April 2000 

Classifieds
Letters
Display Ads
Archives
Article Index
Apr '00 Issue
Latest Issue
MSBA Home Page

Litigation Prevention: Things You Can Do in Drafting & Negotiating

The "best" trial lawyers often use their skills to keep their clients out of court. This means reviewing deals and contracts from the litigator’s perspective before finalizing them. Litigators look for potential litigation problems that even the most skilled corporate attorneys may overlook. In this article, we will review the kinds of clauses and problems that are fertile sources of potential trouble, and how to forestall the likelihood of their leading to litigation.

Contract clauses concerning litigation are often boilerplate, ignoring the specifics of each case and court decisions concerning the boilerplate language. Litigators can assist in redrafting the boilerplate provisions to take account of the specific facts and court decisions and to provide what the client really wants and expects.

Which Paragraph Governs?
The longer and more complex the contract, the greater the likelihood that potential conflicts may exist between different sections of an agreement. To avoid such conflicts, directives must be clearly written to stand alone if that is the client’s intention.

All litigators have been faced with the problem of conflicting clauses. Paragraph 2 says one thing, and Paragraph 5 says another. Which paragraph governs? Or there may be a basic text and an attached rider. Again, in case of conflict, which governs? Tell the reader, otherwise a judge, arbitrator, or jury will tell you.

May or Must?
One of the most notable problem areas is the determination of whether mandatory action is required. Even federal judges can run afoul of this dictate. See, e.g., Asholdge, Ltd. v. Hauser, 163 F.3d 681 (2d Cir. 1998) (holding that a district court abused its discretion in imposing sanctions on an attorney for failing to comply with the court’s letter directing that he "should" file a proposed statement by a certain date, since use of the word "should" rather than "shall" created an ambiguity). If you want to require a specific act specify that it is mandatory, using a word like "shall" or "must."

How It Affects Forum Selection. The use of permissive rather than mandatory language can affect the interpretation of so-called forum selection clauses. This is often of particular importance to non-U.S. companies who want to avoid litigation in a forum in the United States. If the goal is to require litigation in London, England, say so in clear mandatory terms. (For example, "any litigation must be brought in the London Court of Justice, which shall have sole jurisdiction over the dispute etc.") See, e.g., Brooke Group Ltd. v. JCH Syndicate 488, 663 N.E.2d 635 (N.Y. 1996) (given the absence of mandatory language, the court found that the service of suit clause was permissive). Consent to jurisdiction clauses similarly should be specific to avoid ambiguity and litigation problems. Not only should the consenting parties and governing court be designated, but also the manner of service of process.

What of Arbitration Clauses?
In addition to forum selection and consent to jurisdiction clauses, arbitration clauses are one of the most common examples of the indiscriminate use of boilerplate for litigation contingencies without thinking through the process. Does your client want or need arbitration? If so, do you want the arbitration to provide for discovery, application of the federal rules of evidence, limits on the scope of remedies, written decisions, and appealability? For a fuller explanation of all these issues, see Salman and Salman, "Points to Ponder for Arbitration Agreements," 43 Practical Lawyer 31 (Jan. 1997).

Parties can always agree to submit to arbitration at any time, even absent a contract compelling arbitration at the outset of a dispute. See, e.g., Bette J. Roth, et al., The Alternative Dispute Resolution Practice Guide, §4:3, Lawyers Cooperative Publishing (1993). In such situations it is especially important to have a litigator review the agreement submitting the existing dispute to arbitration because issues like the need for discovery and related procedural and evidentiary matters are likely to be more crystallized. Litigators are also more likely to be familiar with the latest amendment to the arbitral bodies’ governing rules. For example, Rule R-44(b) of the American Arbitration Association rules effective January 1, 1999, now enables the parties to request in writing "a reasoned award;" and the attorney and client may very well want to make such a request to increase the possibility of a successful appeal from any adverse award.

Robert R. Salman is a founding and senior partner in the law firm of Phillips, Salman & Stein in New York City and a frequent contributor to national legal publications.

Suzanne A. Salman is an associate with the law firm of Phillips, Salman & Stein in New York City. Her practice includes commercial civil litigation, contracts, antitrust claims, and environmental practices.

Reprinted by permission from the September 1999 issue of The Practical Lawyer, a publication of the American Law Institute - American Bar Association Committee on Continuing Professional Education. All rights reserved.

"Too often in litigation amid the plethora of ‘said,’ ‘aforesaid,’ ‘aforementioned,’ and other examples of ‘legalese’ one loses the meaning of an otherwise simple point."

