Every business transaction is governed by contract law, even if the parties don’t realize it. Despite the overwhelming role it plays in our lives, contract law can be incredibly difficult to understand.
Successful Interior Designers know how to manage the legal needs of the business while bringing a creative vision to life for a client or project. Confusion about rights, obligations, and remedies when things go wrong can strain and even ruin an otherwise promising professional relationship.
This program teaches new designers and entrepreneurs answers to some basic questions, such as:
- What to do when clients / vendors / contractors don’t pay?
- How can one use Indemnifications, Disclaimers and Limitations of Liability clauses to balance business risk when the parties may not be economically balanced?
- What types of remedies are available and what are the limitations in scope for certain types of monetary and “equitable” remedies?
Take a deeper dive into advanced issues for interior design professionals. Learn how contracts can protect your design business and how to safeguard your rights.
Qualifies for .1 CEU credit.
This program was originally delivered on Aug. 17, 2017 at the Design Center at theMART 14th Floor Conference Center, 222 Merchandise Mart Plaza, Chicago, IL 60654
To find out more about how the Adler Law Group can help your business identify risk and issues related to intellectual property ownership, corporation or LLC formation, or just assess risk associated with your business, contact us for a free, no-obligation consultation by emailing David @ adler-law.com, visiting our web site www.adler-law.com, or calling toll free to (866) 734-2568.
One of the most important functions of a contract is to reduce uncertainties and mitigate risks. That is why almost all professional or personal services contracts contain “limitations of liability” provisions. Although they may seem like densely-worded, “boilerplate” provisions, and often overlooked, these provisions broadly affect a party’s ability to bring a claim, show liability, and prove damages that can be recovered.
A limitation of liability clause is a provision in a contract that limits the amount of exposure a company faces in the event a lawsuit is filed or another claim is made. As a preliminary observation, it is important to note that enforcement of limitation of liability provisions vary from state to state. The general rule in contract law is that in the commercial context, many states have found these clauses to be a mere shifting of the risk and enforce them as written.
Limitations of Liability generally address two areas of concern. First, the types of claims that may be barred. Second, the amount or scope of liability for claims that are not barred.
Limiting The Type Of Claim
A typical limitation of liability clause may look something like this:
“IN NO EVENT SHALL A PARTY OR ITS DIRECTORS, OFFICERS, EMPLOYEES, OR AGENTS, BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, INCLUDING BUT NOT LIMITED TO ANY DAMAGES FOR LOST PROFITS. IN NO EVENT SHALL THE TOTAL LIABILITY OF A PARTY EXCEED THE AMOUNTS PAID BY CLIENT, IF ANY, FOR THE SERVICES.”
This clause limits the types of damages that may be claimed, prohibiting claims for:
- Consequential damages (damages resulting naturally, but not necessarily, from the defendant’s wrongful conduct, BUT they must be foreseeable and directly traceable to the breach)
- Incidental damages (includes costs incurred in a reasonable effort, whether successful or not, to avoid loss, or in arranging or attempting to arrange a substitute transaction)
- Special damages (often treated the same as “consequential” by courts, “special” damages have been defined as those that arise from special circumstances known by the parties at the time the contract was made)
- Punitive damages (damages that may be awarded which compensate a party for the exceptional losses suffered due to egregious conduct; a way of punishing the wrongful conduct and/or preventing future, similar conduct)
- Exemplary damages (See “Punitive damages”)
- Indirect damages (See “Consequential damages”)
- Lost Profits (Cases in New York (and elsewhere) have a held that a clause excluding “consequential damages” may no longer be enough to bar “lost profits” claims; therefore, consider including more specific provisions in contracts- if parties want to exclude lost profits for breach of contract, a clause specifically excluding “lost profits” should be included.)
Lost profits that do not directly flow from a breach are consequential damages, and thus typically excluded by a limitation of liability clause like that above. But lost profits can be considered general damages (and thus recoverable) where the non-breaching party bargained for those profits, and where the profits are a direct and probable result of the breach.
Limiting The Amount Of The Claim
If found to be enforceable, a limitation of liability clause can “cap” the amount of potential damages to which a party is exposed. The limit may apply to all claims arising during the course of the contract, or it may apply only to certain types of claims. Limitation of liability clauses typically limit the liability to one of the following amounts: (i) the compensation and fees paid under the contract; (ii) an sum of money agreed in advance; (iii) available insurance coverage; or (iv) a combination of the above.
Parties can and typically do agree in their contract that liability is capped at some dollar amount. If liability exists and if damages can be proved, then the aggrieved party recovers those damages, but only up to the agreed cap. Sometimes these are mutual; other times they are one-sided. Sometimes the cap is a fixed sum (e.g., “the amounts paid for the services” or “$100,000”). Other times, the parties may choose to tie the cap to the type of harm, (e.g. personal injury, property damage, violations of confidentiality obligations).
