We encounter contracts on almost a daily basis. While handshakes and oral agreements are still very prevalent today, written contracts are an important way to memorialize agreements and hopefully help mitigate future conflicts.
That said, how often are papers signed without taking the time to read and understand what is in the fine print? Benjamin Franklin once said that “an ounce of prevention is worth a pound of cure.” This article highlights some key provisions that commonly appear in contracts, with the goal of providing an “ounce” of knowledge regarding what they mean and how they may impact your business.
Alternative dispute resolution: Arbitration
Arbitration clauses are very prevalent in contracts. From the livestock contract used by an online auction to the cardholder agreement for your credit card, they may contain language stating that any controversy or claim arising out of the agreement will be settled by arbitration. So what is arbitration?
Arbitration is a dispute resolution process in which the parties to a contract choose a neutral party (or parties) to make a final and binding decision resolving the dispute. By agreeing to arbitrate a dispute, the parties forgo the ability to have the dispute resolved by a court or a jury.
Arbitration clauses typically specify where the dispute will take place and how the arbitration will be governed. Arbitration hearings resemble a trial; however, unlike a court proceeding, the arbitrator, not the judge or jury, hears the evidence and gives an opinion. In some cases, arbitration can be less expensive and allow for a more speedy resolution than filing a lawsuit in court.
Forum selection
When a lawsuit is initiated, the court where the suit is filed must have certain jurisdictional power to actually hear the dispute. Determining which court is the proper court is not always an easy exercise. A forum selection clause may help simplify this issue. This is an agreement between parties to a contract that serves to override the usual factual and procedural requirements for creating a court’s jurisdiction. By inserting this clause, the parties essentially tell the selected court that it is the court the parties want to use to decide their legal dispute.
For example, Party A (a Texas resident) and Party B (an Oklahoma resident) enter into a grazing lease for property that Party B owns in Kansas. Unfortunately, Party B breaches the grazing lease, and Party A is forced to file a lawsuit against Party B. Party A has a decision to make about where to file the lawsuit. Party A can avoid this exercise by having Party B agree to a forum selection clause in the grazing lease stating, for example, that any dispute arising from the performance of the contract will be decided in a Texas state court located in Tarrant County, Texas. This will allow Party A to avoid the expense of having to fight about where to file the lawsuit and may allow for a lawsuit to take place on its “home court.” Closely reviewing a contract for this sort of provision may be important, especially if you are dealing with an individual or entity from another state.
Force majeure
Floods, hurricanes, fires, wars, pandemics – there are many unforeseen events that may impact a party’s ability to perform under a contract. In order to address these events which are not reasonably anticipated or cannot be controlled, many agreements contain what is known as a “Force majeure” or “Act of God” clause. Under a force majeure clause, a contracting party may not be liable for damages due to the delay or failure to perform under the contract because of an event beyond that party’s control. Performance may be excused until it becomes possible for the party to perform under the contract.
Does the COVID-19 pandemic or another Hurricane Harvey-type event qualify as a force majeure event? The answer will depend on the specific language contained in the clause. While not all contracts may be equally impacted if performance is delayed, having this sort of provision may help plan for future unknown events.
Hopefully, you will never need to think about whether to contest an arbitration clause that requires you to arbitrate a dispute in a distant state. That said, in addition to consulting a reputable attorney regarding your contracts, being on the lookout for provisions such as those discussed above may help alleviate future issues and allow you to be better prepared should things go south in the future.
Friendly disclaimer: This article is for informational purposes only and is not intended to create an attorney-client relationship. I recommend that you consult a licensed attorney in your jurisdiction before relying on the information contained in this article.
