CONTRACTS NEED DISPUTE RESOLUTION PROVISIONS

By Albert G. Marquis, Esq.

When drafting real estate contracts, one of the primary objectives should be: avoid lawsuits and stay out of court. The primary mechanism for avoiding lawsuits is to ensure that disputes do not develop. Generally speaking, this is accomplished by drafting a comprehensive agreement that clearly sets forth the duties and obligations of both parties.

Nevertheless, we all recognize that no contract can be fool-proof. No matter how carefully a contract is drafted, there remains the possibility that a dispute might develop, which could escalate into a full blown lawsuit.

Recognizing this, it is important that every contract deal with the possibility that a dispute will arise. Generally speaking, the mere contention that someone else has breached the agreement should not be grounds for immediately filing a lawsuit. Rather, when a party suspects that a breach has occurred, before filing a lawsuit, that party should be required to send written notice to the opposing party, and the opposing party should be given a certain number of days to cure the breach.

If the breach is not cured, the parties may want to head off the possibility of a lawsuit by requiring mediation and/or arbitration. But both of these remedies can act as a double-edged sword. Mediation could turn out to be a fruitless endeavor that one party could use to its advantage to simply delay the final resolution. Generally speaking, of course, mediation is a preferred remedy. Well trained mediators settle 85% of their cases. But this should not be automatic. Parties need to give thought as to whether mediation is appropriate for their particular situation.

Similarly, arbitration is preferred to litigation, but arbitration has its own problems as well. For starters, arbitrations are not necessarily quicker or less expensive than going to court, particularly if the parties have the right to appeal. And sometimes parties can’t decide how an arbitrator will be selected so they provide that each party can pick its own arbitrator, and then those two arbitrators pick a third. This means that the parties must actually pay for three arbitrators to handle their case, as opposed to going before a judge who is not paid by either party. The expenses of arbitration in such a case can exceed the cost of going to court. Furthermore, there are certain things that arbitrators cannot do. For example, whereas a judge has the power to enter equitable orders (such as injunctions) or order a summary eviction of a tenant, an arbitrator does not have that power. Therefore, there may be situations where arbitration is inappropriate.

Whether the dispute is going to be resolved by arbitration or litigation, the parties want to designate the forum (the geographical location where the dispute is going to be resolved). This is particularly important in today’s business climate where companies from different states are engaging in transactions with one another. There is a big difference between defending yourself in your home town and defending yourself in a distant city in a strange courthouse where the judge and the opposing counsel are old hunting buddies.

And what happens if one party prevails? The general rule is that attorneys fees are not awarded unless there is a contractual agreement to that effect between the parties. Winning the case, but not recovering the costs, can be a hallow victory. Therefore, it is important that the contract contain a provision that the prevailing party be awarded costs and attorneys fees.

Furthermore, for the party who might be owed money under the contract, it is important to include a significant interest provision. Otherwise, it might be more economical for the deadbeat on the other side to pay his attorneys to delay payment as long as possible if he only has to worry about the legal rate of interest (which is generally 2% over prime).

When parties are entering into a contract, they are both optimistic about all the benefits they are going to derive. Considering disputes in this setting is rather like throwing a bucket of cold water on someone who is standing in a warm shower. Nevertheless, it is absolutely critical that the parties clearly specify, within the contract itself, precisely how disputes are going to be resolved. If this isn’t done, you will live to regret it.