The Dangers of Using “Industry Standards” in Your Business Contracts

Often those drafting contracts will make reference to “industry standards” when identifying the level of quality that is expected with respect to obligations under the contract. Typical examples of such contracts include:

• Home building and other construction projects
• Creation of computer software
• Design of products or business methods
• Management and consulting agreements
• And more

An “industry standard” is a benchmark or base level that is expected in the particular industry or field. This is equivalent to the idea of the “applicable standard of care” in medicine. An “industry standard” may also refer to prices or rates charged or manner of conduct. An example might be: “Rates charged are subject to periodic increase. Service provider will not charge more than the prevailing average rate charged by those in the same or similar SERVICE INDUSTRY in San Diego.”

Sometimes an “industry standard” is explicitly referenced in a contract; but often, the idea of an “industry standard” is implicit. A house repair contract might say, for example: “Work shall be completed in a workmanlike manner.” Implicit in the phrase “workmanlike manner” is an industry standard.

From a legal drafting standpoint, there are dangers to using “industry standards” in your contracts. Here is a quick discussion.

San Diego Business Contracts: Avoiding Vague and Uncertain Terms

There are three main disadvantages to using terms like “industry standards” in your San Diego business contracts:

• Term is vague in that without more context or detail, the industry and the standards might be uncertain; example: standards for rough carpentry are different from the standards for finish carpentry which are different also from the standards of furniture making
• Term is variable and uncertain in that “industry standards” change over time
• Term requires reference to documents and information outside the “four corners” of your contract

Because of the foregoing disadvantages, if a lawsuit is filed for alleged breach of contract, the litigation has the potential to be complex and messy. Instead of reading the contract, the judge and jury will now need to read the contract AND documents related to “industry standards.” Indeed, expert opinion will likely be necessary to assist the judge and jury in determining:

• What is the “industry?”
• What are the “industry standards” now?
• What were the “industry standards” at the time of contracting and — potentially — at the time of performance?
• Did the performance match the applicable “industry standards?”

Using terms like “industry standards” in your contracts makes contracts less certain than expressly describing terms and conditions and may cause questions of whether or not a breach has occurred, and adds complexity to a litigation over the terms of the contract. Lengthy litigation is expensive; and hiring experts to determine what exactly is “industry standard” is expensive.

San Diego Business Contracts: Tips For Reducing the Disadvantages

Despite the disadvantages, sometimes it is necessary to use generalized and vague terms. For example, maybe it would make the contract too long and cumbersome to fully explicate the expected standards. Or, maybe speed is important and the parties need a quick contract. Under those circumstances, here are some tips for reducing potential risks associated with using terms like “industry standards.” In the contract:

• Identify the exact industry or profession
• Identify the exact standards being referenced — identify a book or manual, if possible, or the guidelines/standards
• Specify the issuing agency, company, or professional organization
• Indicate the time frame
• Indicate the applicable area or region or city — industry standards are often different from place to place

Call San Diego Corporate Law Today

For more information, call experienced business attorney Michael Leonard, Esq., of San Diego Corporate Law. A good business attorney can provide you and your business with guidance as to how to draft contracts that protect your market share and your profits and how to prevent damage to your business from “bad” contracts. Well written contracts help your business succeed. Call Mr. Leonard at (858) 483-9200 or contact him via email.

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