Editor’s Note: Ryal W. Tayloe is a member of the Litigation and Construction Practice Groups at Ward and Smith, P.A.

I am a litigator. I do not draft contracts; I deal with them once a dispute has developed between the parties to a contract. At the point in time when a dispute arises, the contract’s language is vitally important, as each party to the contract will assuredly search the document for favorable provisions.

Many people enter a contract with great optimism and trust in the other party. It is extremely important, however, to ensure that the contract is fair to both parties and that it is read with an eye toward the reality that some business arrangements do not have happy endings.

Here are a few potential problem areas:

One-Sided Contracts

If the other party prepared the contract, it is safe to assume that the contract is slanted in almost every respect in that party’s favor. Read it carefully, including the small print. In a situation where you have a bargaining position equal to or better than the other party, negotiation of favorable contract terms is a must. In situations where the other party has the upper hand in the negotiations, you may have to acquiesce to the other party’s proposed contract language. However, you should not assume that all of those terms are non negotiable. Instead, try to negotiate a small number of provisions that are most important to you. In addition, regardless of your ability to negotiate the terms, you, at the very least, should take the time to read the terms carefully prior to signing. In the event of a later dispute, knowledge of the contract terms will enable you to better assess your position and your options early in the process.

A careful reading of the contract is also important to make sure the contract accurately reflects the terms of your agreement with the other party. The final written product that is signed by the parties will be legally binding, regardless of what you and the other party may have discussed or agreed to orally. Except in some limited circumstances, the terms of the written contract will take precedence over any prior negotiations or oral agreements.

Dispute Resolution Provisions

In the event of a dispute, what does the contract say about how that dispute is to be resolved? Is the contract to be interpreted in accordance with the laws of another state? Do you have to actually go to another state, city, or county to litigate or arbitrate the dispute? Are the parties required to retain a mediator and have a mediated settlement conference before proceeding to arbitration or litigation? If the contract requires arbitration, do the parties have to use a particular arbitration service such as the American Arbitration Association?

The inclusion of well-drafted dispute-resolution and choice-of-law provisions can answer these questions. If the contract terms are to be interpreted in accordance with the laws of another state, either your local attorney is going to have to spend your money to become educated on those laws or you will have to retain the services of an attorney in the other state. This can be expensive and gives the other party negotiating leverage.

Some contracts also require the parties to engage in mediation before invoking the contract’s arbitration provisions or before bringing a lawsuit against the other party. Mediation is a formal settlement conference presided over by a mediator, usually an attorney, where the fees of the mediator are split between the parties. Any decision reached in a mediation is not binding unless the contract so provides.

Arbitration provisions also are found in many contracts and require an arbitrator or arbitration panel to be chosen, often through the American Arbitration Association or some other similar service, to resolve the dispute. If the mediation and arbitration provisions of a contract are poorly drafted, fulfilling those requirements can be just as expensive and time-consuming as litigating a dispute. However, well-drafted mediation and arbitration provisions and procedures can be negotiated to make them less cumbersome and more cost effective than litigation. Many contract attorneys, in fact, advise their clients to eliminate these mediation and arbitration provisions from the contract altogether, preferring instead to handle disputes the old-fashioned way, through litigation in the courts.

Limitations on Damages

Contractual clauses limiting the types of remedies or the amount of monetary damages recoverable by one party from the other are becoming more and more popular. In a recent North Carolina court case, for example, a grading contractor alleged that the surveying firm it had hired had made a mistake in its survey that caused the grading contractor to have to expend an additional $500,000. However, the contract between the surveyor and the grading contractor limited the surveyor’s liability to $50,000, one-tenth of the damages allegedly suffered by the grading contractor. Despite the fact that the damages agreed to in the contract between the parties were far less than the actual damages incurred, the North Carolina Supreme Court held that such a limiting provision is enforceable in a commercial contract. Quoting Williston on Contracts, the North Carolina Supreme Court stated:

"People should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain. Also, they should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side. It is only where it turns out that one side or the other is to be penalized by the enforcement of the terms of a contract so unconscionable that no decent, fair-minded person would view the ensuing result without being possessed of a profound sense of injustice, that [courts] will deny the use of [their] good offices in the enforcement of such unconscionably."

Accordingly, beware of provisions that limit monetary damages or that limit your remedies if the other party violates the contract. In the alternative, consider how you may use them to your advantage. While such provisions may seem fair during the negotiation phase of the agreement, they do not account for the unknown, and you should "play out" what is most likely to go wrong and how such provisions may hurt you if you cannot perform or may limit you if the other party cannot perform.

Conclusion

These are but a few of the issues that I routinely see in dealing with contract disputes. I advise my clients that it is best to have an attorney review any contract that they are asked to sign. Make sure your attorney understands your agreement with the other party and what you are trying to accomplish in the particular business arrangement. The legal fees for reviewing and drafting a fair and plainly-worded contract pale in comparison to the legal fees incurred in a later dispute.

© 2009, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Ryal Tayloe is a member of the Litigation and Construction Practice Groups, where he concentrates his practice on the representation of businesses and individuals in construction, commercial, and real property disputes and litigation. Comments or questions may be sent to rwt@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.