At the time of a machinery sale, everyone tends to be happy. The manufacturer is pleased to have sold another unit. After all, sales are the lifeblood of any business. The buyer is also pleased with its decision, looking forward to using the machinery for many years to produce more of its own products, perhaps introduce new product lines, and to achieve efficiencies and cost savings. What could go wrong?
Most of the time, nothing does go wrong, and both parties enjoy a productive relationship. At the same time, having litigated for over 25 years, I can assure you that sometimes things do go wrong notwithstanding the good faith efforts of both parties. When things go wrong, claims may follow.
Many sales agreements often contain "dispute resolution" provisions. These provisions typically govern what happens if there is a claim or dispute arising out of or relating to the sale. Often, perhaps because of the good feelings that permeate a pending sale, the parties may overlook dispute resolution in finalizing the contract. Other times, as a final concession in the bargaining, they will accept the dispute resolution provisions proposed by the other side.
Ignoring dispute resolution provisions can be a costly mistake. In essence, the dispute resolution clause is a contractual agreement as to how the parties are going to resolve any claims and disputes that may arise. Dispute resolution provisions often address two potentially important points: (1) Where a claim or dispute will be decided, and (2) how the dispute will be decided. Both issues require careful consideration.
Where the Dispute Will Be Decided. Dispute resolution provisions often have forum selection clauses, which are also known as choice of venue provisions. These provisions specify which court or courts will decide the dispute, and often provide that the court or courts in a particular jurisdiction will exclusively decide the dispute. Although there are sometimes exceptions, the courts have generally enforced these provisions.
It is easy to see why the choice of venue is important. To use an analogy to sports, the forum selection clause may mandate that the dispute be decided (literally) in the other party's home court. Of course, it may still be possible to win in the other party's jurisdiction, but the fight will almost always be more difficult and more expensive.
If the other party is, for example, a large employer in the chosen jurisdiction, it may be difficult to pick an impartial jury. It will also be necessary, at the least, to hire counsel in the jurisdiction to work with the company's usual counsel. This adds a layer of expense.
How the Dispute Will Be Decided. Dispute resolution provisions may also contain provisions requiring that the dispute be decided by binding arbitration, instead of in the court system. In arbitration, the case most often is decided either by a single arbitrator or a panel of three arbitrators. Arbitrators most typically are lawyers with some experience in the substantive area or non-lawyer industry experts.
Many companies, particularly international companies, prefer arbitration over litigation. There are pros and cons to arbitration, and whether arbitration is right for a particular business requires consideration of the particular circumstances.
If the parties do agree to arbitration, the agreement will usually be enforced. In addition, and although there are exceptions, it is extremely difficult to appeal an award entered in arbitration through the court system.
If arbitration is chosen, the dispute resolution provision may also address important topics such as how the arbitrators are to be selected, and where the arbitration is to be held (see discussion above). The dispute resolution provision may mandate that a particular organization, such as the American Arbitration Association ("AAA") or the International Chamber of Commerce ("ICC") administer the arbitration. The AAA, ICC and other organizations also have rules that will often be specified to govern the arbitration. The choice of an administering organization can be important. The use of an administering organization adds a layer of expense in the form of various fees. In addition, the parties must pay the arbitrators' fees, which can be quite expensive.
For many years, proponents of arbitration have argued that it is, without exception, "better, faster and cheaper" than the court system. My personal view on this is simple: One size does not fit all. Arbitration may be the right choice for many clients and circumstances. The reason for choosing arbitration, in my view, is not because it is necessarily faster and cheaper (in fact, in some instances, it may be more expensive), but because of the ability to select arbitrators with some background and expertise in the area of the dispute.
For other clients, arbitration may not be the right choice. It really depends on the particular circumstances.
Other Possible Dispute Resolution Provisions. Dispute resolution clauses may contain other provisions. For example, they may require negotiation between senior executives of the companies or mediation (a non-binding dispute resolution process) before proceeding to arbitration, or, if there is no mandatory arbitration provision, to the courts.
Dispute resolution provisions may also limit the discovery process, or information exchanging process, in arbitration or the courts. Many believe that discovery is the most expensive part of the litigation or arbitration process. (Traditionally, less discovery was permitted in arbitration, but, at least in the U.S., there seems to be a trend toward allowing more discovery unless the parties agree otherwise).
