Prepare to Resolve Contract Disputes Before You Sign

Too few business people know the full scope of the contracts they enter into, especially the "boiler plate," which often has provisions controlling where and how contract disputes are resolved. These are referred to as "pre-dispute resolution provisions" which are agreed to by contracting parties when a contract is first formed and before dispute arises. Common provisions include mandatory arbitration where parties agree to select one or more "neutrals" (typically retired judges or practicing attorneys) to serve as arbitrators to preside over a hearing where the parties present their case, and variants that can call for "mediation" first (e.g., voluntary conciliation), party-to-party discussions, and similar alternate dispute resolution commitments.

Pre-dispute resolution provisions are extremely important once a dispute arises. Too many business people give these provisions little consideraton beforehand, only to realize, after the fact, that their ability to resolve issues is limited by the provisions. In a recent case, a distributor wanted to pursue anti-trust claims against a supplier, only to discover it was prohibited from asserting that claim in federal court (where judges are particularly knowledgeable as to the law in such cases) because the underlying contract contained a broad arbitration provision. The lesson learned is that pre-dispute resolution provisions should be fully considered before entering into a contract.

While many business people believe that arbitration provisions are beneficial, arbitration is not always the speedy and inexpensive forum that many believe. Even though courts often sanction arbitration provisions and dismiss suits if the underlying contract (or even a related contract) contains a binding arbitration provision, many courts refuse to enforce such provisions, depending on the facts and circumstances. To the extent that arbitration is the preferred method of dispute resolution, the provisions should be given careful consideration, before contract execution, so the business understands exactly what it is bargaining for, and that what it bargained for is enforceable. There are other aspects of pre-dispute resolution provisions, such as jury waivers, forum-selection clauses, personal service waivers, choice of law provisions and/or consent to jurisdiction clauses, all of which can be important, both tactically and strategically.

Jury waivers are of particular interest. A well-drafted jury waiver (where the contracting parties give up any right they have to a jury trial) can make a judicial forum a more favored venue for the resolution of a contract dispute, particularly because jury waivers eliminate much of the procedural and substantive challenges to arbitration provisions, and give parties more protection against runaway jury verdicts. By agreeing to have a court resolve a dispute without a jury, not only do the parties eliminate significant extra expense associated with a jury trial, but preserve the rules of procedure and the right to discovery. They also protect appellate rights, and ensure more predictability in the outcome of a dispute, as the trial is presided over and determined only by a judge who should determine the dispute based on the law and facts, as opposed to the complicated decision-making process of a jury.

While not nearly as common in practice or in the literature, planning for disputes to be resolved by way of a bench trial (i.e., one presided over by a judge without a jury) is a viable alternative to pre-dispute mandatory arbitration, and should not be overlooked by contracting parties in pre-dispute resolution contract formation planning. A bench trial can be a meaningful alternative to arbitration if and when the relationship between contracting parties turns south and disputes develop.

For more information, please contact Fred Mendelsohn at fmendelsohn@burkelaw.com or 312/840-7004.