The first article in this series introduced the importance of considering the unforeseen consequences of boilerplate terms in commercial agreements. The second article emphasized the need to identify and avoid potential pitfalls associated with specific boilerplate, risk management and allocation terms. This final segment focuses on oft-neglected contractual dispute-resolution mechanisms, such as those relating to arbitration, jurisdiction, venue and choice of law. Often, these mechanisms are addressed by provisions inserted at the end of contracts, frequently lifted from prior agreements without much consideration. While litigation may be a “last resort” and is rarely a priority consideration at the drafting stage, cut-and-paste contract terms may significantly impact the outcome of a dispute and invite disastrous consequences.
In contract negotiations, a threshold question in assessing potential disputes down the road is whether your interests are best served by arbitration or traditional in-court litigation. Since arbitration is billed as a quicker, easier, cheaper and more private alternative, lawyers sometimes reflexively include arbitration provisions when drafting agreements. Depending upon the complexity of the matter, resolving a dispute through arbitration may be more expeditious than one docketed in a busy commercial part in an overburdened and severely back-logged state courthouse. Swift justice is the real attraction of arbitration, where the rules often preclude dispositive motion practice and limit the availability of discovery devices, such as depositions and interrogatories, in order to streamline the process. The rules of evidence are more relaxed than traditional litigation, further expediting the process. And with rare exception, there are no expensive and time-consuming appeals from arbitration awards. Parties can also agree to build mandatory mediation provisions into arbitration agreements, in the hope of reaching consensus and avoiding combat altogether. The less formal arbitral process is usually quicker and cheaper than its courthouse counterpart. But in many instances, it is not necessarily better.
If the parties agree to resolve their disputes in the courthouse, a jurisdiction and venue provision fixing the locale of the litigation, should be included in the contract. A New York litigant, for instance, would most likely prefer to resolve a commercial dispute in New York, where commercial law is well developed and the courts are accustomed to adjudicating commercial matters. Why would a New York company want to litigate a dispute with its Idaho customer in an Idaho court which may rarely preside over the parties’ particular type of controversy?
If drafted inartfully, the boilerplate jurisdiction and venue provision will lull an unsuspecting party into a false sense of security. For example, a provision stating “the parties agree to the jurisdiction and venue of the federal and state courts in the State of New York” seemingly requires the parties to litigate all of their disputes in New York. Not so. In the event a dispute arises between the New York company and the Idaho customer, the Idaho customer would not be prohibited from commencing suit in Idaho. While this jurisdiction and venue provision permits a lawsuit to be filed in New York, it does not require one to be filed in New York. The preferable jurisdiction and venue provision would read “the parties agree to the exclusive jurisdiction and venue of the federal and state courts in the State of New York, and they agree not to bring any action in any court other than a federal or state court in the State of New York.” The last thing your officers and directors want to do is trek across the country for depositions, court appearances and trial in an unfriendly venue simply because “boilerplate” was plugged into the contract without the proper analysis.