However, sometimes that parties may agree that certain types of harm should not be limited. These “exceptions” put the parties in the same position they would have occupied if there was no limitation of liability provision in effect. For example:
- exposure for violations of intellectual property (copyright, trademark, trade secret, patent) or proprietary rights (right of publicity, right of privacy, contractually-defined proprietary information)
- in the event of an obligation to indemnity and defend for 1) breach of intellectual property representations, and/or 2) third party intellectual property or proprietary rights
- in the event of an obligation to indemnify because a party didn’t have the right to provide data or information
- in the event of an obligation to indemnify and defend for non-compliance with data security standards
- exposure for violations of confidentiality obligations
- personal injury or property damage due to negligent acts or omissions
Businesses that rely upon limitation of liability clauses should periodically reexamine those clauses. Questions that you should be asking include: “what’s my maximum recovery if the other party breaches,” and “what’s my maximum liability if I breach?”
These are only effective if enforceable, that’s why drafting is key. According to many courts, following certain drafting guidelines will help reduce the likelihood that a limitation of liability clause will not be enforced. Such guidelines include:
- Make the clause conspicuous: set the clause in bold face print or underline or otherwise place the clause apart from the rest of the text on the page on which it appears so that the other party is aware of its existence.
- Make the language clear and concise: make sure that the clause is concise and unambiguous as it relates to the contract as a whole.
- Identify specific risks: be specific in identifying the types of damages you think should be excluded.
- Negotiate the clause: discuss the clause with the party that is signing the agreement and negotiate if there is a discrepancy.
- Retain drafts of revisions: keep drafts of any revisions made to the limitation of liability clause so that you have proof that the clause was negotiated.
- Add language stating that these damages are not recoverable even if they were, or should have been, foreseeable or known by the breaching party.
- Recite that the limitation of liability clause is an agreed benefit of the bargain, and that it remains in effect even if any remedy under the contract fails of its essential purpose.
- Consider including a liquidated damages clause for specific breaches, which would replace a damages claim.
DISCLAIMER: THIS IS NOT LEGAL ADVICE. Please consult qualified attorney to discuss your specific situation.
If you are concerned about how to tighten your contracts, we may be able to help. We can review your contracts, your business practices, and advise on whether there is room for improvement.
Please contact us for a no-fee, no-obligation consultation. (866) 734-2568 David [at] adler-law.com
Contracts for Interior Design Professionals
This crash course on legal contracts is designed for interior designers who are drafting a contract for the first time or wanting to make an existing one airtight.
There’s a reason you became a designer, and it probably didn’t have anything to do with lawyers and contracts.
You’re the expert in color, fabric, floor plans, and furniture schemes, not intellectual property and arbitration provisions. If you’re already confused, don’t fret. This crash course is designed for those drafting a contract for the first time or wanting to make an existing one airtight. Led by David Adler, an actual lawyer who understands the ins and outs of the design industry, this workshop will cover the clauses you need to protect yourself in the unfortunate event that something doesn’t work out as planned. Clients can be difficult enough. Don’t let legal trouble slow you down.
In this class, you will learn how to:
- Define what you are doing for your client, as well as NOT doing for them
- Make sure you get paid on time and in full
- Protect yourself against outside factors that may affect cost and ability to complete a project
- Give yourself a way to get out of your contract if things aren’t working
By the end of class, you will have:
- A basic understanding of key contract terms and the reasons as to why they are there
- A basic client agreement that you can use or customize
The Instructor, David Adler, is an attorney, nationally-recognized speaker, and founder of a boutique law practice focused on serving the needs of creative professionals in the areas of intellectual property, media, and entertainment law. He provides advice on choosing business structures, protecting creative concepts and ideas through copyright, trademark, related intellectual property laws and contracts, and structuring professional relationships. He has 17 years experience practicing law, including drafting and negotiating complex contracts and licenses with Fortune 500 companies, advising on securities laws (fundraising) and corporate governance, prosecuting and defending trademark applications, registrations, oppositions, and cancellations before the US Patent & Trademark Office (USPTO), and managing outside counsel. Currently recognized as an Illinois SuperLawyer® in the areas of Media and Entertainment Law, he was also a “Rising Star” for three years prior. He received his law degree from DePaul University College of Law in 1997 and a double BA in English and History from Indiana University in Bloomington, Indiana. Outside the practice of law, David is an Adjunct Professor of Music Law at DePaul College of Law, formerly chaired the Chicago Bar Association’s Media and Entertainment Law Committee, and is currently a member of the Illinois State Bar Association Intellectual Property Committee.
Do you work with start-up companies and need a basic understanding of the various intellectual property issues that can arise?