Conclusion. The purpose of this post is not to advocate particular dispute resolution provisions, but to serve as a reminder that they are very important, and deserve as much attention as other key contractual provisions in negotiating a contract.
Most of the time, nothing does go wrong, and both parties enjoy a productive relationship. At the same time, having litigated for over 25 years, I can assure you that sometimes things do go wrong notwithstanding the good faith efforts of both parties. When things go wrong, claims may follow.
Many sales agreements often contain "dispute resolution" provisions. These provisions typically govern what happens if there is a claim or dispute arising out of or relating to the sale. Often, perhaps because of the good feelings that permeate a pending sale, the parties may overlook dispute resolution in finalizing the contract. Other times, as a final concession in the bargaining, they will accept the dispute resolution provisions proposed by the other side.
Ignoring dispute resolution provisions can be a costly mistake. In essence, the dispute resolution clause is a contractual agreement as to how the parties are going to resolve any claims and disputes that may arise. Dispute resolution provisions often address two potentially important points: (1) Where a claim or dispute will be decided, and (2) how the dispute will be decided. Both issues require careful consideration.
Where the Dispute Will Be Decided. Dispute resolution provisions often have forum selection clauses, which are also known as choice of venue provisions. These provisions specify which court or courts will decide the dispute, and often provide that the court or courts in a particular jurisdiction will exclusively decide the dispute. Although there are sometimes exceptions, the courts have generally enforced these provisions.
It is easy to see why the choice of venue is important. To use an analogy to sports, the forum selection clause may mandate that the dispute be decided (literally) in the other party's home court. Of course, it may still be possible to win in the other party's jurisdiction, but the fight will almost always be more difficult and more expensive.
If the other party is, for example, a large employer in the chosen jurisdiction, it may be difficult to pick an impartial jury. It will also be necessary, at the least, to hire counsel in the jurisdiction to work with the company's usual counsel. This adds a layer of expense.
How the Dispute Will Be Decided. Dispute resolution provisions may also contain provisions requiring that the dispute be decided by binding arbitration, instead of in the court system. In arbitration, the case most often is decided either by a single arbitrator or a panel of three arbitrators. Arbitrators most typically are lawyers with some experience in the substantive area or non-lawyer industry experts.
Many companies, particularly international companies, prefer arbitration over litigation. There are pros and cons to arbitration, and whether arbitration is right for a particular business requires consideration of the particular circumstances.
If the parties do agree to arbitration, the agreement will usually be enforced. In addition, and although there are exceptions, it is extremely difficult to appeal an award entered in arbitration through the court system.
If arbitration is chosen, the dispute resolution provision may also address important topics such as how the arbitrators are to be selected, and where the arbitration is to be held (see discussion above). The dispute resolution provision may mandate that a particular organization, such as the American Arbitration Association ("AAA") or the International Chamber of Commerce ("ICC") administer the arbitration. The AAA, ICC and other organizations also have rules that will often be specified to govern the arbitration. The choice of an administering organization can be important. The use of an administering organization adds a layer of expense in the form of various fees. In addition, the parties must pay the arbitrators' fees, which can be quite expensive.
For many years, proponents of arbitration have argued that it is, without exception, "better, faster and cheaper" than the court system. My personal view on this is simple: One size does not fit all. Arbitration may be the right choice for many clients and circumstances. The reason for choosing arbitration, in my view, is not because it is necessarily faster and cheaper (in fact, in some instances, it may be more expensive), but because of the ability to select arbitrators with some background and expertise in the area of the dispute.
For other clients, arbitration may not be the right choice. It really depends on the particular circumstances.
Other Possible Dispute Resolution Provisions. Dispute resolution clauses may contain other provisions. For example, they may require negotiation between senior executives of the companies or mediation (a non-binding dispute resolution process) before proceeding to arbitration, or, if there is no mandatory arbitration provision, to the courts.
Dispute resolution provisions may also limit the discovery process, or information exchanging process, in arbitration or the courts. Many believe that discovery is the most expensive part of the litigation or arbitration process. (Traditionally, less discovery was permitted in arbitration, but, at least in the U.S., there seems to be a trend toward allowing more discovery unless the parties agree otherwise).
Conclusion. The purpose of this post is not to advocate particular dispute resolution provisions, but to serve as a reminder that they are very important, and deserve as much attention as other key contractual provisions in negotiating a contract.
RSS Feed
