Contracts are the glue that binds businesses together. But surprises lurk inside these documents that could cost millions.
Company. Foley & Lardner LLP Industry. Law firm Key. Don't assume contracts mean what you think they mean.
The famous Hollywood producer Samuel Goldwyn once said a verbal contract isn't worth the paper it's written on. Yet a verbal contract in Florida has far more weight than many might suspect, which could create serious legal problems down the road.
There are many aspects of contracts that get overlooked, not just by the best executives, but sometimes by the best attorneys. And not being aware of those measures could cost companies millions of dollars.
That was a tough lesson learned by Vila & Son, one of the nation's largest landscaping companies before it went out of business in 2011. Posen Construction, which had won a $40 million Florida Department of Transportation contract in 2009, had subcontracted Miami-based Vila & Son to handle what the company claimed was $500,000 worth of landscaping work along a stretch of Interstate 95 in the West Palm Beach area.
Just before work was set to begin, however, Posen had found another landscaping company that would do the work cheaper, according to court documents. And with a simple letter sent to Vila, Detroit-based Posen canceled the contract.
Vila & Son wasn't going away quietly, however. The company sued Posen for breach of contract, and even got a jury to award the company damages in 2012. The judge, however, set aside the verdict. That forced Vila & Sons to appeal, ultimately losing to a contract clause that has its roots in the Civil War: termination of convenience.
'What's the point?'
“Basically, a termination of convenience clause means we can end a contract simply by providing written notice,” says Adam Alaee, an attorney with Foley & Lardner in Tampa, who represented Posen. “That means you're off the job, and we'll pay you for whatever you did up to that point. But beyond that, it's over.”
The federal government started using termination of convenience clauses under Abraham Lincoln, designed to allow Washington, D.C., the chance to quickly exit an agreement depending on financial resources and the fate of the war itself. Depending on how it's written in a contract, it allows one or both sides to cancel a contract simply because one side wants to.
After the world wars, such clauses started making their way into private contracts not involving the government. But until Vila & Sons vs. Posen Construction, it had never been challenged at the state appellate level.
“Vila & Sons argued that termination of convenience could not be used in bad faith, and if someone could terminate an agreement for any reason, then there is no obligation from the other party,” Alaee says. “Once that happens, what's the point of the contract in the first place?”
When the Florida Supreme Court decided not to intervene, the decision supporting Posen in Florida's Second District Court of Appeal became a precedent-setter — a rare achievement for an attorney.
“When we researched this, we realized very quickly there were not many cases on this,” Alaee said. “We knew this could become case law, no matter how it was ultimately decided.”
Based on the court's ruling, any party in a contract can enforce a termination of convenience clause, as long as there is some “consideration” in exchange for it, Alaee says. That consideration doesn't necessarily have to be money; it could be something as simple as a 10-day written notice.
Termination of convenience clauses are not the only surprises in contracts businesses learn about after losing a court case. Another commonly misunderstood contract clause is one that clearly states an agreement can only be modified or waived in writing.
“A lot of companies assume that because a clause like that is there, they're protected from any outside oral agreements, but they're not,” says Sarah Rathke, a partner with Squire Patton Boggs in Cleveland who works with Florida clients in supply chain litigation and consulting. “Even with a contract like this, businesses are still subject to UCC provisions, and they say otherwise.”
The Uniform Commercial Code in question, 2-209, is even included in Florida state law, Rathke says. That provision says that any attempt to modify or revise a contract either by statements or by actions could modify a contract, even if it's never written down.
“Sometimes you have buyers working with engineers on a product, and those engineers might find a more expeditious way to make the product,” Rathke says. “That new way may not be reflected in the contract, but if they are allowed to do it, a court could see that as a modified contract, even if it doesn't work and something goes wrong.”
The only real way not to fall victim to an oral modification is to ensure that every aspect of the contract is being executed the way it's spelled out, Rathke says.
Knowing some of the problematic clauses found in contracts ahead of time could give a company an advantage when it first negotiates such deals, Alaee says. For instance, termination of convenience clauses can be dealt out altogether, or at the very least, come at a pre-set high penalty, making the use of such a clause unlikely.
Even with a good set of eyes on contracts, many still end up in legal snarls. Yet, if a company doesn't think ahead when it comes to where such battles will take place, a new set of problems can form, says Suzi Marteny, a partner and intellectual property attorney with Shumaker Loop & Kendrick in Tampa.
“You see a lot of contracts that call for disputes to be handled through arbitration,” Marteny says. “Someone might look at that, and think that's a far faster and more economical way to handle a dispute. But that's not always the case.”
Arbitration typically still requires attorneys, and because there are far more contract disputes than available arbiters, it could take just as long to hammer out a case as it would in court.
“It takes away your right to a jury, and some people really want their disputes resolved by six ordinary people,” Marteny says.
If contracts involve companies from different parts of the country, choosing which state would govern the contract -- and where disputes are resolved -- can also be troublesome. Some cross-country contracts, for instance, might literally meet in the geographic middle.
“You might pick Kansas, because it's halfway in between,” Marteny says. “But what do you know about Kansas? Do you even have an attorney who can practice there? Those things that seem kind of insignificant at the time you write a contract could become a big, big hassle later.”
Vila & Sons paid little mind to its termination of convenience clause with Posen, not realizing how much it could hurt its bottom line. Losing that contract, and then suffering through a lengthy court battle, came at a bad time for the landscaping company: during the housing market collapse.
At its peak, Vila & Sons pulled in $67 million annually and employed 700 people, according to published reports. But on Aug. 5, 2011, after struggling to make payroll, Vila & Sons closed for good.
“Contracts are far more than the words on the page,” Alaee says. “They can have lasting implications on your business, and force you to spend far more time and money with lawyers than you would've by just giving the contract to your attorney in the first place.”
Who owns what?
With the rise of smartphones and tablets, computer app development has exploded in recent years.
Many entrepreneurs looking for an entry into the billion-dollar industry have sought out programmers to make their next Angry Birds or Twitter idea a reality. Yet some find themselves in legal trouble when they try to sell their completed app, Shumaker Loop & Kendrick partner Suzi Marteny says.
“The average person walking in to a programmer's office to create an app doesn't realize that unless their contract says otherwise, that programmer actually owns the copyright to that code,” Marteny says. “That app takes off, and you want to cash out, but you can't, because you don't own the code that created it.”
To avoid that, make sure an agreement with a programmer doesn't just provide a limited license, she advises. It might cost a little more upfront, but it will save plenty of money in the long run.