Customizing Release Documents
Release documents should be within a litigator’s purview. Standard printed forms offer good beginnings for the drafters, but the forms need to be adapted to particular situations, especially in complex cases. Some of the special additions to releases which we have found helpful include the following:

• Representations and warranties that the Releasor has not assigned any part of the released claim;
• A choice of law clause; and
• Forum selection and consent to jurisdiction clauses

Customizing Settlement Agreements
Settlement agreements are, of course, the classic agreement within the litigator’s realm. As tempting as it may be, do not pull out the last settlement agreement and merely change the names, addresses, and amounts. Each case has unique facts that should be addressed in the settlement documents. Make sure that precise forms for dismissal of the case with prejudice and for releases and, if appropriate, covenants not to sue, are included among the settlement documents. You may also want the agreement to deal with issues of confidentiality and government reporting requirements.

Material Breach Only?
Settlement agreements, like all contracts, can be breached and all agreements should provide remedies for the breach of a material term. First, make it clear that it is only breach of a material term that triggers the remedies for breach. See, e.g., RW Power Partners, L.P. v. Virginia Electric and Power Co., 899 F.Supp 1490 (E.D. Va. 1995). What is material can be a hotly litigated issue. See, e.g., Grace v. Nappa, 389 N.E.2d 107 (N.Y. 1979). The message is clear: if you want to allow suit only for a material breach, say so; and specify the conduct that is to be treated as material.

Cure for Breach? Early Termination?
Material breach clauses have several related clauses. Should there be a provision giving the breaching party time to cure any material default? If so, spell out clearly the time and methodology (e.g., five business days, not just five days). Should there be an early termination provision and, if so, under what specific conditions will the provision be triggered? Also, specify what happens on early termination -- payment, closeout procedures, and so on. What kind of notice is to be given in this electronic age? Be specific. Are attorneys fees recoverable to the winner in any suit for material breach? Under the so-called American Rule, attorneys fees will not be allowed unless a statute or contract directs recovery.

Miscellaneous Transaction-Specific Provisions
The nature of the contract will dictate the need for certain clauses. Obviously, construction contracts and intellectual property agreements will have terms unique to each field. Certain concerns, however, are present irrespective of the underlying subject. For example:

• In any warranty clause, it is just as important to say what is not covered as to specify what is covered;
• In a limitation on liability clause (among the most litigated contract clauses), are lost profits and other consequential damages proscribed? If yes, say so. If the agreement is silent on the subject, the parties face the prospect of litigation to determine whether the defaulting party, at the time the allegedly breached agreement was made, expected to be held responsible for lost profits in the event of its failure to perform. See, e.g., Kenford Co. v. County of Erie, 493 N.E.2d 234, 235 (N.Y. 1986). Are damages otherwise limited? If so, be precise about the limitation in amount and/or kind. As long as the limitations are not unconscionable, they should be enforced. See, e.g., Mom’s Bagels of New York, Inc. v. Sig Greenebaum, Inc., 559 N.Y.S.2d 883 (N.Y. App. Div. 1990).
• In an indemnification clause, is a party to be indemnified for its own conduct? If it is not, say so. Indemnity provisions "are generally designed only to protect against liability to third parties." Atlantic Richfield Co. v. Interstate Oil Transport Co., 784 F.2d 106 (2d Cir. 1986), cert. denied, 479 U.S. 817 (1986). Nevertheless, to avoid the need to resolve the issue by litigation, specify in the agreement that claims based on the contracting parties’ conduct are not covered.

The most basic advice for any contract drafting is to use plain English and clearly define any special terms unique to the agreement. Too often in litigation amid the plethora of "said," "aforesaid," "aforementioned," and other examples of "legalese" one loses the meaning of an otherwise simple point. Avoid the temptation to use legalese and opt for plain English. In this connection, drafting of contracts should be done with the same care as the drafting of all other legal documents. This means multiple drafts should be done. In this computer age, however, drafts may be erased. Erasure may present problems in discovery, and if it is not the firm or company practice to erase all drafts, they should be saved. A good cross-examiner will have a field day asking you about the "missing" drafts. The subject of computer discovery is beyond the purview of this article, but it must be kept in mind during the drafting stage. Your contract, like any litigation document, should be clear, logical, and accurate if it is to have a chance of being litigation free.

"All litigators have been faced with the problem of conflicting clauses. Paragraph 2 says one thing, and Paragraph 5 says another. Which paragraph governs?"