Draft Your Contract

Seven Tips for Crafting an Effective Arbitration Clause (Part 3 of 3)

Posted by on May 28, 2015 in Arbitration, Draft Your Contract

So you’ve decided that arbitration is preferable to traditional court litigation. It’s time to spell that out in your contract. That means crafting an effective clause that will maximize the advantages of arbitration (see Article 1) while minimizing the risks and disadvantages (see Article 2). Whether you are negotiating a complex deal with another sophisticated party, or creating terms and conditions applicable to all your customers, here are seven tips to craft an effective arbitration clause. Make it Mandatory: Make it clear that arbitration is not optional. Avoid language like “the parties may submit their dispute to arbitration.” Define the Scope: If you are like most parties, you want the arbitration clause to have the broadest scope possible. Use simple, uncluttered language like “any dispute related to this Agreement.” But if you think a certain matter should be excluded, be careful. A carve out can increase the likelihood that you may later find yourself fighting separate battles involving overlapping issues, which can then lead to inconsistent results. As a corollary, also consider whether you want a judge or the arbitrator to decide if a certain dispute is covered by the arbitration clause. Choose Your Organization And Rules: Effective arbitration clauses usually specify both the organization administering the arbitration and the procedural rules applicable to it. For example, JAMS and AAA are perhaps the two best known and widely used organizations. Both of those organizations offer a variety of procedural rules the parties can elect based upon their circumstances. For example, if you are likely to encounter small-dollar disputes with individual customers, you would be wise to explicitly reference one of the sets of streamlined rules intended for those situations. Otherwise, you might consider electing one of the many sets of rules applicable to certain industries, such as construction, telecommunications, or real estate. Location: If you anticipate that your dispute will require a live hearing before the arbitrator, clearly state where you want that hearing to be held. Arbitrator Selection and Fees: If not already determined by the rules you elect, make sure the arbitration clause addresses the following questions: (a) will there be one arbitrator or a panel of three? (b) how is the arbitrator selected? and (c) who is responsible for paying the arbitrator’s fees? Consider Express Time Limits: Specifying clear time limits for the arbitration can avoid unnecessary delays. For example, if you want to require a mandatory period of negotiation before either side can initiate arbitration, then limit that period to a certain number of days. You might also consider specifying certain time limits applicable to the arbitration itself so that the proceeding stays on course toward a speedy resolution. Class Arbitration Waiver: If your arbitration clause is part of a standard set of terms and conditions equally applicable to numerous transactions and parties, then you should heavily consider including a class arbitration waiver. Essentially, this language states that the other party (typically an individual consumer) waives any right to pursue arbitration involving any class action claim. Similarly, this language should also state that the arbitrator has no authority to conduct any type of class or other collective proceeding. Why is a class waiver important? Because for all its benefits, arbitration is often not the best forum to handle the complex mechanisms and issues of a class action. In addition, class actions typically expose the defendant to enormous financial and reputational risk. When the stakes are that high, courts tend to be the best forums to resolve a dispute. Unlike arbitration, courts usually offer enhanced procedural safeguards, as well as a far more robust appeals process...

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Are You Sure You Want an Arbitration Clause? (Part 2 of 3)

Posted by on Feb 27, 2015 in Arbitration, Draft Your Contract

Many business people, and even some lawyers, take it as an article of faith that any contract is improved by including an arbitration clause. If you ask them why they think a contract should contain an arbitration clause, you will probably hear something like: “because arbitration is quicker and cheaper than going to court!” Is this true? Yes, it can be. Is it always true? No, not by a long shot. Many people assume that simply including an arbitration clause—any arbitration clause—in their contract means that they will automatically gain the main perceived benefits of arbitration: quicker and cheaper dispute resolution. To paraphrase Marshall McLuhan, this is yet another assumption that has outlived its uselessness. In fact, a poorly drafted arbitration clause can have the opposite effect. Bad arbitration clauses tend to inflict extraordinary delay and expense because such clauses often result in prolonged litigation over what the clause itself means. For example, if the arbitration clause says nothing about class arbitration, is class arbitration permissible or not? Similarly, who resolves a dispute over whether or not a certain claim is covered by the arbitration clause: a judge or the arbitrator? These pesky questions are not minor skirmishes. They are threshold battles whose outcomes will define the entire course of the arbitration proceeding to follow. Depending on the circumstances, these preliminary issues can prolong a dispute for months. When the stakes are high enough, we have even seen these issues stretch out disputes for years while the parties churn through a morass of dueling proceedings and appeals. All the while, litigation expenses continue mounting while the underlying merits of the dispute remain virtually untouched. Even properly drafted arbitration provisions can present enormous danger. If an arbitrator rules against you, it will be very, very hard to overturn his ruling. Why? Because unlike a decision from a judge or jury, an arbitrator’s ruling cannot be overturned on appeal except for a few narrow, specific reasons, such as if the proceeding was rigged by fraud, arbitrator bias, or the like. And in some jurisdictions, an appellate court cannot overturn an arbitrator even if the arbitrator blatantly disregards the law. This is the risk you take when you bargain for the benefits of expedited, private litigation. So how can you minimize the likelihood of either unintended litigation or a bad ruling with no way out? First, drop the assumption that arbitration is a guaranteed time and money saver. It would be great if that were always true, but it’s not. Arbitration can achieve those goals, but not always. Instead, consider the pros and cons of arbitration [hyperlink Art. 1] and invest some time considering how those apply to your specific circumstances. All things considered, if arbitration does not look like a net gain for you, then do not insist on it. Leave it to the courts to settle any disputes. Sure, they may not be perfect, but they are pretty good at it overall. On the other hand, if you decide that arbitration is a compelling alternative to traditional litigation, then by all means include an arbitration clause in your document. However, do not rely on a generic form or some unconsidered boilerplate. Resolve to craft an arbitration clause that will establish a coherent and informed framework for resolving disputes. Calibrate that framework to your specific business needs and risks. We’ll take on this task in the third part of this series and offer some creative and practical drafting tips to achieve that...

