In this comment to a recent post, longtime reader Chris Lemens mentions what he refers to as “no-contest” provisions. That sent me scurrying to
the Bantar Gebang trash dump EDGAR, where I found the following examples (emphasis added):
Each party hereto agrees and covenants that it will not contest the validity or enforceability of any exculpatory provision of this agreement and the other loan documents on the basis that the party had no notice or knowledge of such provision or that the provision is not “conspicuous.”
The parties may enter a judgment rendered by the courts of New York under this Agreement for enforcement in the courts of New York and the party against whom such judgment is taken will not contest the authority of such courts to enforce such a judgment.
Licensor owns all rights, title and interest in and to Marks, and throughout the Term of this Agreement and thereafter, Licensee shall not contest the validity of the Marks, or claim adversely to any right, title and interest of Licensor in and to the Marks; …
An alternative to contesting what the other guy says is to offer your own contention. In effect, shall not contend is equivalent to shall not contest:
The Sub-Contractor shall not contend that any person to whom the benefit of this agreement is assigned under clause 11.1 may not recover any sum under this agreement because that person is an assignee and not a named party to this agreement.
Each party acknowledges and agrees that it has not relied on or been induced to enter into this Agreement by a representation, warranty or undertaking (whether contractual or otherwise) that is not expressly set out in this Agreement and it will not contend to the contrary.
Executive further agrees that the provisions of Paragraphs 13 and 14 are reasonable and necessary for the protection of the Company’s legitimate business interests, and Executive agrees that Executive will not contend otherwise in any lawsuit or other proceeding.
Drafters use shall not claim and shall not allege (and perhaps other alternatives) to the same effect. Given the varying terminology, I’ve decided to call all such provisions “no-dispute” provisions.
So, are no-dispute provisions good, bad, or indifferent?
Precluding someone from disputing something is an indirect way of addressing an issue. If you want to establish something in a contract, it’s best to address it directly, using whichever category of contract language is appropriate, instead of seeking to preclude the other guy from arguing about it. For example, instead of having a contract party say they won’t contest the validity of a given contract provision by claiming that it isn’t conspicuous (see the first example above), it would be simpler to have that party acknowledge that the provision is conspicuous.
But you can address an issue directly and also have the other guy agree not to argue about it. The second, third, fifth, and sixth examples above offer instances of that. Presumably the aim is not only to stake out a position but also to make it costly for the other guy to argue about it later.
Courts might have held that in particular contexts, a no-dispute provision is enforceable—that’s too big a topic for me to wade into at the moment. But I have two reservations about no-dispute provisions generally.
First, no-dispute provisions could in theory be tacked on to every single provision in a contract: whatever the provision is, you could get the other guy to agree not to dispute it. In fact, you could rig up an internal rule of interpretation saying that each party agrees not to dispute anything in the contract. That seems so broad as to be silly. But on the other hand, why single out just specific provisions for this sort of treatment?
In that respect, it’s relevant that the term “no-contest” when applied to contract provisions is generally understood as referring to a provision in a will to the effect that if you challenge the will, you’re barred from receiving whatever you would have otherwise gotten under the will. Such provisions have broader implications than no-dispute provisions, and as such they make more sense.
Second, contract disputes generally happen when something is unclear. It seems unfair to use no-dispute provisions to preclude someone from seeking to clear up such uncertainty. Although I’ve thought about it for all of five minutes, I think I could put together a strong public-policy argument against no-dispute provisions.
So generally, I suggest that no-dispute provisions are indirect, overbroad, and unfair.
Now, would anyone like to tell us how no-dispute provisions have been received in particular contexts?
Updated 5 January 2016: I’m contemplating calling these provisions “won’t-dispute provisions” instead of “no-dispute” provisions.
10 thoughts on “The Pros and Cons of No-Dispute Provisions”
I would go even farther than you; not only is a no-dispute provision indirect, overbroad and unfair, I’d argue that, except in the narrowest of situations, it’s void as against public policy: it’s an attempt to win all suits in advance by delegitimizing the dispute resolution process (like certain kinds of political argument, but I digress). But that’s what courts are set up for, and ousting them of jurisdiction like that, other than through the recognized means of arbitration and alternative-dispute-resolution clauses, won’t go down very well. Too clever by half, as the cousins say.
