Avoiding Contract Mistakes

1) Default Interest Rate. You know that if you don't pay your credit card bill on time, you are charged significant interest and late fees. But it is amazing how often sophisticated businesses make no provision in their contracts for interest due on past due sums. As a practical business matter, it is difficult for a party negotiating a contract to object to an interest rate provision that at least covers the real cost to the other party of delayed payment. If the contract is silent, most states provide for an interest rate on past due sums substantially below what most business people regard as sufficient to cover the real cost (and risk) of delayed payment. Depending on the state and whether the debtor is a corporation or individual, you may be able to charge 18% or more on past due sums, if the contract so provides. (A choice of law clause is important, too, for this and other reasons.) If your company borrows money at the prime rate, the contract ought to at least provide for an interest rate that reasonably approximates the prime rate just to keep you whole.

2) Attorneys' Fees and Litigation Expenses. State laws differ on whether the plaintiff who sues successfully for breach of the contract automatically recovers its reasonable attorneys' fees, absent a contract clause that so provides. In most states, including New York and California, the answer is 'no.' In Texas, it's 'yes.' However, almost no state's law awards attorneys' fees to the successful defendant in such a case, unless the contract says so. In other words, if the other contract party brings a meritless breach-of-contract case against your company, you don't recover your attorneys' fees. As an economic matter, awarding fees to the successful plaintiff but not the successful defendant makes no sense, but it's the law in some places. A more level playing field is created in many contractual situations if the contract provides that the prevailing party in any lawsuit will recover attorneys' fees. There are also many other expenses of litigation that are not recoverable unless the contract says they are. Expert witness fees are but one example. It may be appropriate for your contract to state that a prevailing party recovers all its reasonable expenses of litigation.