Taken very broadly, American civil law deals with how we sort out disputes between private people (or organizations) that do not involve a crime. Where they did not have a chance to meet and discuss their obligations and rights among each other beforehand, such as in a car accident between strangers, the case tends to be analyzed as a “tort.” When they did meet and make some agreement about their relationship beforehand, then the situation tends to be analyzed under contract law or contract-like principles.
Most businesses rely on contracts or contract-like relationships with customers for their revenue. This is true whether you are repairing sinks based on a handshake, taking credit cards at your restaurant, getting signatures on a purchase order for the manufacture of a custom window, or getting a signed contractor’s agreement for construction work. There are plenty of exceptions, of course – we have hundreds of years of creative lawyering and legislating behind us – but the general rule is still worth knowing. Even if it is purely verbal, just about every customer has a contractual relationship with your company. Knowing this is the first step to being able to accurately communicate the rules of customer relationships to avoid confusion and hard feelings down the line.
This is the first in a series of blog posts concerning the common problems I see in my role as corporate and litigation counsel to Colorado companies. I plan to talk about some specific contract issues that cause grief for companies that do business in our state.
When a Contract Goes Sour - Bad Contract
I see a lot of breaches of contract by customers in my work. When they happen, they almost invariably fall into one of a handful of common situations. The first is where the written contract is simply badly written.
If your company just grabs some form contract on-line, or cribs off of the contract used by some other company in your industry, you’re probably taking a big risk. I am not talking about the risk of missing the terms and conditions, like ensuring that your company can recover attorney fees if it has to engage in collection work. While important, that kind of boilerplate is pretty common. I’m referring here to the need to ensure that your contract reflects your particular situation and how your company actually wants to do business.
So, for example, is the contract legal in Colorado? We have some very particular laws concerning what has to be in a roofing contract, for example, and if you do not follow those guidelines the whole thing might be invalid and unenforceable. If it is an independent contractor agreement, does the agreement include the magic language necessary to ensure you get a rebuttable presumption that the vendor is not an employee?
Does the contract describe the relationship you actually want with your customer? Does it require invoicing within a certain period of time? Does it give you protection from back-charges or improper warranty claims? I once had a case where the contract said that it terminated if there was any dispute over the scope of work. It was intended to protect the contractor, but what it actually did was allow the customer to get away without paying. Very unfortunate.
Finally, does the contract describe the relationship that the customer thinks they are forming? If not, that will also cause acrimony down the road. In future blog posts, I'll talk about this side of the issue in more detail. For now, suffice to say that step one of doing business safely is making sure both you and your customers understand the terms of the relationship, and your written contract reflects them.