Website Development Contracts, Part 6: Lawsuit or Arbitration?

Whether you like it or not, disputes do arise from time to time. For example, disputes arise about early termination, delay of deliverables, breach of performance, or the like, so it is best to plan for the worst and hope for the best. Part 5 of this series was about mediating disputes, which could solve the problem before litigation or arbitration.

Most contracts include provisions describing the manner and procedure for handling legal disputes arising out of, or relating to, its terms. For example, the contract should explain how and under what circumstances a party can terminate the contract early — or what will happen if a party terminates early, say by breaching material terms of performance under the contract.

The contract should identify how the parties will handle disputes. Nowadays, contractual disputes can be handled in a variety of ways, in more than one forum. The most obvious forum, of course, is the courthouse. Typically, when people think of breach of contract disputes, they think “lawsuit at the courthouse.” Litigation simply means to take legal action.

The Public View of Lawsuits

Everyone reading this column has watched movies or TV shows depicting lawsuits with lawyers, judges, and witnesses in courtrooms. For those of us who litigate often, most of these are theatrics are just that, theater but not “real life.”

Without delving into a lengthy discussion of why most trial lawyers cannot stand to watch Law and Order or Judge Judy, the fact of the matter is that how movies and TV shows depict lawsuits and trials does not help you make practical, real-life decisions about what your website development contracts should say about dispute resolution.

In 2020, the reality is that about 95 percent of all litigation settles before reaching trial — whether in a courtroom or an arbitrator’s office, as discussed below.

Discovery in Litigation

In general, from the time that litigation is commenced, until trial or arbitration, the parties have the right to collect evidence from the opposing parties by requesting the production of documents such as letters, emails, text messages (SMS), Jira records, and documents of website development projects.

As well, litigation includes the taking of oral depositions under oath of individuals (like testifying in a courtroom in front of a jury), which entails asking detailed questions in front of a court reporter.

The discovery process is very expensive, and in fact today the extremely high cost of collecting evidence has made the electronic discovery, or e-discovery, component of evidence one most expensive part of the litigation process.

Legal Theories

In lawsuits and arbitrations, the parties can claim breach of contract, a tort e.g. fraud or negligent misrepresentation, or a violation of state or federal law — such as misappropriation of a trade secret.

Of course, before you sign a Web development contract you do not expect to terminate or litigate, but you should nonetheless think about potential disputes if the Web development contract ends badly for you.

Almost all contracts include a provision about litigation. Most contracts, in fact, have several provisions concerning litigation. The most common provisions include: Jurisdiction, Venue, Alternative Dispute Resolution (ADR includes mediation which is Part 5 of this series), Attorneys’ Fees, and Costs and Expenses.

Let us start with jurisdiction and venue.

Jurisdiction refers to what laws govern the contract and will be applied by the adjudicator if a dispute were to arise, but judges or arbitrators may not agree with what the contract states the jurisdiction should be.

Here are Jurisdiction & Disputes provisions from a sample Web development contract on Columbia University’s website:

Jurisdiction & Disputes

A.     This Agreement shall be governed by the laws of New York.

B.     All disputes hereunder shall be resolved in the applicable state or federal courts of New York. The parties consent to the jurisdiction of such courts, agree to accept service of process by mail, and waive any jurisdictional or venue defenses otherwise available.

In the sample above, the contract says that the laws of the State of New York apply. It also states that the dispute shall be resolved in the state or federal courts in New York. The physical location where the litigation or arbitration will occur (like New York), is referred to as “venue.” When clearly set out in a contract, judges and arbitrators typically oblige the parties’ agreed-upon choice of jurisdiction and venue.

If the foregoing contract was silent as to venue of litigation (the reference to New York courts), then the judge or arbitrator will still apply New York law — even though the lawsuit or arbitration may be filed in another state — since the other party may be in California and bring the lawsuit or arbitration in California, but the New York applying.

Arbitration is not the same as a lawsuit.

A contract may require that the parties pursue arbitration if they have a dispute which may be controlled by the Commercial Rules of the American Arbitration Association, or another organization.

Often times, the contract does not specify the details for arbitration. But if it does, it could say that either a panel of three arbitrators or a sole arbitrator will conduct a hearing and rule on the evidence, and issue an arbitration final decision referred to as an award at the end of the hearing — much like a jury may rule in court trial.

Unless there is some fraud by the arbitrator the likelihood is remote that a loser in an arbitration will be able to file a successful appeal if they do not like the arbitrator’s award.

Arbitrators follow the terms of the contract, so if the parties’ contract requires that the arbitrator has at least five years of experience in the Web development or e-commerce industry, then the arbitrator must have that experience unless the parties agree otherwise. Also, the parties can agree that the final hearing lasts one day, limits to the hours of depositions, and the venue for the arbitration hearing.

If there is a provision requiring an arbitration, there will be no jury and no judge, only the arbitrator (or panel of three arbitrators) to make the final award.

Lawsuits are in state and federal courts.

Lawsuits end in trials — either before a judge or jury — kind of like what you see on TV or in the movies. State court hearings and trials are governed by state rules that vary on a state-by-state basis.

Federal courts are governed by their own set of rules and procedures. If the plaintiff (the party filing the lawsuit) and defendant (the party being sued) are companies in the same state, then they generally cannot bring the lawsuit in federal court unless there is a legal issue that involves a “federal question.” Ordinarily, this means a violation of a federal law or statute. Here, this could involve, for example, a claim for copyright infringement under the Lanham Act.

As discussed above, the discovery of evidence follows the filing of the lawsuit, and ultimately, if the parties do not settle at a mediation or otherwise, will lead to a trial on the merits. The parties can agree to have a jury or not, and the rules of trial are well established by state and federal courts.

Conclusions

You can negotiate your website development contract to include or exclude provisions about, jurisdiction, venue, mediation, and lawsuits or arbitration. So hopefully you know more about your options.

This website development contract series should help you learn more about legal issues to consider and what to negotiate. We hope you find the information to be helpful.