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Avoiding Contract Mistakes

Even sophisticated companies expose themselves needlessly to contract disputes. I know this to be the case from representing them in litigation that might have been avoided or shortened if only they had inserted one of my top 10 measures for 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.

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