Mark Zebrowski, Kenneth Kuwayti, and Rachel Wertheimer, Morrison & Foerster LLP
Contract disputes result in some of the largest verdicts each year. Businesses are well advised to consider potential contract disputes at all stages of a contract's life, including negotiation and drafting, performance, and breach. Here are ten-and-a-half suggestions to maximize the likelihood of success in contract litigation.
1. Be Clear
In contract litigation each party argues for the agreement to be interpreted in its favor. The more clear and concise the language of the contract, the less likely litigation will arise and the more likely it may be resolved by dispositive motion. Use terms consistently. Beware of reusing old documents without thinking through whether the terms are well drafted and really provide for what you want. Do not consider any provisions to be routine or unimportant; disputes often arise over or involve provisions the parties never considered worth negotiating, or events they never thought would occur. Do not assume that all parties understand the intended meaning of an ambiguous term or that, even if they have the same understanding at the time of contracting, their understanding won't change when a dispute arises. While a contracting party may choose to accept an ambiguous term to get a deal done rather than push a negotiation point and kill the deal, this increases the risk that litigation will arise and be hard to resolve by settlement or dispositive motion, and also increases the risk of an adverse outcome. The greater the clarity, the less the risk.
2. Establish the Ground Rules
Businesses should carefully consider what dispute provisions to include in their contracts. Will they be better off with arbitration or in court? If arbitration, in what forum; with what discovery; before how many arbitrators; under what rules? Should there be a notice and cure period? Should there be mandatory mediation and, if so, what will be the remedy if a party ignores the requirement? Should there be a jury waiver? Should there be an attorneys' fee clause? What law should apply? Where should the arbitration or litigation be held? Will the desired dispute resolution provisions be enforceable? Should damages be expressly limited e.g., no consequential damages or no punitive damages? The answers to these questions are, "it depends." The questions should be asked and the answers should be found in the contract.
3. Perform
More often than not, the party that asserts a breach has itself not fully complied with its own contractual obligations. Inform all necessary personnel of any relevant contractual duties. Calendar key performance dates. Assign responsibility for performance and monitoring. Be cognizant of turnover that may impact performance and institutional memory. Comply with your contractual obligations in good faith. And when drafting contracts, think about whether the provisions you are drafting are ones that are realistic for your own company to perform.
4. Insist on Performance
Parties often get lenient in demanding performance from their contracting partner until "enough is enough," at which time they demand performance or claim breach. By that time, the breaching party will often argue waiver, estoppel, or other theories based on the course of dealing. Insist that your partner comply with its contractual duties, document objection to any deviations, and memorialize any amendments or modifications.
5. Create Favorable Evidence
Contracting parties have an opportunity to create favorable evidence during the negotiation and performance of the agreement. Take advantage of this opportunity. Document your positions and performance, especially in correspondence with your contracting partner, and provide timely notices of breach. Do not let any accusatory or harmful communications from your contracting partner go without a response to set the record straight.
5-and-a-half
Do Not Create Unfavorable Evidence. Everyone in a business organization has the ability to create unfavorable evidence at every point in the life of a contract. Choose who the point person(s) should be for contact with the other side. Determine who on your side should be taking notes. Train the people who will have these responsibilities. The best way to avoid creating unfavorable evidence is to think before you write. In corresponding with your contracting partner and your colleagues, think about how your correspondence might be interpreted down the road. Avoid creating documents whose meaning may be misconstrued or harmful.
6. Retain the Evidence
When a dispute arises it is generally better to have evidence than to not have it. The party that has evidence such as emails, drafts, and notes can generally use such evidence to support a favorable story; the party without such evidence may have a difficult time refuting such evidence, refreshing its own witnesses' recollections, or overcoming the adversary's paper trail. If documents are destroyed, this should be done in compliance with a formal document retention policy. No evidence should be destroyed when a litigation hold is in place.
7. Take Control of Your Destiny
If a dispute is inevitable, it is generally better to be the plaintiff than the defendant. Plaintiffs may be able to choose the forum for the dispute and to have more control over the litigation process.
8. Consider Cross-claims Carefully
Defendants often like to "sue back." While the reaction is understandable, the prosecution of cross-claims will increase the expense and complexity of the litigation. It may also interfere with trial strategy. At trial, it may be preferable for a defendant to simply defend against the plaintiff's claims rather than to also have to prove its cross-claims.
9. Use Motion Practice
Contract disputes often lend themselves to motions to dismiss or for summary judgment, even in arbitration. Where dispositive motions are successful, they have the obvious benefit of ending the litigation. Even where not entirely successful, they can limit the claims and recoverable damages. If you don't win on those pre-trial motions, take advantage of other vehicles to get the court to rule on the meaning of your contract at trial through motions in limine, jury instructions, and motions for non-suit or directed verdict.
10. Witnesses Matter
While the contract and related documents will obviously be important, contract cases often turn on witness testimony, particularly if the court allows parol evidence (which courts generally do). If the court allows an adversary to offer parol evidence, do you have a witness who can refute that testimony? Is your witness credible? Is his or her testimony supported by documentary evidence? Is he or she a lawyer? Thought should be given to having at least one non-lawyer involved in contract negotiations to minimize the risk that the company will have to call its own in-house or outside counsel to testify and have to deal with attorney-client and work product privilege issues. If the lawyer is the only person involved in the negotiations, consider creating non-privileged documents, such as communications with your contracting partner, that detail your positions and can be used later.
Contract disputes are somewhat unique in that they arise from a series of communications and dealings that allow the parties to "create" the evidence at every turn, both good and bad. "Creating" the best evidence (that is truthful and accurately documents your position), avoiding pitfalls, and controlling the ground rules at every step of the contract negotiation, documentation, and performance process can significantly reduce the chance that contract litigation will arise, and materially increase the likelihood of success if it does.
The information in this Top Ten should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This Top Ten is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
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