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Dispute Resolution Terms in Contracts: A Trial Lawyer’s Perspective
Author: Daniel P. Tobin
When parties negotiate and draft a contract, litigation is usually the furthest thing on their minds. The substantive terms of the transaction, specifically those related to pricing and performance, warrant most of the attention because the underlying deal is the very reason for the contract in the first place.
Frequently, terms related to enforcement are relegated to the miscellaneous or general sections, and often are treated as boilerplate, meaning they may get rubberstamped when all the other terms are complete. However, it is worth taking an extra moment or two to review these provisions as if you were a “Monday morning quarterback” or had the benefit of 20/20 hindsight after a disagreement takes place. Doing so will ensure that your rights to enforce or defend the core terms of the contract are not jeopardized.
To this end, here is a summary of the terms that trial lawyers will typically consult immediately when evaluating a dispute involving a breach of contract:
• Waiver of Jury Trials. Parties to a contract may waive their right to a trial by jury. The Texas Supreme Court holds that such a waiver does not violate public policy as long as the waiver is voluntarily, knowing, and made with full awareness of the consequences of it. The more conspicuous, i.e., eye-popping, the waiver, the more likely it is to be enforced.
• Merger or Integration Clause. This states that the contract expresses the entire agreement between the parties and that all prior understandings, representations or commitments are merged into the contract. This clause prevents a party from trying to vary the contract’s terms after it is signed. It can also contain an anti-fraud provision whereby the parties agree that neither party relied on any statements or representations made during the negotiation or drafting phases that are not contained in the contract. This limits a party from attempting to claim that it was mislead or tricked into signing the contract, or attempting to introduce evidence of oral or even written agreements outside the “four corners” of the contract.
• Choice of Law, Forum Selection, and Venue Selection. A choice of law clause allows contracting parties to pick the state whose law will apply. Texas law permits these clauses, which are useful when the parties reside in different states or when performance of the contract crosses state lines. Importantly, this does not necessarily mean that the actual lawsuit will occur in that same state. This is where forum selection comes into play. A forum selection clause is an agreement that the lawsuit must take place in a specified jurisdiction, such as Texas or another state. Texas law generally enforces such provisions as long as the jurisdiction is not unreasonable, inconvenient, or against public policy. Venue selection involves selecting where within the jurisdiction the lawsuit will occur. For example, a venue selection clause would specify a county in Texas in which the lawsuit must take place. It is more difficult to enforce venue selection because Texas courts hold that venue is fixed by law. Often times, contracting parties will still indirectly choose a venue by picking one of the locations that would be permissible under Texas law or by providing that the contract is to be performed within a certain venue.
• Alternative Dispute Resolution. Texas’s public policy encourages parties to try to resolve their disputes out of court. Therefore, contracts can, and often do, contain a provision requiring alternative dispute resolution, such as meditation, before litigation can be filed.
• Statute of Limitations. The law sets a time limit for a party to file a lawsuit after a wrong occurs, which is known as the statute of limitations. When the time period starts and ends depends on the facts of each particular case. Contracting parties can agree to reduce the deadline by which a party must file a lawsuit to as little as one-year.
• Damages. Texas law permits contracting parties to agree on damages should a breach occur. This includes agreeing to limit or reduce the amount of damages to which a party would normally be entitled; agreeing to an exclusive remedy; agreeing to equitable relief, such as an injunction, even if it might not otherwise be available; or agreeing to a set amount of damages, otherwise known as liquidated damages.
• Interpretation. Texas law enforces unambiguous contracts according to the plain meaning of their words. Should the interpretation of a contract be called into question, however, the contract generally will be interpreted against its drafter. This rule can be avoided with a provision that states that no term of the contract will be interpreted in favor or against any of the parties for any reason.
These are not the only provisions that can impact a lawsuit, but the above are the types of terms a trial lawyer will look for when assessing a party’s ability to successfully enforce or defend a contract. Such provisions should be reviewed with an attorney before entering into a contract to ensure that you are put in the best position possible if a dispute arises.