Efforts or Reasonable Efforts? — How Legal Efforts Standards Can Affect You
It’s very popular for people to talk about giving “110%” these days. Suddenly, giving 100% effort seems like slacking. And what about just partial attempts, like 75%? Although they are contract provisions that are often overlooked, “efforts” provisions can have a huge impact on your business deal. Before entering into any contract, you should know what “effort” qualifiers exist and what they mean– because understanding these provisions could make the difference between having a claim under a contract or being subject to a breach of contract claim yourself. The three most common effort qualifiers in contracts are (1) Best Efforts, (2) Reasonable Efforts and (3) Commercially Reasonable Efforts. While these may seem innocuous on the surface, each phrase can mean something totally different and can subject contracting parties to completely different standards and requirements. While some courts remain unclear on the actual distinctions between each standard, here is a brief overview: Best Efforts – This is often considered the most demanding of the effort based standards. This is a gross generalization, but think about it this way–basically if it’s possible, you have to do it, regardless of whether it’s unreasonable or not commercially reasonable or cost-effective. Reasonable Efforts – This is a middle ground between best efforts and commercially reasonable efforts. Again– the general practical application is that there is some leeway as to whether it’s possible vs. whether it’s reasonable. Just because it’s possible, doesn’t necessarily mean you have to do it if it’s not reasonable. Commercially Reasonable Efforts – This is considered the least demanding effort standard. By including a commercial standard, courts look into whether it makes sense from a business or other economic or efficiency standard. So, just because it’s possible and just because it’s reasonable, does not mean you have to do it if it’s not necessarily reasonable for your business. So, the next time you are reviewing a contract or signing a contract, keep an eye out for any effort based provisions and consider how they might change the deal and whether you would rather a different standard be put in place – whether a higher or lower. To the extent possible, it is often preferable to define what standard should apply in more detail, but if one of the more generic standards is used make sure it aligns with your business...
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