I will be co-presenting in this online seminar that will help you:
- understand the trademark and copyright problems your client may encounter with branding;
- learn how to protect your client’s branding once established;
- familiarize your practice with patents, including what they protect, timing, and strategies to prevent inadvertent loss of patent rights before filing the application;
- understand trade secrets and the importance of non-disclosure and confidentiality agreements;
- recognize intellectual property issues relating to technology, including open source code and the cloud;
- establish a proactive approach toward intellectual property ownership between cofounders, employees, and vendors; understand business names, domain names, promotional issues, and website content concerns.
The program qualifies for 1.5 hours MCLE credit.
I would like to personally invite you to attend the upcoming Law Ed program titled, “Identifying Intellectual Property Issues in Start-Ups,” which I will be co-presenting via live webcast on Tuesday, May 27th.
Presented by the ISBA Business Advice and Financial Planning Section
Co-Sponsored by the ISBA Intellectual Property Section
Fifield v. Premier Dealer Services, Inc.
The plaintiff in this declaratory judgment action had been employed by a subsidiary of an insurance company that marketed finance and insurance products to the automotive industry. After a sale of that business, plaintiff’s employment was terminated, but he was offered employment conditioned upon his acceptance of an “Employee Confidentiality and Inventions Agreement” (the agreement) which included non-solicitation and non-compete provisions. The agreement states in pertinent part:
“Employee agrees that for a period of two (2) years from the date Employee’s employment terminates for any reason, Employee will not, directly or indirectly, within any of the 50 states of the United States, for the purposes of providing products or services in competition with the Company (i) solicit any customers, dealers, agents, reinsurers, PARCs, and/or producers to cease their relationship with the Company *** or (ii) interfere with or damage any relationship between the Company and customers, dealers, agents, reinsurers , PARCs, and/or producers *** or (iii) *** accept business of any former customers, dealers, agents, reinsurers, PARCs, and/or producers with whom the Company had a business relationship within the previous twelve (12) months prior to Employee’s termination.”
Plaintiff successfully negotiated with Premier a provision that the restrictive covenants would NOT apply if he was terminated without cause during the first year of his employment (the first-year provision). Three months later, plaintiff resigned, began working for a competitor and sued to have the restrictive covenants held unenforceable stating that plaintiff had no access to confidential and proprietary information. The trial court held that the restrictive Covenants were unenforceable for lack of “consideration” – a legal term of art that generally means a bargained-for exchange of value. The appeals court affirmed.
Defendant argued that the non-solicitation and non-compete provisions were enforceable because the offer of employment was adequate consideration, there was a mutual exchange of promises (employment in exchange for restrictions), and the covenants were pre-employment, not post- employment. Defendant further argued that “the purpose of Illinois law regarding restrictive covenants is to protect against the illusory benefit of at-will employment” which was “nullified by the inclusion of the first-year [non-enforcement] provision in the agreement.”
Plaintiff countered with the argument that the provisions in the agreement are unenforceable because Illinois law requires employment to continue for a substantial period of time and that “Illinois courts have repeatedly held that two years of continued employment is adequate consideration to support a restrictive covenant…regardless of whether an employee is terminated or decides to resign on his own.”
The appellate court agreed with plaintiff citing Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728 (2008) which held that the promise of continued employment in the context of post-employment restrictive covenants may be an illusory benefit where the employment is at-will. “Illinois courts have held that continued employment for two years or more constitutes adequate consideration. Id. at 728-29.”
The Fifield decisions has already generated a great deal of discussion from corporate board rooms to legal blogs. Unfortunately for businesses and their lawyers, the case leaves many unanswered questions.
For example, the court does not discuss whether the outcome would have been different if the employee were a high-level executive with immediate access to a wide range of highly sensitive confidential and proprietary information. At best,mother court simply mentions the plaintiff’s allegations that he had no access to such information.
Another area of uncertainty impacts start-up and early stage businesses. Very young businesses are often highly dynamic and early employees have access to a broad swath of the company’s Intangible assets such as business and revenue models, marketing plans, computer software and hardware and prospective customers, regardless of whether they serve a customer service function or “C-suite” executive function. The requirement that an employee have two years continued employment before a restrictive covenant becomes enforceable ignores the very real dynamic of start-up companies.
Lastly, an important question that went unanswered is whether the employer can offer some other “consideration” besides two years continued employment. For example, is there a pure monetary consideration that would support enforcement of the covenant? What if the covenant only lasted as long as the period of the departing employee’s employment?
If you have restrictive covenants in your agreements with employees, it is strongly recommended that you meet with your lawyer to discuss the impact of this case on these agreements and your business. At the very least, you should carefully review your non-compete and non-solicitation agreements to see if they are supported by adequate consideration. If you have questions or concerns, or just don’t know how to begin, feel free to contact the lawyers at Leavens, Strand, Glover & Adler for a free, in-person or over-the-phone consultation. You can also email the author here: firstname.lastname@example.org.