Contract Clauses That May Assist Your Business
Many contracts contain clauses that control what happens when a disagreement or dispute arises between the parties to the contract. Dispute-related clauses include mediation, arbitration, attorney's fees, choice-of-law and forum-selection. Arizona courts generally uphold such clauses, following a policy of allowing parties to freely draft their own contracts, as long as the clauses are knowingly incorporated into the contract.
Because of the time and expense involved in traditional court proceedings and litigation, businesses are increasingly including clauses in their contracts which specify some form of "alternative dispute resolution" or "ADR." The clauses may specify mediation, arbitration or a combination of these ADR processes in an attempt to avoid litigation. Clauses for attorney's fees, choice-of-law and forum-selection may be an advantage to your company in the event of litigation.
Mediation Clauses
Mediation is a form of dispute resolution where the power to resolve the dispute remains with the disputing parties themselves. Mediation is not like arbitration or litigation in that it is non-adversarial: the object is not to win, but to arrive at a mutually acceptable compromise. Mediation is particularly appropriate for valued, on-going relationships. For example, a business may have a dispute with a key supplier, distributor or valued employee.
Mediation is, however, one step removed from unassisted negotiation between the parties themselves. A trained mediator is present to facilitate an agreement by exploring potential resolutions and helping to draft a final, binding contract when the parties reach an agreement. Throughout the process, the mediator remains neutral. Signed agreements reached in mediation are as binding as any other contract. If the parties cannot reach an agreement, they may be forced to pursue arbitration or the courts.
Although mediation clauses are not as common as are arbitration clauses, businesses may want to consider requiring mediation before arbitration. The minimal time invested in the less-formal negotiation and mediation processes may avoid greater legal fees and costs in arbitration or litigation.
Arbitration Clauses
Contract provisions requiring that any dispute be resolved by arbitration are now very common. While in mediation a neutral third party is present only to facilitate an agreement, in arbitration, an impartial third party or panel holds a hearing and renders a decision. Arbitrations employ a streamlined process and the rules of evidence are relaxed. Resolution by arbitration is generally quicker than litigation in court and often less expensive. The hearing usually can be scheduled sooner and the hearing may last only an afternoon, or a couple of days. Sometimes the proceedings can be handled without the need for lawyers. Unlike most civil court proceedings, arbitration proceedings can be kept confidential.
A common "boilerplate" arbitration clause found in contracts specifies that "any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules.” Other contracts relating to a particular trade may specify arbitration under services provided by a trade association. For example, the New York Stock Exchange and the National Association of Securities Dealers provide arbitration services for securities cases.
Attorney's Fee Clauses
Initiating or defending a proceeding over a disputed contract can be costly. The parties may recognize that the rights set forth in the agreement might not be worth the legal fees and costs of having to enforce or defend such rights in a vigorously-contested dispute. Contracts often include clauses stating that the prevailing party in any litigation arising out of or relating to the contract will be entitled to an award of their attorney's fees and other legal costs.
Although Arizona law generally allows attorney's fees to be recovered by the prevailing party in "any contested action arising out of a contract," using an attorney's fee clause could prove important if the particular type of litigation brought were found to fall outside the nuances of interpretation of the statute. Also, the attorney's fee clause can additionally provide for recovery of post-judgment attorney's fees and costs to collect or enforce an award or judgment.
Choice-of-Law Clauses
Because courts in each state may decide certain issues differently, a "choice-of-law" provision may be inserted into a contract to insure that a court applies a certain state's law to any dispute related to such contract. Corporations will sometimes select Delaware law to govern contracts involving corporate law issues because of business oriented state statutes and a large body of corporate cases have been decided in that state. The decisions provide some degree of certainty as to how courts applying Delaware law would decide similar issues in the future.
A choice-of-law provision could determine the outcome of a future lawsuit. Also, under certain states' law, the amount and types of monetary awards for injury may be limited. For example, the ability to obtain "punitive" awards in addition to compensation for actual losses varies from state to state.
Forum-Selection Clauses
While a choice-of-law provision may govern which state's law will apply, a forum- selection clause controls where the dispute must be brought. For example, a forum-selection clause may specify that disputes must be brought in Arizona, or more particularly, in Maricopa County. These clauses are usually upheld if the clause was the result of fair bargaining, not the result of fraud, reasonable in application at the time of the lawsuit and will not deprive the litigant of "his day in court." Thus, while the clause should not be drafted into a contract to deprive potential litigants of an opportunity to bring valid claims, if fairly bargained for, one party may genuinely seek to secure a litigation forum that will be convenient to that party (even if it is inconvenient to the other party). The ability to bring or defend a lawsuit close to home can have a tremendous impact on the costs of litigation, the use of legal counsel that a party is familiar with, and other strategic issues.
If a dispute arises pursuant to a contract, the inclusion of dispute related clauses as discussed in this article may have a material impact on the outcome of the dispute. Each party to a contract should seek the advice of legal counsel to assess whether dispute-related clauses are necessary in the contract, and how such clauses impact each party.