Business owners often wonder if it is really necessary to hire a lawyer to analyze and counsel related to certain opportunities and risks facing their business. The hesitancy of business owners is understandable, since legal fees can quickly accumulate and short-run returns are not always immediately evident.
A good lawyer, however, works in partnership with a client to achieve objectives and identify risks in a manner that allows the business to maximize its long term earning potential while minimizing its risk exposure.
Often business owners struggle with which portions of their business operation they should retain legal counsel for, recognizing that lawyers are a cost center. Most small business owners elect not to have lawyers review each and every contract of the business in an effort to avoid such legal fees. While this makes sense from a cost-control standpoint, it’s often advisable to have a business’s legal counsel review the key contracts of the organization.
In November, the Michigan Court of Appeals rendered a decision that emphasizes the need for a business to regularly have its most important contracts reviewed. The case, captioned French v. Ben’s Super Center, Inc., involved the purchase by plaintiff John French Jr. of an outdoor wood furnace. Within three weeks of the installation date of the furnace, it was clear the furnace did not work properly. After a series of failed attempts to provide for the repair of the furnace, Mr. French filed a lawsuit against Ben’s for violation of warranties set forth by law and violations of the Michigan Consumer Protection Act.
Under Michigan law, certain warranties such as the implied “warranty of merchantability” can be excluded or modified by contract. However, the exclusion of the warranty of merchantability must be drafted in the manner provided for by applicable law. In this case, the court found the manufacturer had tried to generally disclaim all warranties apart from those specifically given within its product handbook by stating “no other warranty is expressed or implied.” The court found the foregoing language was not sufficient for disclaiming the warranty of merchantability.
Violating the implied warranty of merchantability also triggers liability under other statutes, including the Michigan Consumer Protection Act and the federal Magnuson-Moss Warranty Act.
Ultimately, the violation of this warranty proved to be quite costly for Ben’s. The Michigan Court of Appeals upheld the damage award to Mr. French of the $12,000 contract price for the furnace plus costs which were in excess of $25,000 following the appeal of the case.
While Mr. French brought other claims in addition to the claim for a breach of the warranty of merchantability, Ben’s could have avoided liability pursuant to the warranty of merchantability claim simply by having drafted a better contract. The charges incurred by Ben’s for hiring a lawyer with expertise in consumer products and the Uniform Commercial Code would have been substantially less than the damages incurred in the lawsuit. Further, if other similar claims are lurking for products sold by Ben’s during the same timeframe, potential liability exposure may exist.
The upshot is sometimes it pays to have a lawyer review contracts before litigation commences. The cost of review is likely to be substantially cheaper than protracted litigation.
Is the review of your business’s key contracts among your New Year’s resolutions? You should consider it.