LESSONS IN LIABILITY – Contract Liability

This is the first article of a new series from LegalStandard.com entitled “LESSONS IN LIABILITY – HOW FLORIDA BUSINESSES CAN AVOID COSTLY LAWSUITS.” This series is designed to promote LegalStandard.com’s goal of keeping its clients “in compliance and out of the courtroom.” Even though America’s judicial system is the most advanced in the world, very rarely is a civil lawsuit a smart financial investment for a small to mid-sized business due to the extreme legal costs and time constraints associated with prosecuting or defending a lawsuit.

The first area of potential liability every business faces in Florida is contract liability. Contracts are essential to business and form the backbone of any successful business relationship. Regardless of whether agreements are sealed by a handshake or a twenty-page written contract, business agreements allow the parties to operate with a level of certainty regarding what they can expect from their owners, employees, suppliers, customers and anyone else they have a contract with. Unfortunately, contracts also provide the potential for significant liability if they are found to be unenforceable of if you knowingly, or worse, unknowingly breach a contract without understanding the consequences of your actions. Many contracts also include choice of law, venue selection and attorney fee shifting clauses that can substantially limit your ability to litigate a breach of contract claim. These types of clauses can make the potential liability for contract breaches even more severe and, potentially, devastating for a small business.

Contracts in General

To form a contract in Florida, there needs to be: (1) an offer to do or not do something in the future; (2) consideration provided in exchange for the performance of the other party (consideration must have some sort of value and cannot be a gift); and (3) verbal or written acceptance of the proposed terms (acceptance can also be in the form of performance if the contract so provides). Additionally, the terms of the contract must be unambiguous so that the parties have the same understanding of the agreed upon terms. If there is no “meeting of the minds”, there is no binding contract.

While verbal contracts are equally as enforceable as written contracts in Florida, it is always recommended that you reduce any significant agreement to writing. Small business owners should always have the mindset of anticipating how they will prove or disprove any potential issue in a courtroom at the time an agreement is entered into rather than after a problem arises. It should be assumed in today’s competitive business market that circumstances may change or a disagreement may arise. In keeping with this cautious mindset, business owners should understand that it is often very difficult to establish the detailed terms of an agreement to a judge or jury without a written contract. A properly drafted written contract removes almost all doubt of what is expected by the parties.

As you can imagine, not all written contracts are the same. One type of contract that is becoming increasingly popular is the “form” or “template” contract that can be purchased on the Internet. These contracts are drafted to be fair and/or neutral by national legal service providers, but rarely include all of the necessary terms and conditions anticipated by the parties when they reached their agreement. These form contracts also seldomly include state-specific terms and conditions that are necessary and/or recommended for Florida contracts. A second popular type of contract is the one-sided contract seen in the terms and conditions found on websites or on the back of invoices or purchase orders. These contracts are almost always non-negotiable and drafted for the sole benefit of the party who created them.

Unfortunately, the limitations and deficiencies in these types of contracts are compounded when parties do not read and understand the terms in the contracts before signing them. A recent Deloitte survey of 2,000 individuals in the United States found that over 90% of the participants consented to the legal terms and conditions of contracts without reading them. That same study showed this percentage increased to 97% for participants between the ages of 18 and 34. A second study from a professor at NYU Law School showed that less than 1% of 50,000 users read the terms and conditions found on online commerce sites, even though such terms and conditions are legally enforceable and include extreme consequences if there is a breach. Yet another study showed that the most commonly reviewed contract terms address cost, length of the contract and the ability to modify the terms of the agreement, but that consumers usually read these terms only after they had signed the contract.

Understanding Contract Terms

Ignorance is not a defense to contract liability in Florida. Courts assume that you have read and understand the terms of any contract you sign – even if that is not the case. In fact, courts in Florida have found that parties are bound by the terms of a contract, even if they are unable to read English. See Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Benton, 467 So.2d 311 (Fla. 5th DCA 1985). While there may be exceptions to this rule, the exceptions are narrow and often difficult to prove in court.

The best way to avoid contract liability, is to know what you want before you start negotiating the detailed terms of a contract. That way you can protect your interests by knowing the critical issues that must be included in the agreement and knowing what you are, and are not, willing to surrender to get the deal done. The second step is to reduce any important agreement to writing and have an attorney who understands your interests draft or review the contract before you sign it. An experienced business attorney can make sure the contract is enforceable and that you understand your rights and risks associated with the agreement. Involving an attorney may be more expensive in the short-term, but the long-term savings may be significant. Contracts can be reviewed by an attorney for as little as $295.00, which is far less than the court costs necessary to file a lawsuit – not to mention the hourly fees charged by the attorneys representing the parties.

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