By John Burns
It’s happened to all of us. In a rush to close a deal, sign a contract, or even use software, we’ve clicked on “ACCEPT” or signed on the last page without carefully considering every paragraph. And let’s be honest, if this didn’t happen my profession would have far less work to do.
But there are two important concerns for businesses and their counsel in reviewing the boilerplate language that may be thrown into an agreement near the end, after what we may consider the truly important or difficult terms have been worked out. These concerns relate to two of the most frequently “thrown in” clauses of contracts: choice of law clauses and arbitration provisions.
The first is a choice of law clause. In a recent case I handled, all parties agreed that North Carolina law should govern the transaction, which was the purchase of some sophisticated machinery from Canada to be used in North Carolina. Any disputes that arose from or were related to the transaction would be governed under North Carolina law. Simple enough, right? They had an agreement and could move on.
Imagine the surprise on both sides after a dispute arose and arbitration counsel for both parties realized that a mere reference to North Carolina law did not exclude application of the United Nations Compact for the International Sale of Goods. While it was likely the intention of both parties and their drafting counsel to apply the North Carolina Uniform Commercial Code and other state sales law to the transaction, the UN CISG is a treaty enacted under federal law and is thus part of North Carolina law. It was therefore not waivable after the fact and completely applicable to cross-border sales of goods, like the equipment purchased in that case.
The resulting application of decisions of European and Asian courts, as well as arbitrators, to thorny questions of international law not only surprised both clients, it increased the expense and complicated the case tremendously. The simple inclusion in the contract of a statement that the parties meant ahead of time to exclude the applicability of the UN CISG would have avoided that expense and complication, and left the dispute to be decided on the familiar ground of the North Carolina Uniform Commercial Code. There are reasons one might want the UN CISG to apply, but they are the kinds of considerations which should be actively contemplated and negotiated, not just thrown into an agreement.
The same standard applies to careful scrutiny of arbitration clauses. Arbitrators in commercial cases have almost unlimited power to decide the case within the limits of the authority assigned to them by the parties. How broad do you intend that authority to be? Do you intend for the arbitrator to have the ability to impose punitive damages or award attorneys’ fees? The general rule in American courts, including those here in North Carolina, is the “American Rule,” under which the parties pay their own fees regardless of the result. A broad arbitration provision, combined with an international dispute, could inadvertently expose your company to the legal fees racked up by your opponent’s large New York law firm.
Limiting language included in the arbitration provision at the beginning of the transaction can avoid that scenario, save significant expense, and allow you to conduct a fully-informed cost-benefit analysis of the risks of pursuing arbitration in the event of a dispute. Too broad of an arbitration provision introduces doubt and uncertainty and leaves your fate very much in the hands of a single person with no real opportunity to appeal.
Simple fixes on the front end of a transaction are far less expensive than the consequences of getting them wrong. The attorneys at the Forrest Firm are ready to assist you in reviewing your contracts and agreements. Contact me at the firm to get started.