Tips for Avoiding Litigation – In Agreements and Contracts
Season 2, Episode 15 – A contract. An agreement. Is there a difference? Chances are you never thought about it. So what makes a contract or an agreement a good idea? When should you have one? What should be included? There’s so much more to consider than what the good ol' handshake can cover. And knowing how to properly lay out your expectations can help you avoid litigation down the road. In this podcast episode, JDSA Attorney Matthew Hitchcock presents Tips for Avoiding Litigation – In Agreements and Contracts.
Announcer: This is JDSA's Law Talk, the program that gives you straight facts on our laws and answers questions about the topics that may affect your everyday personal and professional life.
Host: Welcome to JDSA's Law Talk. I'm your host Clint Strand. This is the program that clearly explains complicated legal issues and how a law applies to your every day personal and professional life. Joining me for this episode, JDSA attorney, Matt Hitchcock. Good to see you again.
Matt Hitchcock: Great to be here. I'm excited to talk about contracts today.
Host: Let's talk about contracts. Let's also talk about tips to avoid litigation because that's the whole point of contracts. Everybody's on the same page, right?
Matt Hitchcock That's right. Clearly defined rights, duties, and responsibilities in a contract can really help you avoid litigation down the road.
Host: But if it were that black and white, we wouldn't be talking to you in the first place, so let's talk about some of those pitfalls, how to avoid them and more. It's coming your way next right here on JDSA's Law Talk.
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Host: Welcome back to JDSA's Law Talk. Now remember, you can learn more about this and other legal topics on our blog on jdsalaw.com. We're talking to Matt Hitchcock about tips to avoid litigation in agreements and contracts. And Matt, I have to tell you something. When I knew that we were heading into this conversation, something that's always rolled around my head is something that my daddy told me that I think a lot of people have heard is that there's no such thing as a handshake agreement, right? So let's get into the basics. Is there a difference between an agreement and a contract? What are we talking about here?
Matt Hitchcock: Well, a lot of times there's not a difference between an agreement and a contract. A contract can be oral, no writing whatsoever. It can be written. It can be partially oral and partially written. A contract has three basic parts and those parts are an offer by one person, and acceptance by another, and consideration. So an inducement could be money, maybe it's money. Maybe it's lunch. Maybe it's a new car. Maybe it's I'll stop doing something if you do something for me.
Host: So the consideration is the why. Why are you doing this in the first place? Or agreeing to do it in the first place?
Matt Hitchcock: That's right.
Host: Okay, we're talking about promises on both sides here. I agree to do something. You agree to do something and we're going to do it.
Matt Hitchcock: That's right.
Host: Okay, but the devil is always in the details so I have to imagine that contract language is important here, whether it's oral or written.
Matt Hitchcock: That's right, because it specifies the rights, responsibilities and duties. So if we have a very short verbal agreement to do something for one another in exchange for some consideration, that might not fully and accurately outline my expectations of your behavior or your expectations of my behavior so the advantage of using formal contract language, what some people might call boilerplate, is that it clearly outlines a variety of circumstances and expectations of the parties. In the event that we have a dispute, we can use the contract, that agreed upon language to help us resolve it and in the event that we don't have a dispute, if I'm not sure of how I'm supposed to act under our agreement, I can turn to our contract and that might shed some light on it.
Host: So really what we're talking about is clarifying the scope of our work, making sure that both sides are really on the same page because I have to imagine when we're talking about lawsuits, or potential lawsuits, I have to think that misunderstandings have to go to the bottom of the core as far as when you entered in the agreement, both parties fundamentally thought that they were entering into something a little different from what the other side thought.
Matt Hitchcock: That's right. Expectations are always going to be different from one side to the other. You may interpret their head shaking or handshake or signing on the dotted line as being in agreement to what you're thinking, but they're doing the same. And oftentimes where we don't have specific detailed contracts with clear language we end up with disputes that don't have an easy resolution because it's not covered by the contract and that's when we end up in court.
Host: Okay, so is there an easily definable litmus test when we're talking about clarifying the scope of work here?
Matt Hitchcock: One of the things that you might rely on is to consider the perspective of an outsider. If an outsider were unfamiliar with the agreement in its entirety and they read the contract, would that outsider understand the rights and responsibilities of the parties? In the event that they do, then you probably have a fairly good contract that's going to be useful. In the event that they don't, you probably have some drafting and reworking to do.
Host: What about an example? Do you have an example for me?
Matt Hitchcock: Yeah, so for example, let's say I have a contract with my pool guy to dig a pool.
Matt Hitchcock: And the contract says the pool guy will come out and he will dig the pool and he will finish the pool, and it will cost $20,000.
Matt Hitchcock: Well that's great, right? I'm getting my pool and the contractor is getting his paycheck.
