California Litigation Blog : California Business Litigation Lawyer & Attorney : Jeffrey Huron Law Firm : CA Real Estate Law & Contract Disputes

Do you skip the boring boilerplate in contracts before signing them? If so, you could be in for a big surprise later if there is a contract dispute.  Before you sign any contract, you should focus on how disputes will get resolved. You are best served if there is language that provides for each of the following: (1) mediation prior to litigation; (2) reimbursement of attorneys' fees; and (3) litigation, not arbitration.

MEDIATION FIRST: Although the majority of lawsuits are settled, it is usually after the parties have incurred substantial attorneys' fees. Mediation should occur early and often until the dispute is resolved. Your next contract should therefore make mediation mandatory before either side may file a lawsuit. Anyone who sues first, loses his or her right to recover attorneys' fees.

ATTORNEYS' FEES: You want to discourage lawsuits by ensuring that the loser pays the winner's legal fees. The fee language should be broad enough to cover any dispute arising out of or related to the contract.

LITIGATION, NOT ARBITRATION: In arbitration, you give up the right to a jury trial and an appeal. This means that your stuck with a bad decision--even an incorrect one--unless you can prove the arbitrator was biased. Arbitration is also expensive and often inefficient.

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The California Supreme Court has definitively upheld contractual obligations for payment of interest charges on late payments. Southwest Concrete Products v. Gosh Construction Corp., 51 Cal.3d 701 (1990), involved a dispute between a contractor and its pipe supplier. The supplier sued the contractor when it failed to pay after alleging the pipe was of poor quality. The supplier’s invoices contained an interest provision on late payments at the rate of 1 ½% per month (18% per year). After the jury found in favor of the supplier, the trial court awarded the supplier prejudgment interest at the contract rate of 18% per year rather than the 10% legal rate for prejudgment interest.

The issue of whether the interest charges violated the usury law establishing maximum rates of interest reached the Supreme Court.  In upholding the interest charges, the Supreme Court ruled that the law of usury applies only to a “loan or forbearance.” The contractor did not claim that the contract involved a loan, but argued instead that the interest charge provision amounted to forbearance.

The Supreme Court disagreed. Forbearance is when the creditor agrees to refrain from enforcing the debt immediately and gives the debtor more time to pay. The supplier’s invoices required the contractor to pay the interest charges on any unpaid balance after the tenth day of the following month of the date of purchase. The supplier did not agree to forbear enforcement, and the fact that it filed suit was proof that it did not agree to refrain from enforcing the debt.  Therefore, the Supreme Court found the usury law did not apply to the interest charges and upheld the trial court’s award.

If you provide services or materials, then you should include an interest provision in your contracts or invoices.

Here are two examples:

1. Late charges will be imposed on any balance remaining unpaid after 30 days computed at 1.5% per month (18% per year). Your unpaid balance is determined by taking the beginning balance of your account for each month, adding any new charges and subtracting any payments and credits made to your account. We will then multiply this amount by the applicable monthly periodic rate of 1.5% to compute the late charge for your account for that month.
2. Net 30; Interest at 1.5% per month after 30 days.

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With the economy worsening, what can you do to expedite collection of money owed to your client?  File a lawsuit and immediately apply for a right to attach order.  A right to attach order is a prejudment remedy that may be obtained on 16 court days' notice or upon 24 hours' notice in special circumstances.

Applying for a right to attach order has several advantages.  The application encourages defendants to settle by threatening to deprive them of the use of valuable assets during litigation.  The application may also trigger defendants suffering from financial hardship to file bankruptcy before you waste time and money obtaining a judgment, which then becomes worthless.

The court will issue an attachment order when (1) there is a claim for money pursuant to a commercial contract, (2) the claim is for a fixed amount or the amount can be easily determined, and (3) the claim is likely to succeed.  (Code of Civ. Proc. Section 483.010.)  The contract does not even have to be a writing; it can be an oral agreement or simply implied from commercial conduct between the parties.  This means that you can obtain a right to attach order for the breach of a loan, lease, employment contract, partnership agreement, and for non-payment of invoices for goods and services.

An attachment entitles you to attach any property held by a corporation, partnership or association.  You may also attach personal property such a bank accounts, accounts receivable, equipment and inventory, community property, negotiable instruments and securities, and money kept at a business.  (Code of Civ. Proc. Section 487.010.)  The Sheriff holds all the property seized until the case is resolved.  Because the Sheriff cannot hold real property owned by the defendant, you can record the attachment order, which creates a lien on real property owned by the defendant, preventing him from transfering ownership to another person.

Prior to applying for an attachment order, you can hire a private investigator (such as Transwest Investigations, Inc.) to locate and identify potential assets to determine whether it makes sense to seek an attachment.  Investigators charge between $500 and $1500 for such services.  A less expensive alternative is to do the search yourself, using websites, such as KnowX.  Even if you don't do your own investigation, after the court issues a right to attach order, the defendant must tell you the identity, location and value of property in which he has an interest.  (Code of Civ. Proc. Section 485.230.)

The defendant's attached property is security for the satisfaction of your future judgment.  Without an attachment, the defendant is free to conceal, encumber, and transfer any assets before you obtain a judgment.  Therefore, if you have a meritorious commercial contract claim, it is a mistake not to seek a right to attach order.

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