A Contract Challenge for You

Certain clauses are almost always found near the tail end of the contract – after everyone is tired of reading. They blend into the boilerplate, come after the scope of work and contract price and barely register with even experienced contract readers.

The problem is that this clause governs how and where you can press your claim to get paid.

Your Challenge: Weave your way through the following clause (lifted from an actual contract submitted to us for review) and find what would make it a terrible agreement for your company to make.

This Agreement shall, in all respects, be interpreted enforced and governed by the laws of Missouri, excluding its choice of law provisions All claims and/or controversies of every kind and nature arising out of or relating to this Agreement, including any questions concerning its existence, negotiation, validity, meaning, performance, non-performance, breach, continuance or termination shall be settled (a) at Other Company’s election, by binding arbitration administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules and, in such case (i) the arbitration proceedings shall be conducted before a panel of three arbitrators, with each party selecting one disinterested arbitrator from a list submitted by the AAA and the two disinterested arbitrators selecting a third arbitrator from the list, (ii) each party shall bear its own costs of arbitration, (iii) all arbitration hearings shall be conducted in St. Louis County, Missouri, and (iv) the provisions hereof shall be a complete defense to any suit, action or proceeding instituted in any Federal, state or local court or before any administrative tribunal with respect to any claim or controversy arising out of or relating to this Agreement and which is arbitrable as provided in this Agreement, provided that either party may seek injunctive relief in a court of law or equity to asset, protect or enforce its rights in any intellectual property and/or confidential or proprietary information as described in this Agreement, or (b) in the event that Other Company does not elect binding arbitration as permitted in point (a) above, exclusively in the United States District Court for the Eastern District of Missouri or, if such Court does not have jurisdiction, in any court of general jurisdiction in St. Louis County, Missouri and each party consents to the exclusive jurisdiction of any such courts and waives any objection which such party may have to the laying of venue in any such courts.

See the very end of this post for the answer.

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If your company is owed money, you will either have to chase it in Missouri (which, presuming you are in MD will be a huge expense and inconvenience), or submit the claim to AAA arbitration before a panel of 3 arbitrators. No disrespect to AAA, but they are considerably more expensive than a number of other reputable dispute resolution organizations. Moreover, for all but the largest claims, paying for three arbitrators to hear the case is an incredible waste of money.

It’s akin to each side paying for 1½ additional attorneys!

And, here are 3 solutions for addressing the problem with the clause:

Solution #1: Press hard for the right to bring suit for non-payment in your neck of the woods.

Solution #2: Do not allow the other side to choose whether the matter is arbitrated or litigated (as larger companies will often try to “bleed” smaller ones by choosing the more expensive forum).

Solution #3: Include a clause allowing either access to court or arbitration by one arbitrator for smaller claims. (Personally, I recommend that companies in MD carve out claims of $30,000 or less for trial in the Maryland District Court and that they never agree to a three arbitrator tribunal as it would be much too expensive to enforce their right to payment.

One More Thought: In all that language, there is no waiver of the right to proceed before a jury. A jury trial waiver should always be inserted into business or construction contracts.

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