Host: Grab the swimsuit. We're ready.
Matt Hitchcock: And it's summertime, we're ready to go. But what did we forget to define in there? A couple of things. What kind of material is the contractor going to use? Is the pool going to be concrete? Is the pool going to be a different kind of liner? Maybe I want a fancy palm tree etched into the bottom of the pool. Our agreement didn't cover that, so that if I thought my contractor was going to do all of the things that I wanted for $20,000 and really that was just the base price for some concrete, then we have a problem.
Host: Wait a minute, I mentioned waterfalls and tile. Where's my waterfalls and tile?
Matt Hitchcock: That's right. And so now we have a dispute, right?
Matt Hitchcock: And if our contract probably doesn't cover what we're going to do in a dispute. A good contract would cover the behaviors under the contract and then in the event that there's a dispute, maybe we agree to arbitration. Maybe we agree to mediation before we file a lawsuit. Maybe we agree to a particular venue. But if we don't have that information in the contract, now we have to fight about all those things. It gets more expensive, more time consuming and is more difficult to resolve.
Host: Okay, so we've talked about the what, but I have to imagine the when is an important note in the contract as well and by that I mean "Hey, I'll get it done as soon as I can" probably isn't going to cut legal mustard.
Matt Hitchcock: It most likely won't because as soon as you can might mean within the next year-
Matt Hitchcock: ... and as soon as you can to me might mean you'll be out here next week.
Matt Hitchcock: And when you're not out here next week, I'm upset. I'm angry and now we have problems. So if you include a specific time for performance, specific dates, or a window of time, it's going to depend on the situation, the nature of the relationship, but that can really solidify what the expectations and rights and behaviors are under the contract.
Host: So you're not just talking about finish line here, you're talking about milepost markers within the course of the work to be done.
Matt Hitchcock: That's right because a lot of times, that's the way that we evaluate on a continuing basis whether we're getting the bargain that we expected and so if we have certain specific performance time lines, like when you, to go back to the pool, I want to have the hole dug by next week. Two weeks after that, I want to have all the concrete in and settled. Three weeks after that, I want to have all the finishing touches done and then the following week, I want to have the project complete. If we outline that, now we're both on the same page.
Host: Okay, so taking that to a different deal, let's say there's a construction project out there if there are mile markers and consequences or incentives for those, then if you're the contractor working, everybody is on the same page as far as, "Hey sometimes, you're running behind schedule and it's nothing nefarious, like stuff happens, but you know to juggle your work because if I don't get X done with this project by this date, I know what's going to happen.
Matt Hitchcock: That's right and it also allows the contractor or the party paying for the construction work, it allows them to anticipate that problem. If the contractor knows in advance that he's going to have trouble getting supplies because there's a huge demand for steel or a huge demand for the supplies that he needs to complete the work, they can talk about it in advance, so that communication before the date passes and the work's not done, they can resolve the issue before it becomes an issue.
Host: Okay, so we talked about the basics, we talked about the scope, and we talked about timelines. Let's talk about quality. When we say "good" what does "good" mean? We'll talk about that next right here on JDSA's Law Talk.
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Host: Welcome back to JDSA's Law Talk. I'm your host Clint Strand, talking with Matt Hitchcock about tips to avoid litigation. Now when you enter into a contract, you want work to be done, you want it to be done right. Let's talk about quality then, the how good. This needs to be nailed down with specivity, right?
Matt Hitchcock: It does and that's something that's generally going to be left to the parties to decide themselves. So under the law, typically when we talk about qualities or warranties, we let the parties establish what that quality level will be and any warranties that might apply.
Host: So give me an example of what we're talking about here in a specific industry.
Matt Hitchcock: One of the easiest industries to address quality expectations is in goods.
Matt Hitchcock: We buy a car. We expect the car to run efficiently. We expect the car not to break down. We expect the car to get us from one place to another and maybe we expect the car to haul a heavy load or maybe if it's a truck, we expect the towing capacity to be a certain amount. And so when we are buying a good like a vehicle, even if we don't have those warranties and quality expectations specified, the law provides some general quality and general warranty expectations, just as a basis for all goods.
Host: Well I have a great example for this. In the auto industry, there was a car maker that shall not be named that made a big deal about their emission standards for their diesel engines and then it came out that they were actively installing software to game the emissions testing software. They were essentially breaching their contract, not only with the customer but with the government that were providing these protections. They got in big trouble.
Matt Hitchcock: They absolutely got in big trouble. I think they're still dealing with that trouble. The customers bargained for and expected a particular good with a particular quality that was based up a brand's reputation over time and reviews and their scientific reports on how they comply with gas mileage and emissions requirements and that turned out to be false and what that car company's running into now is they have millions of unsatisfied customers. So not only do they take the hit from the fine initially, but now they're dealing with having to bring those people back in as customers or sell more cars in the future and that's a problem with their reputation.
