Non-competes are governed by different rules from other contracts. Courts limit non-competes to certain circumstances, such as when an individual has received confidential information, goodwill, or specialized training; even then, the restrictions on competition must be “reasonable.” However, when it comes to determining the applicability of the Federal Arbitration Act, the United States Supreme Court recently held non-competes should be treated the same as any other contract Continue Reading The Supreme Court Blesses Arbitration Clauses in Covenants Not to Compete, But is Arbitrating a Non-Compete Always a Good Idea?
A recent article in the Wall Street Journal discussed the rise in litigation regarding covenants not to compete, along with a summary of the positives and negatives of these covenants. For good or bad, a covenant not to compete is enforceable in Texas if it is ancillary to, or part of, an otherwise enforceable agreement at the time the agreement is made, but only to the extent that the covenant contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other protectable interests of the employer. Continue Reading 10 Drafting Tips for Covenants Not to Compete
Construction legislation in the 2013 session was much different from 2011. In 2011 many new construction related laws were passed including governance of indemnities and mechanic’s liens. In 2013 many significant construction related bills were considered, but relatively few passed. Nevertheless, the few that did get signed into law are worthy of review. Continue Reading Legislative Update
Bankruptcy preference claims are always an unpleasant surprise. They are frustrating and, in many circumstances, are unjust because they allow a bankruptcy trustee or the debtor to clawback money you received in exchange for providing valuable labor, services, or products. Continue Reading Contractors and Suppliers’ Defenses to Bankruptcy Preference Claims
Bankruptcy court is often the “court of bad news” for creditors. In particular, subcontractors and suppliers face unique challenges when a customer files for bankruptcy. But they also have unique rights that may elevate their claims. Failing to act quickly and correctly on those rights can have significant consequences. Continue Reading Weathering the Storm of an Owner or General Contractor Bankruptcy
Previously, Texas law provided that a court “may” award costs and reasonable attorney fees in a suit to foreclose a lien, enforce a payment bond claim or declare a lien to be invalid to the extent that such costs and reasonable attorney fees were “equitable and just”. The use of the word “may” allowed courts discretion over whether to award a lien claimant his or her attorney fees. This led to unfair results. Even lien claimants who prevailed did not always receive their attorney fees and/or costs. Continue Reading Collecting Attorney Fees for Lien and Bond Claims
Indemnifying someone for their own negligence is a tough pill to swallow. Yet, such clauses, often referred to as “broad form indemnities”, have been common for many years in Texas construction contracts. Continue Reading Broad Form Indemnities in Construction Contracts
Because of time constraints and the desire to get the business, subcontractors and suppliers routinely sign lengthy subcontracts and master service agreements without closely reading the terms and conditions. Below are some clauses that every subcontractor and supplier should review in a contract. Continue Reading Important Contract Clauses for Subcontractors and Suppliers
If you decide to agree to an arbitration clause, then you should carefully consider what issues you want to address in the clause. Below are some key points and provisions that should be considered when negotiating or drafting an arbitration clause.
1. Consider the Number of Arbitrators
Using only one arbitrator may be risky because the grounds to vacate an arbitration award are very narrow. You may be stuck with that arbitrator’s award, even if erroneous. To minimize this risk you may choose three arbitrators rather than one. This will reduce the risk of error, but substantially increase the cost.
2. Define the Procedural Rules
Many parties define their discovery rules and set limitations on depositions, interrogatories, and requests for production. This is desirable because it cuts costs. However, discovery limits are risky because one set of discovery limitations does not fit all disputes. For example, if you are a claimant in a large construction defect dispute, you may regret agreeing to limit discovery.
Likewise, many parties agree to apply the Federal Rules of Evidence. This is wise because it provides the parties with some measure of certainty regarding what rules apply and it enables the parties to use case law construing these rules for guidance.
3. The Scope
The scope (i.e., the universe of claims to be arbitrated) is arguably the most important issue. Surprisingly, this is a frequently litigated issue with respect to arbitration, so make sure the scope is clear (the AAA provides parties with a clause builder program). Most parties prefer a broad scope and use terms like “all claims arising out of or related to this Agreement.” Courts tend to construe such broadly worded arbitration clauses to include torts arising out of the subject matter of the contract.
4. Retain Judicial Relief
The arbitration clause should contain a carve out that explicitly allows you to seek injunctive relief and to foreclose your lien in a court because an arbitrator lacks the contempt power to enforce an injunction and cannot foreclose a lien. If you fail to retain any judicial remedies, your adversary may argue the arbitration clause has stripped the court of jurisdiction to enter such orders.
If the arbitration clause requires mediation as a condition precedent, consider striking that requirement. Mediation, in the right circumstances, is great tool to efficiently resolve a dispute. Naturally, it is popular. However, in many cases mediation at the outset of a dispute is not fruitful because the parties do not yet understand the strengths and weaknesses of their claims and/or defenses. Mediation typically makes more sense after the parties are allowed to conduct discovery and, therefore, are better able to assess liability and damages.
Arbitration clauses are very common in contracts in the construction and energy industries. Many industry players reflexively insist on arbitration despite its pitfalls. While arbitration has its place, a bench trial is a viable alternative to arbitration.
Bench trials are simply trials to a judge rather than a jury. Parties may agree to a bench trial in a contract by agreeing to waive their rights to a trial by jury (i.e., a jury waiver).
When drafting a contract and trying to decide between an arbitration clause and a jury waiver, consider the following factors:
Expense – Contrary to popular belief, arbitration is very expensive. The fees associated with filing the arbitration and paying an arbitrator, the arbitral administrative organization (e.g., AAA or JAMS), and the court reporter fees are often substantial. In contrast, the filing fee for a lawsuit is nominal, and the judge and his/her court reporter are essentially free (they are paid with your taxes).
The Right to Appeal – The grounds to vacate an arbitration award are very narrow. Consequently, arbitration awards are seldom vacated by the courts. This is the biggest drawback of arbitration. Because it is so difficult to reverse an arbitration award, placing your fate in the hands of an arbitrator is risky and could be fatal. On the other hand, appellate courts have broad powers of review over trial courts and routinely reverse trial courts for many reasons.
Confidentiality – Arbitration, unlike a bench trial, is a private proceeding that is closed to the public. Further, the documents filed in the arbitration, subject to the arbitrator’s rules and the parties’ agreement, may be kept confidential. Although a trial is public, the trial court can protect a party’s confidential information by entering a protective order and requiring confidential documents to be filed under seal.
Freedom to Choose the Fact Finder – The parties pick the arbitrator, but they cannot pick the judge. This is an advantage of arbitration. It allows parties to pick a fact finder that both believe will be fair. It also allows parties to pick a fact finder with expertise relevant to the subject matter of the dispute. Picking someone with expertise may reduce the risk of a mistake on a key issue that depends upon understanding a specialized area of law or a specific industry.
Enforceability – In many foreign countries, arbitration awards are generally more likely to be enforced than a judgment from a court located in the United States. If you are contracting with a foreign entity with assets overseas but no assets in the United States, then, in these circumstances, arbitration may be preferable to a lawsuit because of the question of enforceability.
The Bottom Line
Arbitration is expensive and the limited appellate review of an arbitration award makes it potentially dangerous. Nevertheless, arbitration will always have its place. Arbitration is and will remain preferable for certain disputes because it offers privacy, the freedom to select the fact finder, and is more likely to be enforced abroad than a judgment.