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2 contractual clauses to avoid

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“I sell one of my three lubricant and tire stores to a large national chain that has similar stores across my part of the country. Their lawyer prepared the sales agreement. Our family’s lawyer pointed out two paragraphs he didn’t like:

  1. Arbitration: Instead of going to court, private arbitration is required if there is a dispute over anything related to the sale or the activities of the parties afterwards.
  2. The loser to pay the other party’s attorney fees.

“I thought having an arbitrator to settle a contract dispute could be much faster and cheaper than going to court. Also, I was completely honest in this sale and will honor the terms of the deal so if the buyers sue me I know I would win and would certainly expect them to reimburse me for my fees. ‘lawyer.

“Why would my lawyer suggest not to accept these two clauses of the contract?” Thanks for your help, “Jeff”.

“Jeff’s family lawyer gave him some really good advice,” said Matt Kenefick, a San Francisco-based commercial litigation lawyer. “There are many good reasons to exclude these clauses from a contract. For a small business owner selling their business to a large corporation, arbitration may have more disadvantages than advantages, ”he notes, listing common reasons against accepting arbitration:

  1. Arbitration can increase litigation costs, since in addition to paying your lawyer, you pay the arbitrator’s fees and the costs of the arbitration service provider. Some arbitrators charge over $ 800 per hour.
  2. Arbitration eliminates the right to a jury trial. In some circumstances this can be important because juries can be sympathetic in the David and Goliath situations.
  3. Arbitration can make it difficult to obtain interim remedies. For example, when a dispute goes to arbitration, obtaining a restraining or seizure order to preserve the status quo will require a much higher standard of proof.
  4. Arbitration eliminates most rights of appeal. Generally speaking, you cannot appeal even if the arbitrator rules against the law!
  5. Location: Arbitration clauses may specify an unsuitable location for the arbitration proceeding.

“There are however times when refereeing makes sense,” Kenefick said. “For example, if you want to remove the right to a jury trial, arbitration allows the parties to choose an arbitrator with specific expertise and experience related to their dispute. In some cases, the parties may choose a panel of more than one arbitrator. Arbitration reduces the risk of relying on one person – a judge – or an overly understanding jury. Plus, arbitration might make sense if you want a fast track. Always keep in mind that the devil is in the details – so you need to be extra careful to make sure that what’s in your arbitration clause matches your needs and expectations.

So the gist of the arbitration is this: “It is not necessarily bad, but it can be bad. Experience has shown that referees are much less likely to be affected by sympathy for the little guy. So, if you are the little guy in a business transaction, arbitration can be wrong and you might very well have a better chance of getting a favorable outcome in a courtroom. But if you’re Goliath in a fight between David and Goliath, you’d probably be better served by an arbitration clause.

It is often a surprise when a small business owner receives a subpoena and complaint. Often the first reaction is, “When I win this thing, these guys are going to pay for my lawyer!” Well, not so fast.

In the United States, the American Rule of Attorney Fees states that “except as provided by law, without an attorney’s fee clause, each party pays its own legal fees and court costs, regardless of the winner of the lawsuit. “.

The American rule contrasts with the English rule, which almost every other country on the planet follows, forcing the loser to pay the lawyers and costs of the winner.

Kenefick lists two situations where this clause can be dangerous:

  1. Parties who are emboldened to take legal action because they think they can recover their legal fees.
  2. A lawyer’s fee clause can significantly increase the stakes in a dispute, as the amount in dispute will be increased by each party’s respective claim for their fees. For a party with deeper pockets, they can use this to leverage a settlement against an opposing party who cannot risk being ordered by the court to pay the other party’s attorney fees.

“So a party who is more likely to be the defendant in a future litigation will not want to include a legal fees clause in their agreement; while a party that anticipates that it is more likely to be the plaintiff in a future litigation will want to include a fee clause. “

“Dominant party attorney fee clauses can lead to unfairness in contract disputes, unless the parties are both financially sound,” he observes. “They can make it difficult for financially weak people to assert their claims for fear of losing the case and being hit by the winner’s attorney fees and court costs.”

Kenefick concluded our discussion with this disclaimer:

“Arbitration and attorney’s fees clauses can be volatile and should therefore not be taken lightly.”

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