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Arbitration & Mediation: Know the Basics (Part 1 of 3)

Posted by on Feb 18, 2015 in Arbitration, Draft Your Contract, Mediation

Most of you know arbitration and mediation as two different kinds of alternative dispute resolution. Some of you have even participated in one or perhaps both. But what exactly are they? How do they differ? And which one is the best fit for your business needs? Arbitration = Private Litigation Arbitration is essentially private litigation that results in a binding, final decision. Instead of a judge or jury deciding your case, the parties select a neutral arbitrator who renders a decision. The parties typically agree to arbitrate based on a clause in an agreement, usually long before a dispute arises. Advantages: When deployed correctly, arbitration can be cheaper and faster than litigating in court. Arbitrations also typically afford the parties a higher level of confidentiality than is otherwise available in a court of public record. And to some degree, arbitrations can be less formal. Disadvantages: Ironically, a bad arbitration clause can be worse than none at all. A poorly drafted arbitration clause can inflict enormous expense and delay on the parties as they fight over what it means, and the cost of such a battle can negate the entire purpose of arbitration. Additionally, arbitration awards are appealable only in very narrow, specific circumstances. So if the arbitrator rules against you, virtually any appeal will be a very tough, uphill battle with a slim chance of success. We’ll discuss these dynamics in more detail in a future post, Are You Sure You Want an Arbitration Clause? Mediation = Facilitated Negotiation Mediation is a process where the parties to a dispute meet to negotiate and explore whether they can agree on a resolution. A neutral mediator, usually selected by the parties, facilitates the parties’ negotiations, but he has no authority to force the parties into settlement, nor is it his job to predict how a judge or jury might ultimately rule on the matters in dispute. Instead, a mediator’s role is to assist the parties as they seek their own, voluntary resolution of their dispute. Advantages: Perhaps the biggest benefit of mediation is control. Parties who mediate retain control of the outcome of their case, instead of handing that control to a judge or jury. When parties feel like they control their own destinies, they also tend to feel a higher sense of satisfaction with the eventual resolution. As Shakespeare said, “He is well paid that is well satisfied.” And of course, a successful mediation will resolve a dispute at a fraction of the cost of a full-blown trial. Disadvantages: Mediation is often not a productive exercise until the parties have already expended significant time and money litigating. Many business disputes start out with muddled issues and murky facts. Until the issues are crystallized and the facts are illuminated, parties are understandably reluctant to mediate. Why negotiate when you do not fully know either your own or your adversary’s strengths and weaknesses? Mediation also tends to be an ineffective tool when the dispute itself is binary, i.e. where only one of two outcomes is possible. When the outcome must be either “whole hog or none,” that doesn’t leave much space to...

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Terminating Your Contract: Things to Remember Part 2

