One-sided contract term of the day (2): uneven litigation rights

We continue our series highlighting IP Draughts’ “favourite” one-sided provisions in contracts.  These provisions are often found in contracts where there is an imbalance of power between the parties, and where the party with the power (let us call him the “Patron”) seeks to reduce a sometimes theoretical risk by imposing it on the other party (the “Supplicant”).

Today’s one-sided term is:

Clause X does not prevent the Patron from taking proceedings relating to a Dispute (“Proceedings”) in any other court or tribunal with jurisdiction.  To the extent allowed by law, the Patron may take concurrent Proceedings in any number of jurisdictions.

Typically, Clause X states that the agreement is subject to the exclusive jurisdiction of a named court.

Thus the Patron is “having his cake and eating it”.  The Supplicant is forced to litigate in the court named in Clause X.  The Patron can litigate in that court if he chooses to do so, but he also has the option of suing in any other court that is willing to accept jurisdiction.

The quoted clause is taken almost verbatim from a draft agreement that IP Draughts was sent recently.  He deleted the clause when marking-up the draft, the other side accepted the deletion, and no discussion was required.

But why, oh why, was the clause there in the first place?  It gives such a bad impression of aggressive one-sidedness.  The answer is almost certainly that it was in the template that the drafter was using, and he or she did not choose to delete it before issuing the first draft.

The sentiment of this clause is not particularly unusual – IP Draughts has seen similar clauses in a fair number of agreements that he has reviewed over the years.  Usually the clause only appears in agreements where the drafter is in “strongly protective mode” rather than “reasonable, balanced terms mode”.  For example, IP Draughts has seen the clause in many financing and investment agreements.

IP Draughts wonders whether investors realise how bad an impression it gives to the investee company when such one-sided provisions are included in the agreement.  IP Draughts cannot decide whether investors are usually (a) unaware of this impression, (b) a litte uncomfortable sometimes, but guided by their lawyers as to what is conventional and what is needed to protect their investment interests, (c) indifferent to it, perhaps feeling that the investee should not get exercised about “legal boilerplate”, or (d) happy to reinforce the point that they are in charge.  No doubt it varies from investor to investor.

One possibility is that many investors lack experience of commercial negotiations, outside the cocoon of investment transactions, and therefore don’t “get” how important it can be to establish a mutually-respectful “partnership of equals” in commercial negotiations.  And that this extends to the terms proposed in the contract, which are a central part of the structure of that relationship.

Perhaps in some cases the investor’s view is: we just do what everyone else does. We use the same lawyers as other investors, and the same types of documents.  Those documents have developed over many years, and are from a different gene pool to commercial collaboration agreements.  We’re just following market practice.

Perhaps. A similar argument is heard for pay levels in the financial sector, and that argument is now being challenged.

IP Draughts’ scoring for extremeness: 9/10


Filed under Contract drafting, General Commercial

11 responses to “One-sided contract term of the day (2): uneven litigation rights

  1. Reblogged this on IP Draughts and commented:

    Another golden oldie that is getting an airing. Investors often propose terms that, in another environment, would be perceived as aggressively one-sided, but which seem to be regarded as conventional in the investment world.

  2. Andrew Feldstein

    In commercial equipment leasing in the US, we occasionally see this kind of “floating forum” clause. Its purpose is not insidious, but rather to facilitate the discounting of the rental payments with a lender–many lenders like litigating in their preferred forum.

    • Andrew, my reaction to that is that it is not insidious for the person requesting it (lessor?), as he is just trying to facilitate a potential lender demand. But it is insidious that lenders demand it, rather than accept that if there are good reasons why the main agreement is made under a different law, the lender should go along with that.

      • Andrew Feldstein

        I agree with that, and we don’t use these clauses. But I sometimes see them in SMB (small-to-medium business) lease forms.

  3. Vance Koven

    I’d like to pursue Ernest Schneider a bit on his assumption that a judgment in the UK would not be enforced in some US states, when there has been a contractual consent to UK jurisdiction and venue (speaking now in a business-to-business rather than a consumer context). In the US we rely on such contractual undertakings as much as one does in international transactions, and I am not aware of any states that as a matter of law refuse to enforce them (of course, individual judges will wriggle out from them when they see fit, but that’s a risk anywhere). If one is so concerned about such state variations, one should instead use an arbitration clause, where US Federal law and international treaties impose a uniform duty of recognition.

    • Vance, I will let Ernest reply for himself, but I note that he used the example of “default judgment” ie (presumably) where the defendant doesn’t respond to the action. I don’t know whether enforcing this type of judgment is more difficult (is it viewed a bit like interim remedies, which are difficult to enforce in foreign courts?) I agree with your general point about arbitration.

      • Vance Koven

        Courts are indeed loth to permit or enforce a default judgment when a defendant has not received effective notice, and domestically at any rate will vacate one on pretty lame excuse if the other party is not unduly prejudiced. Notice of a suit, though, is generally governed by the civil procedure of the forum jurisdiction and is seldom specified in the contract. There are, as you know, international conventions on recognition of judgments, and notice of the original suit is a paramount concern when seeking enforcement. The party filing suit must therefore take special care to comply with proper notice procedures. However, that is as true between states of the US as between the US and other countries (although the requirements are looser).

  4. Douglas Robertson

    On the more general point is it willful and done with ‘eyes open’ or inadvertent. I have experience of both. I do think there are still a whole bunch of negotiators that take the most extreme position and leave the other party to negotiate away from it. Even though they know the terms are wholly unacceptable or even unpalatable. To my mind this is often lazy and forgetting the point made in the article that a deal is much more than what is written down but how the parties look after each other to grow into a sensible business partnership. The difference is often evident where one person negotiates the deal for a party and somebody else is responsible for the relationship thereafter and immediately has to engage in fence mending and trust building. Crass approach to negotiation in my view.

  5. Mmmm… What about if the licensee wants to sue you? Shouldn’t they get a similar clause?

    • Ernest Schneider

      Nope, because the fundamental and non-contentious point is exclusive jurisdiction in England. The alleged on-sided refinement is nothing else than an anti-avoidance provision to deal with the Catch-22 problem.

      The general comment about mindless boilerplate drafting is, however, valid. Too many people put forward drafts with clauses they don’t understand and, as with the jurisdiction clause, cannot then reasonably justify when challenged … but then, those people are needed to make us look good!

  6. Ernest Schneider

    Hey, that’s one of my pet clauses in licensing! It makes sense where a default judgment from London would be of dubious enforceability in the licensee’s local jurisidction (think about one or the other US state). The point is to avoid the Catch-22 of full proceedings in the local jurisdiction being shot down for want of jurisdiction.

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