By June 26 2017
Litigation

Beware of One-Sided Contracts

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In the course of doing business, your business will likely enter into many standard-form contracts with service providers. These contracts are commonly used by providers of garbage collection, cleaning services or any number of other services. While some terms, such as the specific services provided, their price and when they will be provided, may be negotiable, typically the bulk of the contract is offered on a take it or leave it basis. The terms and conditions may be appended to the contract and typed in small, hard-to-read print. You may feel you do not have the time to review those terms and conditions, and you may be concerned about the expense of having a lawyer review them.

Certain terms in these contracts can make it difficult for your business to get out, and can lead to unforeseen liabilities. Examples of such terms are:

  • the service provider is allowed to increase the price of the services without notice;
  • the term of the contract runs for five years, and renews automatically at the end of each term for another five-year period;
  • the contract can only be terminated by the customer during a narrow timeframe, such as within 180 days but not less than 90 days of the expiry of the term;
  • if the customer wants to end the contract outside of the permitted timeframe, they are liable for liquidated damages for the value of the contract over the duration of the unexpired term.

As long as things are going well between your business and the service provider, terms such as the ones above may not trouble you. However, you may be in for a rude awakening if and when:

  • the service provider institutes a substantial price increase with which you are unhappy;
  • the services provided are unsatisfactory; or
  • you wish to terminate the contract, whether because you are closing a location, switching to a new provider or for another reason.

In the above situations, it is important to know your legal rights and obligations. Certain terms in the contract may be negotiable. Others may be legally unenforceable. For example, Canadian courts have held that a liquidated damages clause that functions as a penalty, rather than a genuine pre-estimate of expected loss, is unenforceable. This is a long-standing principle of contractual law, which was articulated by the Alberta Court of Appeal in an influential 1998 decision. Whether or not such a clause functions as a penalty is a fact-specific determination, and depends on the circumstances.  

The above principle was recently applied in a 2016 Alberta Provincial Court decision. Judge Ingram found that a liquidated damages clause in the contract of a waste management provider was unenforceable as a penalty clause. In that case, the liquidated damages clause required the customer to pay out the unexpired period of the term. Judge Ingram found that the waste management provider would achieve a substantial cost savings by not having to provide the services for the duration of the term, and that the loss of its income stream over the term was not a genuine pre-estimate of its damages.

If your business is thinking of entering into, or experiencing an issue with, a standard-form contract with a service provider, you should contact a commercial lawyer. A lawyer will can help you understand your rights and obligations, and negotiate the best resolution for your business.     

Invitation for Discussion

Our litigation lawyers are skilled in enforcement matters. If you would like to discuss this blog in greater detail, or any other business litigation matter, please contact Andrew Hill, or one of the lawyers in the Business Litigation Group at Nerland Lindsey LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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