When you’re negotiating and drafting a contract, your client may be excited and focused on the positives, but you have to keep your eye on the dark side, i.e., the consequences of a breach. Consider bargaining over favorable damages provisions—just in case.
Although what makes sense for any given contract will differ, here are seven things to consider bargaining for in your next contract negotiation:
- A surety or guarantor. A prime consideration in every contract is the financial capability of the other party to respond to a judgment for damages. You can certainly improve this capability by bargaining for a surety or guarantor for performance of the agreement or security in the event of nonperformance. Review the various types of surety and fidelity bonds available in different contract situations to make certain that the type of surety bond obtained satisfies your client’s purposes.
- Insurance requirements. Generally, casualty and liability insurers don’t ensure the performance of a contract. But insurance is available against some instances of breach of contract. For example, defective or delayed performance by a building contractor or errors and omissions by an architect or engineer may give rise to causes of action that can be covered by insurance.
- Indemnity protection. Often a breach of contract may expose the innocent party to liability to third parties. Consider indemnity and hold-harmless provisions as protection against this possibility. See CC §§2772–2784.5.
- Attorney fees and costs provision. Carefully weigh the relative advantages and disadvantages of a provision for attorney fees and other litigation expenses. Bear in mind that, under CC §1717, a provision for attorney fees for one party creates the right to attorney fees for the prevailing party in a lawsuit, whether or not that party is expressly entitled to attorney fees under the contract. In many contracts, particularly construction contracts, in which performance occurs over a relatively long period of time during which one or more breaches by both parties may occur, an attorney fee provision may be burdensome. If you do want to include an attorney fees provision, consider also including a specific provision for other litigation expenses, e.g., expert witness fees and investigation expenses normally not recoverable as costs of suit.
- Notice requirement. One method of limiting damages is a “notice of claim” requirement. These are frequently seen in construction contracts in which an owner requires that a contractor must, during the performance of the contract, give notice of a claim for any extra work, delay, or extensions of time within a specified time period after the claim first arises.
- Liquidated damages. Here’s one to be a bit cautious about. For example, in a construction contract, an owner may feel that liquidated damages are a good prod to a building contractor. But an owner with substantial interest payments on a construction loan and possible loss of rental income due to delays may suffer substantially greater damages than a liquidated penalty of a few hundred dollars per day. Additionally, the enforceability of a particular liquidated damages clause might be questionable.
- Forum selection clause. The forum for resolution of disputes can affect the recovery available to the client. For example, a contractual provision for a forum that is distant from the client’s normal place of business can significantly increase litigation expenses. Arbitration is considered by some to be a rapid and inexpensive method of dispute resolution, but the procedure in an arbitration can be detrimental. For example, depositions for discovery are not available in arbitration proceedings in connection with breach of contract unless the agreement to arbitrate specifically so provides (CCP §1283.1(b)), and arbitration proceedings require payment of fees to the arbitrators. Don’t just assume that arbitration is either a favorable or less expensive forum for resolution of a dispute.
Everything you need to know about contract damages can be found in CEB’s California Attorney’s Guide to Damages, chap 1 and California Law of Contracts, chap 10. For specific guidance in drafting remedies provisions in your next contract, turn to CEB’s Drafting Business Contracts: Principles, Techniques and Forms, chap 15. If you’re entering the world of cloud agreements, check out CEB’s program Cloudy with a Chance of Contracts: How to Draft and Negotiate SaaS and Other Cloud Agreements.
Other CEBblog™ posts you may find useful:
- Contract Drafting 101
- Turn Legalese into Plain English
- Post-Dispute Adoption of Arbitration Bylaw Fails
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