Many supply chain disputes can be resolved before either party files a lawsuit. Commercial incentives often encourage the parties to avoid court, regardless of the severity of the current impasse between the parties. Sometimes an out-of-court resolution makes the most sense from a business perspective. But as any seasoned supply-chain attorney can tell you, some disputes need the external pressure of a court to get resolved. Getting in front of a court, though, might not be as straightforward as you think.
Before filing a lawsuit or preparing to defend against one, parties should ask themselves an oft-overlooked question: What did the parties agree to about when, where and how they can go to court? These provisions—usually titled “dispute resolution”—are almost always buried at the end of standard terms and conditions and often overlooked when drafting and negotiating contracts. But they can play an enormous role in how a dispute is resolved, and even who wins. Because of their importance, parties should give these provisions due consideration during contract negotiations before any dispute arises, to the extent such provisions can be negotiated.
It is not difficult to see the significance of these provisions. For example, contractual dispute resolution clauses may dictate when either party can file a lawsuit. It is common for dispute resolution clauses to contain some form of mandatory mediation process before either party can sue. These provisions may require notice and attempts to resolve the dispute that must be exhausted before either party can file a lawsuit. These informal processes may include required periods of days, weeks or even months before next steps can be taken. They may also require the participation of certain individuals from either party. In most circumstances, courts will enforce these provisions. For these reasons, one should carefully assess the extent to which the parties’ contract might require this process as soon as a potential dispute is brewing.
Parties should also review the relevant contractual documents for an arbitration provision. However, not all arbitration clauses are the same. Some may be permissive, while others are mandatory. Failure to adhere to an arbitration provision could sidetrack the first several months of a case, as they will be spent litigating not the merits of the case, but whether the case should be in court or in a private arbitration.
The parties’ contract might also dictate two other important aspects of a lawsuit: 1) where it can be filed and 2) what law will govern. A jurisdictional clause could mean that the lawsuit has to be filed in one of the parties’ backyards; it could also dictate decisions about counsel and strategy. In the absence of a choice of law provision, a jurisdictional clause might also dictate the substantive law that will apply to the proceedings. If the contract does have a choice of law provision, it may provide that a different state’s—or country’s—substantive law will apply to the dispute. And the applicable law is critical because it can determine the parties’ rights and how the contract is to be interpreted. For example, certain actions might be a breach under the law of one jurisdiction, but not a breach under another. Also of note: The remedies available to the winning party may vary from one jurisdiction to the next. Again, one should carefully review these provisions to assess whether they are enforceable, and if so, what the best strategy is going forward.
These provisions are usually not top-of-mind until one party tells counsel that it’s time to go to court. But for the reasons just discussed, among others, these issues should be considered much earlier—even at the contracting stage, as they will likely impact the overall legal strategy from the start. Depending on your position in the supply chain and your contracting leverage, you may be able to change your customer’s standard terms. Contracting parties may also want to review their own terms and conditions for dispute resolution provisions, or else risk having their future legal strategy hamstrung by their own standard terms.
Warner attorneys regularly counsel suppliers on these issues. Members of Warner’s Automotive Industry Group are also experienced in drafting dispute resolution provisions so when a dispute arises, our clients’ options and interests are best protected.
Dispute resolution provisions are just one of the many reasons you should contact counsel at the outset of contract negotiations, and no later than the first sense that you might be headed toward a supply-chain dispute. If you have questions or concerns related to this or any other supply chain issue, please contact Adam Ratliff or your Warner Automotive Industry Group attorney.