Any experience with a penality clause for deadlines

[Macguru]

I have some bad experience with some web agency. This joint is poorly managed and those people never meet their deadlines. Site owners also sometimes cause similar problems when we share tasks and responsibilities. Since it's the first time we do business togheter, it's hard to figure in advance. We are now considering a penality clause related to deadlines for such clients.

I have seen boilerplates on the web, and have a good idea of potential content and exceptions.

My questions are :

How will new clients, especially site owners, will react to it?
How to explain them the reasons in some diplomatic way?

[bumpaw]

Man I hope this topic gets some good play. One of my biggest headaches is getting client promised input. A time limit clause is definitely worth considering. I loose a little momentum when there is too much stopping and starting.

[stevenmusumeche]

The best way to handle this is to include a penalty clause for late projects and a bonus clause for early projects. Of course, you must set specific dates and clearly define what a "completed" project is. I've seen penalty clauses by anywhere from 5-25% of the project's total cost.

[iamlost]

Disclaimer: The following information is not "legal advice". Please consult a qualified attorney to discuss/review each contract proposal prior to acceptance.

We (myself included) commonly use the term "penalty clause" in a broader context than it's legal meaning. That may be acceptable in general terms but not in terms of an actual contract.

There are several useful contract clauses that are often overlooked:

1. should any part of a contract be found invalid a savings clause ensures that the remainder remains enforceable. Without a savings clause, an entire contract can be rendered invalid by a single invalid clause.
   
2. an attorney fees clause requires that the loser of any contract litigation reimburse the other party's attorney fees and associated costs.
   
3. a non-waiver clause ensures that allowing any non-compliance with contract terms by omission or by waiver does not affect the right to require compliance at any subsequent time. Without a non-waiver clause any variance allowed (payment terms, etc.) from the contract may be considered a valid change to the contract from that point onward.
   
4. time is of the essence clause: means that a violation of contract deadlines equals a breach of contract. Watch out for a clause saying time is not of essence: it becomes hard to enforce schedules/deadlines! Without a time is of the essence clause claiming liquidated damages for performance non-compliance may be more difficult.
   
5. a liquidated damages clause sets the damages due, or the formula for determining the damages due, prior to an actual breach of performance. Legally, this is usually considered different from a penalty clause (i.e. threat of punishment, designed to prevent a breach) and is generally more enforceable. Without a liquidated damages clause it is difficult to collect on non-performance without litigation. Note: parties in breach may claim that the clause is actually a penalty clause and punishment and therefore not enforceable.
   
6. talk to your attorney: there are many more that may apply in your circumstances.
   

There are differences between British (generally including Australia, Canada, India, and New Zealand) and American interpretation of liquidated damages and penalty but generally the following holds: penalising (punishing) a party is not an approved breach of contract remedy; making the non-breaching party "whole" (reimbursed as if the breach had not occurred) is. The entire contract could be voided if a contract clause is judged to be a penalty.

Simply put: if you have a liquidated damages clause (i.e. saying that each day without being provided content is a loss of whatever your day rate is), and you specify that it is not a penalty (except in India where they apparently do not differentiate), and the clause is obvious to all parties, it is likely to be deemed reasonable and be enforceable. If the terms are considered punishment or penalty then a court may deem them unenforceable.

Note: US courts might not enforce liquidated damage clauses the exceed the actual loss.
Note: British courts tend to enforce liquidated damage clauses regardless of actual loss so long as the original assumptions in determining the amount was reasonable. Also, if a British court invalidates the liquidated damage clause they usually allow suing for actual damages.

On (any) Breach of Contract:

1. bring the matter to the attention of the other party (by telephone call or conversation).
   
2. Summarize the conversation, concerns, and agreements.
   
3. send a copy of the summary to the other party. Keep a copy for yourself.
   
4. have your lawyer write a letter stating your concerns and asking for contract compliance.
   
5. if your contract specifies mediation or arbitration call in a mutually acceptable third party to resolve the dispute.
   
6. otherwise, the conversation summary letter and the lawyer's letter will provide a base for further action.
   

Ain't contracts fun?!

[johntabita]

I personally don't like penality clauses for this reason: If the customer is to be penalized for missing a deadline, then the same should apply to me. Now, perception is everything. If the customer perceives that I missed a deadline (even though it really may be his fault I missed it), then it does nothing but damage the relationship.

On the other hand, I share your frustration when the client misses a deadline, especially when payment milestones are attached to production deadlines and you don't get paid in time as a result.

To prevent this, I used to put a clause in my contract like so:

"If we do not receive from the Client all of the content necessary to complete the project within 45 days of the date of this contract, the remaining balance for the design and development portion of the project will be due and payable."