Posted by on Mar 10, 2014 in Draft Your Contract, Practice Pointers

Let’s continue the discussion on issues to consider with regard to the termination of your contract. Most contracts have provisions governing what will constitute a breach or default and what the parties’ respective rights and obligations are in the event the contract is terminated for such breach or default (“termination for cause”). Right to Cure It is common in termination for cause provisions for the terminating party to allow the defaulting party to have a period in which to correct the default. This is typically called a “cure period.” Determining a reasonable cure period is dependent on the subject matter of the contract, the nature of the default and the parties’ respective bargaining powers. For example, if a party defaults in a service obligation under a contract, the provision may state that the defaulting party has ten (10) days to re-perform the service in accordance with the contract before the terminating party may officially terminate the contract. Notice One element of having the right to cure a default before the other party may terminate the contract is the concept of notice. Notice is important because it is a means by which the parties communicate to each other what is deficient or lacking in the other’s performance. Without adequate notice of what the breach or default is, it is difficult or impossible for the defaulting party to take full advantage of the cure period. Contracts typically have provisions stating when and how a party must notify the other of a default. The notice period is usually congruent with the cure period, such that the terminating party must provide a certain amount of prior notice of the default, coupled with providing the defaulting party the opportunity to cure the default, before the termination right is triggered. There are other matters to consider when dealing with termination issues, and these are just a few which pertain to termination for default. If you’re in the process of terminating or drafting a contract, please contact an attorney to discuss the particular termination issues that may be encountered in regard to your...

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When Disasters Plague Your Contract

Posted by on Jan 6, 2014 in Draft Your Contract, Limiting Liability

Part of the contract drafting process entails a bit of forward thinking: trying to identify and minimize ahead of time those things that could go wrong. If you’re new to the business world, or you’ve just entered into a new sector or started a new business, it can often be difficult to predict the downfalls your business may face– or the downfalls the other contracting party may face. There are some risks that every business must face which are more predictable than others. For example, every business at some point can expect to have an invoice dispute with a supplier, customer or independent contractor. On the other hand, there are those risks which are completely unpredictable and therefore less controllable. In the world of contracts, these risks are often called “force majeure events,” and well-drafted contracts usually contain a Force Majeure provision dealing with how such events will affect the parties’ respective obligations during the course of the contract. Force Majeure refers to acts of God and other events which are wholly outside of the control or influence of the party. Typical force majeure events include things like floods, fires, tornadoes, hurricanes, tsunamis, earthquakes, riots, etc. While these events are pretty intuitive and it is hard to contest their occurrence being completely outside the control of the contracting party, there are some events, such as supplier bankruptcy and currency and market fluctuations which are less clear and which are often heavily negotiated. Force majeure provisions list the events which will constitute force majeure and set forth the parties’ respective obligations or release from obligations if the force majeure event occurs. For example, a force majeure provision may excuse a supplier from complying with a deadline or delivery date. As a startup company or entrepreneur, be cautious when you see a provision dealing with force majeure and, if you’re drafting an agreement, ask yourself how your contractual relationship may benefit from including a provision to help manage uncertainties. If you are interested in learning how to protect against risk, including force majeure risk, please contact an attorney or have an attorney review your agreement before you sign...

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Your Liability Can Have Limits #3

Posted by on Aug 22, 2013 in Draft Your Contract, Limiting Liability, Practice Pointers

We’ve talked about 2 ways people limit liability in a contract (waiver of consequential damages and limitation of liability provisions). Another way you or someone you’re negotiating against can limit contractual liability is by including a provision that limits the time in which a party can bring a claim under the contract—i.e. shortening the statute of limitations that otherwise would apply. I know that sounds great, but: “what’s a statute of limitations”? A statute of limitations is essentially a law which establishes the maximum time after an event has occurred within which a party may commence legal proceedings. That is to say, a statute of limitations is a law that basically tells people how long they have to file suit. Statutes of limitations can vary depending on the type of claim or issue at hand. For example, in the State of Tennessee, the default statute of limitations for breach of contract claims is 6 years, meaning if 6 years has passed since the other party breached your contract, you probably can’t sue him or her for breach of contract (unless your contract says otherwise). The Tennessee Code sets forth statutes of limitations for many types of actions, including defamation, injury to personal property, products liability, medical malpractice, and the list goes on. Not only is it important to know the statute of limitation which may apply to your potential legal claims in any given situation, you should remember that you can often limit these statutory limitations contractually. It is common for contracts to include a provision that shortens the default statute of limitations to 3 years, 2 years or even 1 year. I’ve even seen a contract that attempted to limit the period to 3 months (!). Statute of limitation provisions are often placed at the back of the contract in a “governing law,” “dispute resolution” or “miscellaneous” section. A shorter statute of limitations can really take you for surprise if you dilly-dally or delay your decision concerning whether to file a claim. Obviously, if you are providing the good or service, you’d probably want the period to be shorter, and if you’re the one buying the good or service, you’d probably want the period to be longer. If your contract doesn’t say anything about it, don’t worry: the statutory default of 6 years would kick in. Don’t be afraid of these limitations, though, because, if used correctly, they can really help both parties understand and manage their respective risks under the contract. While there may be a way to argue around the statute of limitations provision in your contract, this is one reason why you should always read the fine print carefully (*or have an attorney review your contract and advise you concerning liability matters). If possible, you want to avoid having to hire an attorney to argue why your contract provisions should be...

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