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How Suppliers and Vendors Can Protect Themselves by Including Attorneys' Fees and Other Costs provisions in Their Contracts

Suppliers, vendors, and distributors who do not have reasonable attorney's fees either in their credit applications, contracts, and/or personal guarantees are, quite frankly, asking for trouble. If your company wants to take control of situations that get out of hand by non-paying customers you need to rethink the way you do business immediately. By including such a provision in your company's contract, it will go a long way to bringing a more speedy end to litigation once the customer realizes that it has to pay for your attorney's fees. Often times, the fact that your company has an attorney's fees provision can be included in any initial demand letter to the customer. I suggest the following steps so that your company has the appropriate language in its contract in the event of customer default and/or any subsequent lawsuit.

1. The clause must be set out as reasonable attorney's fees. If you seek to include such a provision in your company's contract then you must spell out your right to do so very clearly. Attorney's fees are different than costs or expenses for which you may at some point seek reimbursement from that customer. The magic language is simply "reasonable attorney's fees." Nothing more, nothing less.

2.  The reasonable attorney's fees provision should also be articulated in any accompanying personal guarantee. Just because the customer's company may be bound by having an attorney's fee provision in the contract does not automatically mean that the guarantor is also bound by this same attorney's fees provision. Remember, a guaranty under Massachusetts law is regarded as a separate contract and subject to the Massachusetts Statute of Frauds, G.L.c.259, section 1. Therefore, if you are going to create a guaranty it must be in writing and contain all of the essential terms of a comprehensive guarantee. As well, the guarantee must include a provision for "reasonable attorney's fees" against the guarantor in the event of a default.

3. Make sure that your credit application or other contracts have a provision to collect interest. As with attorney's fees, your company's contract needs to clearly articulate what you are seeking interest for all unpaid balances in the event of any collection.

4. The credit application itself. Make sure to take the extra time and expense to draft a credit application that is worthy of being an effective and enforceable contract in and of itself. Require that the customer provide you with bank account information from several accounts, trade references (to the extent that such information can be verified and trusted), all information relating to bankruptcy activity within the past 10 years, and any present judgments against the company.  For many clients, I have even inserted a clause in the credit application to require information as it relates to any pending lawsuits at the time the credit application is submitted. It must be emphasized, as well, that if your company is going to go to the time and expense of creating these instruments that you have a system in place to analyze the information received from the credit application itself. It does little good to require the information and then not have a system in place to evaluate the information provided from the credit application itself.

5. Under Massachusetts law, the drafter of the contract is responsible for its terms. The rule is simply that any ambiguity in a contract is to be resolved against the drafter. Having said this, it is incumbent upon your company that when undertaking this effort to make sure that the contract is clear and concise not only as it applies to the application of attorney's fees, costs, expenses, and interests. On the subject of costs and expenses, those terms are treated differently. Costs refer to court costs, in most instances, such as filing fees and sheriff's fees, as examples. Expenses include other costs which include overnight mail, deposition expenses, expert expenses, and so forth. Your contract should be reviewed several times for clarity and precision and often this is best accomplished between the attorney and client as part of an overall team effort. At the Katz Law Group, we work with clients to ensure that the end product is concise and clear. 

6. Do not engage in verbal agreements with customers. I cannot say this enough. Clients continually come to me and ask can we recover attorney's fees on a verbal agreement for a breach of contract matter? Unless the agreement is in writing in the first instance you will not be able to recover those attorney's fees. Massachusetts does permit attorney's fees in only two situations: Under the written terms of a contract or by a statute that allows for attorney's fees. Unless your claim for attorney's fees falls under either category you will not be able to recover the same.

When it comes to contract drafting and preparation please do not leave anything to the imagination. At the Katz Law Group, we have assisted many companies in preparing contracts and agreements that fit their specific business interests and objectives. In many instances, those same contracts and agreements have been sufficient to prevent litigation and, if and when litigation arose, to afford our clients a more speedy resolution. If your company is in need of assistance in this area, please give us a call at 508-480-8202 for further information and advice.

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