A colleague of mine once described attorneys as falling into one of two categories—we are either architects or historians. That is, either we help our clients design and build or we help our clients recreate the past when things fall apart. To my colleagues who fall into the architect category—those attorneys who create business entities, assist clients with real estate transactions, and prepare innumerable other agreements—I insist that in addition to documenting the core terms of the deal, they look to the future so as to help me if I need to recreate the past. Specifically, I encourage my colleagues to include provisions that will govern any litigation that results from the parties' contractual relationship. Complex commercial litigation comes with its share of surprises. What follows is a discussion of contract provisions that may reduce the number of those surprises.
Arbitration clause. Most commercial agreements can be improved with an arbitration clause. The purpose of such a clause is to require all disputes between the parties that arise out of the agreement to be decided in binding arbitration. Jury trials and court proceedings can be expensive, time-consuming, and subject to a wide and uncertain range of results. Generally, arbitration costs less, resolves disputes more efficiently, and, in some respects, is more predictable than trial court litigation.
For example, in arbitration, the parties are generally entitled to select the arbitrator who will hear and decide the case. Such an arbitrator is more likely to have the expertise necessary to resolve complex commercial disputes. Additionally, a properly drafted arbitration clause may limit the parties' rights to appeal, saving many of the expenses that attend traditional trial court litigation.
Many state legislatures have enacted the Uniform Arbitration Act. As a result, arbitration clauses are generally enforceable in the courts of nearly every state as a matter of state law. Most commercial agreements are governed by the Federal Arbitration Act, which preempts inconsistent state laws and generally requires both state and federal courts to enforce arbitration clauses. Moreover, with their dockets crowded with numerous criminal cases and family-law matters, trial judges enthusiastically enforce arbitration agreements.
Forum-selection clause. Whether or not you include an arbitration clause in your agreements, think about where it will be most advantageous to litigate your case should a dispute arise. If your company is headquartered in Portland, but your sales force is entering into agreements in multiple states (or multiple countries), your company faces the prospect of responding to lawsuits in as many jurisdictions. Reduce that risk by including in those agreements a clause providing that all litigation arising out of those agreements—whether in the form of a judicial action or arbitration—will take place in your chosen forum.
Choice-of-law. In addition to avoiding the expense of a jury trial and limiting any litigation to a location that is convenient, it is also important to consider which body of substantive law will govern a potential dispute. For example, if you are sued by an out-of-state customer, will the law of your home state or the customer's home state govern that dispute?
If the issue is left unaddressed in your agreement, you may be unpleasantly surprised by the answer. For example, while under Oregon law the plaintiff in a fraud action may attempt to recover punitive damages, the general rule in Washington (subject to certain statutory exceptions) is that punitive damages are contrary to public policy and therefore generally not recoverable. Thus, depending on the type of agreement that you are entering into, it may be advantageous to select Washington law rather than Oregon law. If, for example, you are using a form agreement to enter into a significant number of consumer transactions, choosing Washington law may reduce the range of damages available to any putative claimants. Thus, a choice-of-law provision—carefully drafted in light of the purpose of the transaction—may serve to limit your company's exposure in the event of litigation.
Attorney fees. Without an agreement or a statute to the contrary, the general rule is that each party in litigation is required to pay its own attorney fees, regardless of the outcome. In other words, each side pays its own freight—win, lose, or draw. In preparing an agreement, however, the parties are free to provide that the prevailing party is entitled to recover its attorney fees if the parties end up in litigation. Such a provision may serve to deter meritless claims as well as to protect a party forced to resort to litigation to enforce its contractual rights.
Determining which party is the prevailing party can be difficult. For example, if both parties assert claims under the same agreement, and each party prevails on its respective claims, which is the prevailing party? If the agreement is governed by Oregon law, the answer may be both. To avoid this situation, don't simply provide that the prevailing party is entitled to an award of attorney fees. Go one step further and tell the court or the arbitrator how to determine which party in a multiclaim case is the prevailing party.
None of the provisions discussed in this article will prevent litigation. By including them in your agreements, however, you will introduce a measure of efficiency and predictability into an otherwise expensive and uncertain process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