Host: So, Matt, the point of all this is tips to avoid litigation. Thinking about road blocks before they actually trip you up. So if you're creating a contract or an agreement, can you put things into the contract that might anticipate scenarios where you may need to get out of the contract, because I'm assuming there's scenarios where the contract just might not work anymore but you're in a contract, you don't want to breach it, but it's not amendable to you to continue in said contract. Is there a lever or a mechanism where that comes into play?
Matt Hitchcock: Yes, so what you're talking about is commonly referred to as an early termination provision.
Matt Hitchcock: So that's applicable when one party, or potentially both parties, aren't finding the success that they had hoped underneath the contract as it's written even though the contract might have a couple of years left on it, the early termination provision is something someone can invoke so that they don't have to continue to languish underneath this contract that's not working for them for years and years and years and just either drive them out of business or drive them insane and so it's an escape clause. What it allows one party to do is oftentimes the early termination provision will be written notice that I no longer want to continue with this contract 30 days in advance, 90 days in advance, maybe six months in advance. But it's built in there and the parties know how to invoke it and get out of the contract if they need to.
Host: So what we're talking about here is a situation where instead of everybody winning, everybody loses a little less. Like a great example I'm thinking of, early termination clauses in leases where a renter wants to get out of a lease with a landlord, right?
Matt Hitchcock: That's a great example. What we would have in that situation is the renter would pay an additional fee, maybe an extra month's worth of rent or two months worth of rent which would be a little bit more than the renter would want to pay and a little bit less than the landlord had anticipated receiving but in that situation, the renter is free to move out after they pay the early termination fee and the landlord is free to lease the property to someone else. So even though they're not getting the expectation of their bargain, between the two of them, hopefully they don't lose so much that they don't wind up okay in the end.
Host: Alright. So sometimes losing a little bit less is unfortunately the best you can do in a particular agreement, but it's still better than a lawsuit.
Matt Hitchcock: That's right. We might be talking about, for a renter, a landlord and a tenant, we might be talking about a couple hundred bucks, maybe a couple of thousand bucks and you know a lawsuit is going to cost you well in advance of 10 maybe $20,000 if you wanted to really pursue it. It just wouldn't be worth it. So something like an early termination provision is smart because it clearly defines what the parties to the contract can do if the contract no longer works for them.
Host: Again, because what we're talking about here are tips for avoiding litigation. We'll bring it all together as we wrap things up with Matt Hitchcock right here on JDSA's Law Talk. That's next.
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Host: Welcome back to JDSA's Law Talk. I'm your host Clint Strand talking with Matt Hitchcock, tips for avoiding litigation. We have covered a ton of ground, so lets ago ahead and bring it all together. What would you like us to leave with from this conversation?
Matt Hitchcock: Well, I think the important thing to remember is that whenever you enter into a new agreement, if you're a business man, or if you're moving into a new place as a tenant or if you're renting out a place as a landlord, it's hopeful. You're at the ground stages. It's exciting and it can lead to sloppiness so the one thing that I would caution people as they enter into the first phase of the relationship is make sure that the agreement that you have covers the problems that you can foresee happening. Maybe you take it to a lawyer to review. A lot of times if your contract is going to be in excess of a couple of thousand dollars, it's probably worth your time to pay a lawyer a little bit to review the contract to ensure that it covers common problems that we see with those types of contracts.
Matt Hitchcock: The other thing that a contract really needs to do is to clearly define the rights, responsibilities, and duties of the parties throughout the relationship as closely as it can and that can help you avoid the financial pitfalls of running in to a disagreement over what you expect versus what I expect and it can avoid having to pay a lawyer after the fact which is always more expensive than in advance to clarify what the rights, responsibilities, and duties are to the parties.
Host: Again, this is the ounce of prevention is worth more than a pound of cure type of thing. Always talk to a professional first. Make sure you know what you're getting into so you can enter into that agreement with confidence. And like you said, with excitement because it's something you should be excited about.
Matt Hitchcock: That's right and really we have a system in the United States and in Washington that supports people going into business with one another and expanding and trying new things and growing and so we should take advantage of that and we really should try to figure out a way to make deals happen because there's risk on the back end, doesn't justify not doing things. It just justifies doing your due diligence to make sure that you do it right the first time.
Host: Matt Hitchcock, really interesting stuff. Thanks so much.
Matt Hitchcock: My pleasure.
Host: You've been listening to JDSA's Law Talk. Visit us a jdsalaw.com to hear more programs explaining how the law applies to your everyday personal and professional life. And most importantly, how the team of attorneys at JDSA Law can help you. I'm your host, Clint Strand. Thanks again for joining us on JDSA's Law Talk.
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