Protecting Your Business From the Unexpected

Frank Kollman
Frank Kollman

While you have heard this expression a thousand times, it is worth repeating:  “It is better to have a good customer than a good contract.” If a project has gone as well as can be expected, the terms of the contract become almost meaningless. In fact, if you had to go to the contract to resolve a dispute, there was a failure of some sort. Contracts are more important when things go wrong than when things go right. Unfortunately, things often go wrong, so a good contract can be very helpful.

In drafting contracts, there are clauses that are important to the contractors and clauses that are important to the lawyers. The ones that are important to the lawyers are often unintelligible, contradictory, and unfair to the other party. Nevertheless, contracts should be written in English sentences, understandable by anyone with an 8th grade education. Judges asked to resolve contract disputes are more likely to reach the right decision if the language is clear and concise, not full of Middle English words like “hereby,” “heretofore,” and “hereafter.”  Using fewer words is also a good idea.

When Richard Nixon resigned as President, he wrote on White House letterhead:  “I hereby resign the Office of President of the United States.” There was no need to use the word “hereby” or even “Office of” in that letter. Further, he was technically the President of the United States of America, so he even got that wrong. It would have been better if he had merely written “I resign,” or “I resign as President.”

You should also keep in mind that while almost every contract contains language that cannot be modified except in writing signed by all the parties, there are plenty of legal decisions based on oral modifications where the written requirement was ignored. There are also many legal decisions where the plain meaning of contract language was ignored because the facts were compelling against the party trying to invoke the contractual language. I could write a very long article on the law of contracts, but in the end, all contract disputes are decided on the facts.

Just the facts

No matter how you think the legal system works, it’s all about the facts. Federal courts and most state courts are not allowed to issue advisory decisions stating how they would decide a case on hypothetical facts. Instead, there has to be a real controversy involving real facts. In other words, a court will not tell you what it would do if someone hit you with a hammer, but it will decide a case where you were actually hit by a hammer. It is much easier for a court to decide issues like damages knowing what the actual damages were. 

Because facts are so important, presenting the facts in any legal dispute is the key to winning or losing. What happened, when did it happen, what did you do, what did they do, and how do we prove all that? Most trials are won or lost in the opening statement where lawyers lay out the facts they intend to prove. Lawyers are not even allowed to make legal arguments during opening statements, and those who try are missing the opportunity to tell the court what happened. Facts are far more important than the law in winning a case.

Because facts are so important, developing the facts is essential from the minute you bid a contract to the minute you get your last installment of the contract price.  If something happens that could have significance down the line, document it. Documents include letters, notes, faxes, emails, text messages, voicemails, meeting invitations, smoke signals, conversations, and any other record. With respect to conversations, if someone says something that sounds like it might be important, might cause trouble down the line, or might be helpful if something goes wrong in the future, write it down. 

Clearing the air

Further, never let any problems fester. If something goes wrong during a project, do not wait to tell people who need to know, especially the customer. Waiting to report a foul up can have far more serious consequences than reporting and fixing it right away. It has always been my practice that bad news gets reported immediately and good news can wait. There are plenty of examples of when waiting to report bad news had horrible consequences, and plenty of stories where the immediate identification of problems saved the day.

If you have, in fact, breached the contract by doing something incorrectly or by accident, you can frequently avoid problems by advising the customer right away of the problem, preferably in a matter-of-fact tone. 

“Frank:  While we hope this does not delay the completion of Zone 2, we wanted you to know that the ship carrying the specialty girders sunk in the Bermuda Triangle today. We are working with our suppliers, and we would of course welcome any suggestions from you for alternative sources. Best regards.” 

At this point, while you may eventually be in breach of the contract, you have put the ball back in the other person’s court, which is generally the best place for the ball to be from your perspective. 

By the way, for those of you who do not read contracts sent to you, I strongly encourage you to do two things: First, read the scope and schedule to make sure you know what you are supposed to do by when. Second, pray.

Take It or Leave It negotiations

How do you deal with “take it or leave it” contractual negotiations? First, decide how much you want the work. Second, decide how likely the customer is to be a pain in the butt. Third, consider sending “clarification” emails or texts for the most problematic clauses, asking for more information on what it means, or asking what would happen in certain circumstances if these clauses were invoked. The worst that can happen is that the customer responds back that it means what it says. On the other hand, if there is no response or the response softens the interpretation of the language, you have a serious leg up.

In a perfect world, contracts would be fair and reasonable. They are not. If possible, have a standard subcontract agreement to send along with your bid. While the customer may not use it, it at least gets the parties thinking about the contractual process as something other than “take it or leave it.” 

Pay attention to the indemnification provisions in the contract. It is reasonable for you to indemnify based on your negligence, but it is unreasonable to be asked to indemnify for claims arising out of your work. That would mean you are responsible for claims caused by the negligence of others, including the party you have the contract with, even if you have done nothing wrong. If possible, make sure the contract deals with unforeseen circumstances and events outside of your control.

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