Sunday, November 27, 2011

Drafting the Legal Disputes Provisions of a Contract

Often parties negotiating an agreement are quick to gloss over or even ignore the importance of the several provisions that address the rights of the parties in the event of a dispute.  It is not unusual for the parties to spend a great deal of time negotiating the substantive terms, and seemingly pay little attention to the dispute related clauses.  It is unclear if this a result of deeming these provisions less important because they are generally at the end of the the agreement or because the parties fail to recognize that these clauses can (and should) be negotiated to arrive at agreed terms just like the other important provisions of the agreement.

There are several provisions of a contract that should be considered as falling under the umbrella of dispute-related clauses.  Therefore, for purposes of this post, I am referring to (1) Governing Law clause, (2) Forum selection, namely the legal body where the action will be heard, such as the court, mediation, or arbitration, (3) Venue, (4) service of process, (5) attorney's fees and costs of litigation, and (6) Remedies.

1.  Governing Law:  The parties have a right to choose the law of what state, or if applicable, of what country, applies to the interpretation of the agreement and any disputes arising under the agreement.  If both parties are from New York and or the performance of the agreement is to be in New York, then agreeing that New York law should govern the agreement is fairly clear.  But, what if one party is from New York, the other is from California, or performance of the contract in in yet another state, then there may be conflicting viewpoints from each party as to the law a party may prefer.  The laws of one state can differ from the laws of another state on material issues, and thus before agreeing to the application of the laws of a state (or country), it is essential to understand if such laws will adversely affect your rights and obligations.

2.  Forum.  Consider forum in terms of what body will have the authority to hear and adjudicate the dispute.  Generally, the parties can choose between having the dispute heard by a court (provided it has legal  jurisdiction over the claim) or choose an alternative dispute resolution (like mediation and arbitration) before a named dispute resolution institution (such as the American Arbitration Association).  Lawyers can argue all day about what forum is preferred for what type of claims, but in my view the decision depends on the nature of the underlying contract and the potential claims that could arise thereunder as certain claims/contracts are best handled by a court while others are well-suited for arbitration.  Thus, do not simply agree to "arbitrate" all disputes because you have heard it is less expensive and results in a faster resolution of the claims.  Instead, careful consideration should be given to such issues as what is the best forum in light of the nature of the contract, the parties, and the likely disputes that could arise.  And, as a word of caution, if you agree to arbitration, make sure the arbitration provisions are well-drafted as there are a number of issues that should be addressed, including the arbitral body, applicable procedural law, how many arbitrators, how costs are shared, right to seek injunctive or other equitable relief, and enforcement of the final award.

3. Venue.  Decide not only what body is to her the dispute, but where it should be heard.  For example, if you just state the courts of New York will have jurisdiction, then you could end up litigating the issue in New York City (because the plantiff is headquartered there) even though you live in Buffalo.  The simple fix is include a venue provision that expressly refers to a court or arbitral institute located in say, Buffalo, New York, if that is where you prefer and the other party agrees.  On the other hand, do not automatically believe that where you operate or reside is the preferred jurisdiction for adjudicating a dispute.  Take, for example, a contract entered into with a party from another country.  Just because you live in New York and the other party is located in a foreign country, it does not mean you always need to fight vigorously to have New York as the venue for any claims.  In some circumstances, like enforcement of a promissory note, it may be better to have the foreign venue and governing law because it may be very difficult to enforce a New York State judgment in the foreign jurisdiction as opposed to enforcing the judgment in place where it was rendered.  The point here is not to suggest in this post what is the preferred venue for each type of contract or potential dispute, but to realize you need to think through the venue clause as carefully as the financial or other terms
of any agreement.

4. Service of Process.  Notwithstanding the fact that state, federal and foreign country laws dictate methods for service of process in connection with a lawsuit, the parties can agree to a particular method in the agreement.  By way of example, consider including a (non-exclusive) right to serve a person by mail as it can be a lot less costly and much simpler than arranging for other methods of service.   If it turns out the laws of a foreign country require service under expressly defined procedures, then follow those rules, but if there is no prohibition, then you may have saved yourself substantial costs and time by providing for an alternative service method in the contract.

5.  Attorney's Fees/Costs.  Like it or not, under the U.S. system, in all but a few situations (for example, where provided by statute) each side is responsible for its own costs, including attorney's fees.  However, the parties can alter this rule and instead require the loser pay the prevailing party its costs and fees.

6. Remedies.  The contract can include provisions detailing specific remedies a party may seek in the event of a breach.  While the prevailing party has a right to any damages it proves, the agreement may also address equitable remedies (like, injunctive relief), a right to demand specific performance or include a liquidated damages clause.  

Clearly, the dispute related provisions in any agreement should be carefully reviewed.  If a contract does not include such provisions, insist that they be incorporated into the agreement before you execute it.  Do not just assume these clauses are boiler plate only to be confronted with very unfavorable dispute related provisions if a legal issue arises down the road.

Disclaimer:  The discussions in this blog do not constitute legal advise nor create any attorney-client relationship.  You are urged to seek the advice of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.



No comments:

Post a Comment