It helps to have a level playing field when litigating or arbitrating. The playing field is often set when the parties sign the contract. Once a business relationship has gone sour, it is too late. In short, it pays to closely examine the contract you are signing before you sign it. The “boilerplate” you agree to may place your company in a ballpark you won’t want to be in, or playing by rules you won’t like. At a minimum, consider the following:
Before blithely signing an agreement that contains an arbitration clause, consider carefully whether that is really in your company’s best interests. Arbitration is a different animal, with different costs, risks and benefits. Different arbitration companies have differing rules, locations, and other provisions.
Under the American system of law, the loser at trial usually does not pay for the winner’s attorney fees unless a contract or public policy statute provides otherwise. Sometimes, an attorneys’ fees clause can keep a miscreant party from acting up, but sometimes, these provisions can cause disputes to erupt into litigation. A contract provision requiring the losing party to pay the other’s attorneys’ fees can cause the parties to be less likely to settle because they think they will win and recover their fees, although statistics show (and logic reasons) that this only happens half the time at best. Attorneys’ fees clauses should be considered and worded carefully both in scope and conditions under which fees would be awarded.
Exculpatory Clauses or Liquidated Damages Clauses
Contracts often limit the type or amount of damages that may be awarded to the non-breaching party. Sometimes these clauses are enforceable, sometimes not. California and other states have laws that restrict when a party may avoid liability for wrongful acts. Agreements avoiding liability, fixing damages, eliminating punitive or consequential damages, or shifting responsibility need to be crafted carefully.
Often, one party will seek to have the other agree to indemnify it if suit is brought by a third party. This often occurs in contracts such as work-for-hire contracts, consulting agreements and software licenses. The idea is that the party less responsible should not be the first to pay damages. These agreements can be constructive, but can be onerous unless carefully crafted, and take into account each party’s ability to indemnify.
Once in a while, a contract requires the parties to mediate disputes before proceeding to litigation or arbitration. These types of clauses can be found, for example, in consulting agreements, real estate agreements and in some AIA contracts.