Arbitration clauses and attorney fee provisions tend to be boilerplate contract provisions to which parties give little thought. Generally, these clauses are automatically included or excluded from a contract on the theory: That’s the way we’ve always done it. Perhaps it’s time to rethink that strategy. The following discussion explains how, under certain circumstances, the proper use, or non-use, of certain boilerplate clauses can provide additional protection to companies to avoid or otherwise limit costly claims.
Many Florida corporations conduct business throughout the United States. They reach into other jurisdictions to buy and sell products, hire employees or independent contractors, and/or provide or purchase services. Most of these transactions are the subject of a written contract. Contracts with parties in states outside of Florida create uncertainty with respect to the application of law. Contract provisions that are valid and enforceable in Florida may not be enforceable in another state. Thus, Florida corporations would benefit from having their legal disputes decided in a Florida forum under Florida law. This is frequently accomplished through the use of choice of law and forum selection clauses in which a party outside of Florida agrees to litigate a contract dispute under Florida law and in a Florida court.
Forum selection clauses are the subject of frequent challenge. In Florida, a forum selection clause does not automatically grant a Florida court jurisdiction over an out-of-state litigant. Courts employ a two-part test to determine whether personal jurisdiction exists. First, courts evaluate whether the cause of action falls within the reach of Florida’s long arm statute. Second, courts must determine whether the exercise of personal jurisdiction over a non-resident is constitutional, namely that the non-resident has sufficient minimum contacts with Florida such that he should have reasonably anticipated being hailed into a Florida court. Florida courts must first determine whether personal jurisdiction exists before deciding whether a forum selection clause is enforceable.
When a Florida corporation sues a non-resident in Florida under a contract with a forum selection clause, a Florida court will be more inclined to enforce the agreement and require litigation in the chosen forum. However, when a non-resident sues a Florida corporation in a foreign jurisdiction, the corporation loses its home field advantage. The corporation would have to retain counsel in the foreign jurisdiction and move to dismiss the action on the basis of the forum selection clause. The out-of-state court might be more inclined to favor the jurisdictional and public policy arguments of the non-resident and keep the litigation in the foreign state, particularly where the non-resident has no ties to Florida other than its contractual relationship.
To tip the scales in favor of resolving all disputes in Florida, companies should consider the use of arbitration clauses. Not just any arbitration clause will do. The clause must be properly crafted to limit a foreign court’s authority to consider whether the clause is enforceable. The United States Supreme Court recently clarified the scope of an arbitrator’s authority, holding that parties are permitted to allow arbitrators to decide gateway issues on whether the claims are subject to arbitration. However, the parties must express a clear intent to grant such authority to the arbitrator in their contracts.
With proper drafting, a court in a foreign jurisdiction would have no legal basis to keep the litigation when faced with a motion to stay or dismiss. Arbitration clauses tend to be strictly enforced. The issue of arbitrability, including the arbitrator’s jurisdiction, would be referred to an arbitrator in Florida who, like a Florida court, might be more inclined to enforce the forum selection clause. Additionally, as a practical matter, the fact that the non-resident would have to appear in Florida to address certain procedural issues could influence that party to simply waive any jurisdictional argument and arbitrate in Florida, or perhaps even give up the claim altogether. Thus, a properly drafted arbitration clause can substantially strengthen a forum selection clause requiring litigation in Florida and even stop claims from being pursued.
Before a company modifies all of its contracts to include arbitration clauses, it must also consider the risks associated with arbitration. Ensuring that Florida law will be applied and that the dispute will be resolved in Florida does not guarantee that the dispute will be decided in favor of the Florida company. Further analysis is still required to determine whether arbitration is the best alternative for a particular contractual relationship.
The primary benefits of arbitration clauses include reduction of time and expense litigating. Garden variety contract disputes litigated in court often take two years to resolve and exceed six figures in legal fees and costs. During the litigation process, the parties’ attention is frequently diverted from their business and operations are disrupted. In contrast, arbitration involves limited discovery and far less legal paperwork. Arbitration proceedings generally are completed in as little as three months and usually do not extend beyond a year. The costs are far less than court litigation.
While the savings in costs and time are significant, those opposed to arbitration point to the heightened risk of unfair rulings. Absent limited exceptions, an arbitrator’s decision is final and binding. Appeals are rarely successful. Because discovery in arbitration is limited, the facts often are not as fully developed in arbitration proceedings as they are a lawsuit. Witnesses are fewer. Presentation of evidence tends to be abbreviated. The relaxed evidentiary rules in arbitration open the door for unreliable testimony (e.g., hearsay and speculation).
Arbitration clauses tend to be more useful where the value of the potential claims are small. Contracting parties should consider the worst case scenario if a contract is broken. In the case of potential claims less than $100,000, for example, arbitration frequently makes sense because the costs of litigation in court will likely exceed the value of the claim. Where the value of potential claims is substantial, in excess of $1 million for example, the risks of unfair rulings that cannot be appealed might be too great to accept.
While deciding whether to use an arbitration clause, companies should also consider whether to use an attorney fee provision in their contracts. Most contracts contain boilerplate fee language as a matter of course. Florida law does not grant prevailing parties attorneys fees in cases alleging breach of contract unless the contract provides for such an award. Truth be told, however, attorneys fees provisions are rarely enforced because they require a final judgment. A winner and loser must be declared. Most cases settle before final judgment and, therefore, the winner is not declared.
Most companies have a mix of large and small contracts. In dealing with the breach of a contract that holds small value, companies often terminate the agreement and move on to locate another vendor, supplier, or similar contracting party. For example, pursuing a claim for breach against a small vendor is often not worth the company’s time and trouble. Recovery of any funds, let alone attorneys fees, is questionable given the financial volatility of small businesses. On the flip side, the small vendor who needs the company’s business may view the company as a deep pocket. Terminating the agreement may spark a lawsuit from the vendor.
Unlike personal injury cases, lawyers generally do not take breach of contract cases on a contingency basis. Thus, the vendor would have to pay legal fees to pursue a claim. The inclusion of an attorneys fee provision in the contract may embolden the vendor. Where a fee provision is absent, however, the claim is less likely because the costs of litigation may exceed the value of the breach. Most logical people do not spend $100,000 to collect $50,000. Thus, companies entering small contracts with parties they are not likely to affirmatively pursue in litigation may want to consider eliminating attorney fee provisions from their agreements.
Companies often treat contracts like children’s clothing passed down the sibling ladder. Old forms are dusted off and merely the names attached to the labels are changed. While such a practice is convenient, it can be costly and dangerous in the long run. Laws and legal strategies are constantly evolving. Thus, before dusting off that next old form, give some thought to an annual checkup.