This article continues our discussion of common pitfalls in contracts that Buffington Law Firm’s Orange County business litigation attorneys have dealt with in breach of contract disputes. Breach of contract disputes are probably the most common type of business dispute. We hope that this article will help our clients and readers avoid these pitfalls. If you have a breach of contract issue, we invite you to call and speak to one of our experienced Orange County breach of contract attorneys as a free legal consultation.
Part 1 of this article discussed hostile venue and jurisdictional clauses as a common trap that a party will often try to slip into a contract.
1. Jurisdictional and Venue Clauses that specify foreign countries. An extreme example of a hostile venue and jurisdictional clause sometimes involves a contract which provides, in a deal involving a US company buying a foreign product, that “any dispute concerning any party’s performance under this contract shall be subject to the laws of, and adjudication shall be administered by, the courts of [European country].” A clause like this usually makes it next to impossible for an American company to economically sue for breach of contract. Not only will it be necessary to find and hire a foreign attorney, but breach of contract and warranty laws in European and other foreign countries can be, to put it mildly, strange and interesting.
2. Attorneys Fee Provisions. An attorney fee provision, which provides that in the event of a lawsuit that the loser must pay the winner’s attorney fees, often sounds like a good idea. Unfortunately, often it is not. California’s Code of Civil Procedure, like most states, provides that under most circumstances each side pays its own attorney fees regardless of the outcome. [Cal. Code Civ. Proc. Section 1021]. This is known as the “American Rule.” (By contrast, in Great Britain the loser usually pays the winner’s attorney fees.) Contract drafters often insert attorney fee provisions into a contract without much thought. This can vastly increase the dangers of litigation. In moderate sized contract disputes if the lawsuit lasts any length of time sometimes the attorney fees that are at stake are as much money as the parties are fighting about! It happens often. The decision as to whether to include an attorney fee provision is a very important one that we recommend be made after considerable thought and consultation with counsel.
3. Arbitration Clauses. Buffington Law Firm’s commercial litigation attorneys have broad experience in arbitrating breach of contract, investment, employment, and other types of cases. We have learned that the decision to arbitrate is an important one, and we believe that this decision requires careful thought by the parties in consultation with their attorneys.
Contract drafters often include an “Arbitration Clause” in a contract without much thought, reasoning that “litigation is expensive” and that Arbitration will help lower these costs. In fact, the decision to include (or not include) an Arbitration Clause in a contract is one of the most far-reaching decisions that the parties can make. If one of the parties finds it necessary to sue on the contract, the Arbitration Clause will change many things about the litigation. Firstly, it is a myth that Arbitration is always less expensive than litigating in court. In commercial and many other kinds of arbitration, there is about as much discovery and law and motion as there is in ordinary court cases, and many Arbitration Clauses specify that discovery will be consistent with the Code of Civil Procedure. Even for relatively small cases, Arbitrator fees can be expected to cost a minimum of $25,000 and often they are much more than this. Every time one side or the other brings a motion (i.e. a discovery dispute, Motion for Summary Judgment, etc.) the Arbitrator will charge several thousand dollars to hear and rule on the Motion. Arbitrators normally charge, as of 2013, $450/hour and up. Do not assume that Arbitration is always cheaper than court!
Incidentally, in California, in the context of employment agreements, the employer always pays the entire cost of the arbitrator fees. While employers often like to require arbitration in order to avoid a jury trial, this decision carries significant costs. Right out of the gate, before attorney fees or anything else, the employer has committed to significant arbitrator fees. This provides a strong incentive to employers to settle such disputes with employees.
There are many factors to be considered concerning whether or not to arbitrate besides cost. For example, an arbitration decision usually cannot be appealed. There is no right to a jury in arbitration. These can be good or bad things. It is true that arbitration can sometimes lead to a more informal style of litigating a case, and this too can be good or bad.
All Arbitration Clauses are not the same. One thing to keep in mind about Arbitration Clauses is that they are almost never drafted by litigation attorneys. The no doubt very skilled attorneys who draft almost all Arbitration Clauses are transactional attorneys, who usually have very little if any experience in a courtroom, or with litigation in general. They will often specify, for example, in an Arbitration Clause that “arbitration shall take place before the American Arbitration Association…” or words to that effect. While this may sound plausible (after all “American Arbitration Association” has an authoritative ring to it, does it not?) in fact AAA is in our Firm’s opinion distinctly third string as Arbitration forums are concerned, at least here in California. As of 2013 unlike the major Arbitration firms, AAA has very few retired judges on its panel; it mostly employs attorneys who are trying to break into the lucrative arbitration business. AAA does not maintain many facilities within California, which means that there is a problem concerning the issue as to where the Arbitration Hearing will take place. Beware of Arbitration Clauses which specify AAA as the forum. In our opinion this constitutes a mistake.
The main point that this article is trying to make about Arbitration is that the decision to include an Arbitration Clause in a contract is a very important one. How the Arbitration Clause is written is also very important. Unfortunately, many contract drafters make the decision to include such a clause without giving this decision the consideration it deserves. This carelessness sometimes has serious consequences.
We hope that this two-part blog has been helpful to our readers. This list is by no means complete. If you are negotiating, or about to sign, an important contract, one of the most cost-effective things that you can do is to have an attorney review the contract before you sign it. Buffington Law Firm’s experienced business litigation attorneys have long experience in both reviewing contracts and litigating them in actual court. This perspective means that we can help you avoid the many pitfalls which are often present in a contract.