To be clear, this is not a highly negotiated provision. It’s typically thrown in towards the end of the contract, right before the “Miscellaneous” or “General” clause and is almost always a boilerplate provision inserted without much thought about its impact. This is terrifying for one simple reason…if there is a dispute about any provision of the contract, about a party’s use of the service(s), about the manner of performance by either side, really about almost anything in the relationship, this is the clause that is going to dictate how that dispute is resolved. Seems important, doesn’t it?
So why don’t parties pay more attention? Well, first, there are a finite number of places that you can name as the venue to resolve a dispute. The most common provisions include a choice of (a) state and/or federal court in a designated state; or (b) a general provision stating that arbitration or mediation take place, often with a choice of one of the larger existing arbitration associations. But the reality is that either of these choices likely leave you embroiled in long-term, costly litigation if there is a dispute.
The question then becomes, what is the solution? First, it’s important to pay attention to this provision and not consider it boilerplate throw-away language. Depending on your positioning as a business, courts in certain geographic locations may pose distinct and problematic issues such as overwhelmed dockets and biased jury pools. Arbitration associations may require the use of complex rules and procedures that need to be learned (costing additional attorney time) depending on the type of dispute. Or they may not have access to neutrals with expertise in particular types of disputes dictating that additional billable neutral time will be necessary. These are real-life considerations that can drastically impact a company’s financial position if the litigation ends up being drawn out. If your company is in growth mode, but EBITDA negative, or even just earns modest revenue numbers, one long drawn-out lawsuit can effectively end your business.