If you are a business person working with contracts, you probably already know that lawsuits - regardless of their outcome - are expensive and time-consuming. And "alternative" dispute resolution procedures such as arbitration don't fare much better if standard arbitration clauses are used. (I use a unique arbitration clause that streamlines the process.) It's better to avoid litigation or arbitration altogether; the best way to do that is to have a contract with provisions that discourage one party from filing suit - or an arbitration petition - against the other party.
What might these anti-litigation, anti-arbitration contractual provisions be? Several come to mind:
1. A provision that in any lawsuit or arbitration between the parties, the losing party must pay the winning party's attorney fees and court costs. As Attorney Stephen Hulst points out in his Michigan Business Court Blog (9/1/2015), "It's a good piece of leverage to have, to be able to say at the outset of a case, 'you signed this contract, and the contract language is clear that you are going to pay for my legal fees and costs if I prevail in this case.' " But to be effective, this provision must be carefully drafted or there may be problems in making it stick. For example, what does "prevail" mean? To win the case by a verdict of a judge or jury? What if there is only a partial victory? Does that mean that the victorious party has "prevailed"? What if the case is settled before or during the trial but before a verdict is rendered? Did the party receiving the "benefit" of the settlement "prevail" over the party being "hurt" by the settlement? Also, unless the provision is carefully drafted, a judge may interpret it as applicable only to a lawsuit, not an arbitration.
2. A shortened period for a lawsuit or arbitration petition to be filed. If the contract is for the sale of goods, the Michigan Uniform Commercial Code permits the parties to agree to a limitations period of not less than one year after the breach. If the parties don't include this provision, the period within which legal action may be filed is extended to four years. Why does a one-year limitations period discourage legal action? Because if the legal action is not filed within one year after the breach of contract, the non-breaching party arguably has no remedy against the breaching party.
3. The requirement that legal action must occur in a particular city, county, and state. If I'm headquartered in Grand Rapids, Michigan, and I'm contracting with a company located in San Diego, California, I'll ask the California company to agree that the only proper forum to hear a dispute will be state and federal courts (or arbitration panels) located in Grand Rapids, Michigan. This provision discourages litigation because the California company will understandably be reluctant to give the Michigan firm a home-town advantage for a lawsuit or arbitration proceeding involving the contract.
4. A provision that the contract be governed by a particular state's laws. Going back to our contract between a Michigan company and a California company, I'll ask the California business to agree that the contract must be interpreted under Michigan law, not California law. The provision increases the chances that if there is a contractual dispute, the California company will hire a Michigan lawyer to represent it; this may increase the time and expense that the California company must bear to communicate with their lawyer. Avoiding legal fees is a great incentive to settle a dispute short of filing a lawsuit or arbitration claim.
5. A time restriction on invoicing, including appropriate waiver and release language. I had a client who was invoiced by a supplier several years after the goods were allegedly received by the client. A lot of the documentation proving non-receipt of the goods was archived and had to be retrieved at a substantial cost. So after that experience, I drafted a provision for my client's sales contract requiring suppliers to invoice my client within one year after the goods were shipped, and if they failed to do so, the suppliers waived their right to receive payment for the goods - and released my client from all liability to pay for the goods. While this provision has never been considered by a court or arbitration panel, again it serves as a legitimate incentive to settle a dispute without litigation or arbitration.
6. But the best way to discourage litigation or arbitration is to sign contracts written in plain language. Traditional legal jargon in contracts creates ambiguity that leads to disputes. Examples include here- and there- words such as herein and thereby, according to Joseph Kimble, a professor emeritus at Western Michigan University–Cooley Law School. "Not only are they stuffy and archaic, but they can be ambiguous," he says. "You sometimes don't know whether herein means in this paragraph or in this entire document, and there's lots of cases out there that center on the meaning of the words herein, or therein, or hereby, or thereof.”
There is no guarantee that these six steps will avoid a contractual dispute resulting in painfully expensive and time-consuming litigation or arbitration, but they increase the odds that the dispute can be resolved on a business level, without calling in the lawyers to bandy about arguments and threats that will likely create an atmosphere hostile to a prompt resolution. And those lawyers will bill their clients for those arguments and threats.
And my final piece of advice? If you and your business counterpart on the other side settle a contractual dispute, make sure that your lawyer drafts the appropriate "release and settlement agreement" (in plain language of course) so that a presumed-dead and buried controversy stays that way!
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