On the point about acknowledging that a provision is conspicuous, by even saying in one clause that a party acknowledges that another clause is conspicuous, you’re creating a recursion if that acknowledging clause isn’t itself conspicuous. So, the best solution is to make the “target” clause C*O*N*S*P*I*C*U*O*U*S!!!!!! (with apologies to Leo Rosten).
I don’t think you’re going further so much as being explicit: I mention the strong public-policy argument.
Presumably the matter not to be disputed (the ‘non-disputandum’) is either (a) a matter of fact, (b) a matter of law, or (c) a mixed matter of fact and law.
If the drafter’s object is to establish the matter as solidly as possible, using an acknowledgment by one or both parties would probably be effective as to (a), ineffective as to (b), and sometimes effective as to (c), depending on how blatantly it purports to usurp a judicial or legislative function.
No-dispute clauses can backfire if the court imagines one party is trying to tie the court’s hands and reads ‘no party shall contend otherwise’ as a thinly veiled ‘no court shall hold otherwise’ and taking offence.
The possible use of a quasi-testamentary in-terrorem clause against a party who disputes a contractual non-disputandum is interesting, but a court might disallow it as imposing a penalty for a contract breach.
The place that I would use it is where the parties are attempting to agree to a status that their agreement does not itself create. For example, suppose that the parties intend the contractor to be an independent contractor and not an employee. As per MSCD, they say that is their intent. As MSCD notes, you can;t actually bind the court, so language of intention is appropriate, and the court will decide what it decides. Fine as far as it goes.
But the customer may want to further protect itself from being victimized by a contractor who agrees to the intent, then reneges on it by filing a claim for employment benefits, saying that their intention is irrelevant (which might be true). A no-dispute provision turns making that claim into contractual breach. My damages from that breach would presumably be my attorney’s fees. (Alternatively, I could approach the same result by way of an indemnity.)
For me, at least, this is not redundant, because acting contrary to language of intention is not breach. It would be redundant if we tacked it on to language of obligation. If I wanted to recover my attorney’s fees arising from breach, I would simply put in a provision awarding attorney’s fees to the prevailing party.
So I would not use it where language is unclear, and would share your objection to that use. I would use it where the outcome is uncertain because contract language cannot make the determination.
But unless it’s a close case, intent would be secondary to how the relationship actually develops. At the outset of the relationship, before any services have been performed, it would be unreasonable, and unfair, to preclude someone from ever contesting the nature of the relationship.
I disagree. I think it would be unreasonable, and unfair, for someone who has agreed to act as an independent contractor to then claim employee benefits.
Still, I kind of think that an indemnity would be a better way to handle it. The point is reallocating a financial liability.
It takes two to tango. If the company allows the relationship to develop such that the individual can make a halfway plausible argument that they’re an employee, the company would have no reason to complain.
EU case law establishes that your third example is unenforceable on public-policy grounds – specifically, EU competition (antitrust) law. This is echoed in the EU ‘safe harbour’ or block exemption regulation for technology transfer, which provides, in article 5, that the exemption (safe harbour from Article 101 of the EU treaty) is not available for: “any direct or indirect obligation on a party not to challenge the validity of intellectual property rights which the other party holds in the [European] Union…”
This example doesn’t quite fit within some of the discussion on this posting, in that it is not concerned with contesting something before the court. Rather it is concerned with not taking action outside the contract.
I haven’t had the chance to encounter one yet, but i am sure arguing against it in another party’s form contract will get you labeled an unreasonable, fussy, pedantic jerk. At least from the prospective of an in house attorney all too often dealing with stuff that strays too far away from the fee and liability provisions … Sigh
I re-envisioned this as a risk-allocation provision and came up with this:
‘If any exculpatory provision in this agreement is invalid or unenforceable, the party that fact favours shall indemnify the party that fact disfavours from all loss or liability the disfavoured party incurs arising from that fact’. –Wright