I now do it differently. Recently, I was advised to schedule payments independent of production milestones, such as 50% up front, 25% in 30 days and the remaining 25% in 30 more days. If a client knows that he'll be paying the full amount in 60 days, regardless if the project is completed, I think he's more motivated to make sure he's not the one holding things up. I feel that this achieves the same result without the negative connotation of a "penalty."

[Macguru]

Thanks a lot iamlost,

Very good and very well structured input from you here. I also think we sould validate all legal boilerplates with an attorney familiar with local laws. An once of prevention...

We are not at this step yet.

I was more curious about new clients reactions facing such contractual conditions.
Is their reactions a good way to gauge them?

Hello johntabita,

I dislike them too, but some clients really crossed the line. Of course such clauses works both ways.

>>Now, perception is everything.

A clear and detailled time table can prevent this. It's not part of contracts since it's developpment is part of the service. But once it's set and approved by all parties, I need minimal adjustments to it from there.

[iamlost]

How will new clients, especially site owners, will react to it?
How to explain them the reasons in some diplomatic way?

A client should expect a contract. How else do you define a business relationship? Surprise from a client at presentation of a contract proposal would give me concern about the professionalism of both them and our relationship.

I do find that most people look upon contracts as punitive clubs to be wealded from a position of strength and any clause requiring something as a threat. Mindset is a problem.

My approach (mindset) is different. I describe a business contract to some (those who look surprised at a contract proposal) clients in house building terms: <Note: example is edited; expand as required>

1. Client:
   
2. Contractor:
   
3. Timeframe:
   
4. Site:
   
   • what property is required for a building site (ie webhost)
     
   • what infrastructure: water, sewer, power, etc. (ie storage, bandwidth, etc.
     
   
   
5. House:
   
   • rooms required, layout, traffic flow (ie site architecture)
     
   • building materials, colour selection (ie html, css)
     
   • plumbing, electrical, heating, etc. (ie database, scripting, etc.)
     
   • landscaping (ie marketing)
     
   • security (security)
     
   
   
6. Finance:
   
   • mortgage (ie website cost)
     
   • draws paid to contractor (!)
     
   
   
7. Insurance:
   
   • title insurance (ie copyright)
     
   • fire, flood, etc. (ie data loss)
     
   • completion date (ie performance provisions)
     
   • quality, integrity (ie web standards)
     
   
   

I then explain that only part of a contract is actually the who, what, where, and when of construction. Another part is the insurance.

Here we (I like to involve the client if possible) walk ourselves through the entire project (the contract proposal) looking for every possible thing that could go wrong and then note (I show it already addressed in the contract) an acceptable remedy.

Occassionally there are mutually acceptable changes/additions. If a disagreement is fundamental the contract proposal is withdrawn. The important feature is that this occurs prior to work commencing so losses are minimal on both sides.

Two notes:

1. the approach is insurance (we don't expect a fire or burglary but we insure against it) not bullying (why do business in that case?).
   
2. the contract is a description of our relationship and therefore applies to both parties. For example: if the client is to supply content and is late there needs to be a remedy for me, if I am late meeting a contractual milestone there needs be a remedy for the client.
   

I have found this "home builder" description and insured mutual remedy approach readily understood and accepted by my clients.

One final comment: If you do not want remedies against your performance while expecting them of the client ask yourself: why?

[iamlost]

A clear and detailled time table can prevent this. It's not part of contracts since it's developpment is part of the service.

I totally agree with the first statement. I disagree (emphasis is mine) with the second.

I include a timeline (and milestones, if appropriate) as part of the contract. How can you claim a breach of performance of something not in the contract?

Allowance for changes to time can be included in the contract and change orders used to affect the change. Remedies may apply, depending on the contract.

It is simple: it is all in the contract.

[Macguru]

Let me give more information about the context. English is not my native language and this can sometimes be confusing, sorry. :)

We already use contracts boillerplates that we adjust according to each jobs. There is no penality clause in it yet, (or more accuratly, a liquidated damages clause since it's more like what we need here).

I was curious if any of us had some experience of clients reacting to such clauses during the negociation process.

I am running a small web marketing consultant agency, we deal with advertising, web design and communication agencies. Project management includes the development of a detailled timeline as part of the work to be done. Same thing for official texts and GFX layouts. It cannot be delivered before we agree to do it. Most of our jobs are only between 100 and 200 hrs of work. We are not building briges here. ;-)We can't spend too much time on this. On the other hand, it's easy to include each delivered goods (such as the timeline) in this clause. When we deliver a first timeline, it's up to each head manager responsibilities to check about his availble ressources before he approves it.

Let's go back to my original question :

How will new clients, especially site owners, will react to it? (liquidated damages clause)
How to explain them the reasons in some diplomatic way?