Do you skip the boring boilerplate in contracts before signing them? If so, before you sign your next contract – stop and read the boilerplate! The boilerplate is important, as anyone who has ever had a contract dispute will tell you.
In reading through the boilerplate, you should focus on how disputes will get resolved. You are best served if the boilerplate provides for each of the following: (1) mediation prior to litigation, (2) reimbursement of attorney’s fees, and (3) litigation, not arbitration.
- Mediation First. The vast majority of lawsuits are settled prior to trial. Mediation is a form of alternative dispute resolution. The parties themselves (rather than a judge or jury) determine whether and on what terms to resolve their dispute with the aid of a mediator. The mediator works with the parties to resolve their dispute. It is better to promote settlement of disputes by mediation before you file a lawsuit and incur attorney’s fees. Therefore, you should make mediation mandatory before any party can file a lawsuit and a precondition to the recovery of attorney’s fees. Click here to see a sample mediation provision.
- Attorney’s Fees. The general rule is that, without a contractual provision, statute, or case law to the contrary, attorney’s fees are not recoverable by the prevailing party in a breach of contract case. Yet, many contracts do not contain an attorney’s fee provision, awarding attorney’s fees to the prevailing party in the event of litigation. This is a mistake because lawsuits are too easy to file and too difficult to dismiss. Therefore, you want to discourage litigation, especially over questionable disputes, by ensuring that the loser pays the winner’s legal fees. There are narrow attorney’s fee provisions (limiting an award of fees to disputes to enforce a contract term) and broad attorney’s fee provisions (permitting an award of fees to disputes arising out of, or related to, the contract). The broader the provision, the less likely you will face the all-too-common, and rarely successful, fraud claim. Click here to see a sample of a broad attorney’s fee provision.
- Litigation, Not Arbitration. Before you sign a contract providing for arbitration, you should know that arbitration awards are final. In other words, there is no possibility of appeal and you cannot set aside the award even if the arbitrator makes a mistake. This may explain the widely held view that arbitrators tend to “split the baby.” Arbitrators also charge several hundred dollars an hour to hear and decide the dispute in addition to the administrative costs charged by arbitration providers, which range from $2,000 to more than $10,000 depending on the amount in dispute. These fees quickly add up. Moreover, the informality of arbitration often means that valid defenses are not fully considered and evidence, which would not normally be admissible in a court, can be introduced. Additionally, because of court reforms, litigation before COVID-19 was as fast as arbitration in most cases. Arbitration, however, does offer confidentiality and limited discovery. Nevertheless, the high expense, the absence of an appeal, the informality and sometimes-arbitrary nature of arbitration make litigation the better choice for resolving disputes. If you do choose arbitration for whatever reason, make sure to consult an attorney because courts are beginning to permit parties the freedom to design provisions that minimize the disadvantages of arbitration.
“Attorney’s Fees. The prevailing party in any dispute arising out of or related to this Agreement shall be entitled to an award of its reasonable attorney’s fees and costs.”
“Mediation. The parties agree to mediate any dispute or claim arising between them out of this Agreement before filing a lawsuit. Mediation fees, if any, shall be divided equally among the parties involved. If any party files a lawsuit without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney fees, even if they would otherwise be available to that party in any such lawsuit. The filing of a lawsuit to enable the recording of a notice of pendency of action, for order of attachment, receivership, injunction or other provisional remedy shall not constitute a violation of this provision.”