“Lawsuit:  A machine which you go into as a pig and come out of as a sausage. ”

-Ambrose Bierce

Perhaps the best description I have heard of the lawsuits that currently plague our system here in the United States.  We live in a litigious country and an ever increasing litigious world.  I think this is a problem, and yet many people continue to ride the wave of lawsuits against each other in hopes of instant success.  The fact of the matter is that most lawsuits end up more like the quote above than anything else.  There are usually not any clear winners, other than the attorneys who get paid no matter what the outcome.

There are two trains of thought when it comes to the inclusion of mandatory arbitration and attorney fee clauses in contracts.  The first is to always include them as standard practice.  The second is to exclude them as standard practice.  Obviously we are talking about two completely opposite approaches here.  The choice is yours.  Here is the reasoning for each approach.

Arbitration

Here is some standard language for arbitration used in one of my old contracts:

16.1.     Arbitration.  Any controversy, dispute or claim arising out of or related to this Subcontract or any other agreement concerning the Project shall be settled by final and binding arbitration in accordance with ORS 36.300 et seq. or any successor provisions governing arbitration except as provided below:

16.1.1.  Commencing Arbitration.  Arbitration shall be commenced by providing the opposing party with a written notice of the dispute or claim within 30 days of the event giving rise to the dispute or claim or within 30 days after discovery of the condition giving rise to the dispute or claim, whichever is later.  The written notice shall summarize the basis of the dispute or claim and describe the relief sought.

16.1.2.  Location.  The arbitration shall be held at a location within Oregon as agreed upon by the parties.  If the parties cannot agree upon the location of the arbitration hearing, the hearing shall be held at the County Court House of the County where the Project is located, or any other place as the Presiding Court of that County shall order.

16.1.3.  Arbitrator.  The claim or dispute shall be resolved by a single arbitrator selected and agreed upon by the parties.  The arbitrator shall be a licensed contractor, architect, engineer or attorney with substantial experience in residential construction.  If the parties cannot agree upon an arbitrator, the arbitrator shall be appointed by any court of competent jurisdiction.  Each party shall pay an equal share of the costs of arbitration including the arbitrator’s fees and expenses.

16.1.4.  “Limited” Discovery.  Each party agrees to limit pre-arbitration discovery to the production of documents pursuant to ORCP 43.  Within 30 days of commencement each party shall produce any and all documents relied upon to prove or defend their claims.

16.1.5.  Costs and Fees.  Each party shall bear its own costs of discovery, deposition, attorney and witness fees but the arbitrator shall be empowered to make a different allocation of such fees and costs in the award.

16.1.6.  Award.  The arbitrator’s award shall be a final and binding resolution of any and all disputes or claims submitted for resolution and judgment of the court may be entered on the award pursuant to ORS 36.350 or any successor provision.

16.1.7.  Parties Bound.  The owner, Contractor and all subcontractors, sub-subcontractors, material suppliers, engineers, architects, designers, construction lenders, bonding companies, and all other related parties concerned with and involved in the performance of this Subcontract are bound, each to the other, by this arbitration clause, provided such party has signed this Subcontract, has signed a contract which incorporates this Subcontract by reference, or signs any other agreement to be bound by this arbitration clause.

As you can see, this clearly lays out what will happen, when and with whom.  This is very cut and dry.  The reason for wanting this as a standard part of your contract is that there is no question as to what will happen if things go wrong.  It is clear to both you and your subcontractor and a simple path to resolution is available if necessary.

The problem with mandatory arbitration is that it all too often is the first course of action in any dispute.  Parties sometimes give up their ability to communicate as adults and find that the “only way” they can get a situation resolved is through arbitration.  This is expensive and time consuming.  It is always better to work things out one human being to another if possible.

 

Attorney Fees Clause

Most contracts have attorney fee provisions in them under English Rule.  Another name for this provision is “loser pays.”  This system stipulates that the prevailing party’s attorney fees will be paid by the losing party.  It often includes “all reasonable fees associated with the proceeding including attorney fees, court fees, and other fees incurred in the process.”

The argument for this is that if you are sued or you find yourself needing to sue another party, and you end up winning the case, you should not have to pay for the attorney fees associated with the case.  After all, you were in the right so why should you be punished financially?  By including this provision in your contract, you give yourself the ability to collect fees if necessary.

The downside of this clause is that attorneys know right away that they will get paid no matter what the outcome of the case.  There is no incentive for them to win the case.  In addition, it does not matter to them if the case is completed in a week or in a year.  They get paid by someone in the end regardless.

With both of these clauses, you’ll need to decide what feels right for you.  Talk to your attorney and ask him or her what they think is best.  Don’t simply use or not use these clauses because everyone else does or does not.   Know what you are putting into your contract and why.  This is true for all of the sections in your contract.  Understand what you are saying and why.  It will help you avoid lawsuits and arbitration in the end.  Your ability to clearly discuss the provisions of your contract with a subcontractor who appears to be defaulting on your agreement may be just what is needed to bring them back from the edge.  Take the time to understand your contracts.