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Negotiating Dispute Resolution Clauses in Contracts

Written by Jeremy S. Baker –

Dispute resolution clauses in contracts should be drafted to promote the negotiated resolution of disputes in a fair, timely, and cost-effective manner before the parties must resort to binding dispute resolution methods, such as arbitration or litigation, which are expensive and hurt business relationships.

This article summarizes considerations for drafting contractual dispute resolution provisions.

Continuation of Work During Dispute

Purchasers should consider inserting dispute resolution clauses to require vendors to continue to provide goods and services while a dispute is pending. This can help to avoid further exacerbating the dispute and the issues to be resolved. One example of such a clause is below:

Company and Vendor agree that Vendor’s work will not be stopped or slowed in any way during the pendency of any Dispute; provided, however, that all monies owed hereunder and not in dispute are timely paid pursuant to this Agreement. Notwithstanding the existence of any Dispute, Company shall continue to pay Vendor as provided in this Agreement for all goods and services not subject to a Dispute.

It may be in the interest of vendors to strike such clauses, depending on the nature of their work, to gain advantage in a dispute. Most vendors, however, are willing to continue to work if their business partners pay all undisputed outstanding sums to them.

Continuation of Work clauses can be limited to provide that the work will continue under some circumstances but not others. The following is an example of compromise limiting language for use if the parties cannot agree on a straight Continuation of Work clause:

Vendor shall continue to prosecute its work pending resolution of a Dispute unless (i) the parties concluded Step Negotiations and Mediation regarding such Dispute without a resolution after one-hundred days have elapsed from the effective date of the Notice of Dispute; and (ii) the amount in dispute exceeds $50,000. In that case, either the Company or the Vendor may suspend the performance of Vendor’s work under the agreement until the Dispute is resolved.

This is just one of many possible ways to qualify or limit a Continuation of Work clause. Any dispute resolution clauses that permit a party to suspend or terminate its work during the pendency of a dispute should be coordinated with the general Suspension and Termination provisions of the Agreement.

Step Negotiation Clauses

If negotiations to resolve a dispute reach an impasse, parties often benefit by involving additional people in the negotiation to change its dynamics. Project employees who are charged with performing contracts can, at times, become too invested in their positions to see opportunities for win-win compromise. Fear for their professional standing can cause them to focus on defending their past actions rather than resolving the dispute. Involving managers one level above the project level employees can be useful to break the impasse.

Convening informal negotiations—and, frequently, changing the negotiators—as a precondition to formal dispute resolution procedures is called “Step Negotiation.” One example of Step Negotiation dispute resolution clauses follows:

As a precondition to initiation of a lawsuit or arbitration demand, if either party gives the other written notice of an unresolved Dispute of any kind, the parties shall attempt in good faith to resolve the Dispute promptly by negotiations, as stated herein. Company and Vendor agree to meet at a mutually acceptable time and place within ten (10) days after delivery of such written notice, and, thereafter, as often as reasonably necessary to attempt to resolve the Dispute. Each party shall be represented by a senior management person who was not involved in prior negotiations concerning the dispute and who has authority to resolve the dispute.

You may also consider adding this to dispute resolution clauses:

To the extent that insurance issues are involved, insurer representatives shall be present or available. The identities of the negotiators shall be made known at least three days in advance of the meeting. If a negotiator intends to be accompanied at a meeting by legal counsel, the other negotiator shall be given at least three (3) working days’ notice of such and also may be accompanied by legal counsel. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of all rules of evidence. If the matter is not resolved within thirty (30) days from the initial written notice of the Dispute, or if no meeting takes place within fifteen (15) days after such initial notice, then either party may initiate mediation or arbitration as provided herein.

ALTERNATIVE DISPUTE RESOLUTION

Mediation

Mediation is a flexible, non-binding form of Alternative Dispute Resolution (“ADR”) in which a neutral third party attempts to facilitate a negotiated settlement between one or more parties. The key features of mediation are that it is non-binding and the discussions with mediator and among the parties are confidential. The mediator helps the parties understand their alternatives to settlement and the cost and risk associated with not settling. With this insight, the parties can evaluate whether a particular settlement is in their overall best interests. The parties may ask the mediator to confidentially evaluate the parties’ positions and offer opinions on their respective merit in litigation or arbitration. However, the mediator cannot bind any party or force it to settle.

Mediation is a valuable tool for assessing whether a negotiated settlement or an investment in a binding and more costly form of ADR, such as arbitration or litigation, would yield a better outcome. Mediation tends to succeed if the parties choose an appropriate mediator, freely exchange information (that will be discoverable anyway in arbitration or litigation), and proceed in good faith with a realistic assessment of their best alternative to reaching a mediated settlement. Even mediations that fail to result in a settlement are seldom failures. Exchanging information with one’s opponent tends to provide valuable insight into the claims and defenses they may face if the dispute escalates to arbitration or litigation.

Simple Pre-Dispute Mediation Clauses

Parties can agree to mediate potential disputes before they arise by including a mediation clause in their contracts. An example of pre-dispute mediation dispute resolution clauses is below:

Company and Vendor shall endeavor to resolve their Disputes by mediation. A request for mediation shall be made in writing, delivered to the other party to this Agreement, and filed with the person or entity administering the mediation. The request shall be made in advance of and as a condition precedent to arbitration or litigation. The parties shall share the mediator’s fee and any filing fees equally. The mediation shall be held at the Company’s headquarters, unless another location is mutually agreed upon. Agreements reached in mediation shall be enforceable as settlement agreements in any court having jurisdiction thereof. All negotiations will be confidential and shall be treated as compromise and settlement negotiations for purposes of all rules of evidence. If the mediation process has not resolved the Dispute within sixty (60) days of the submission of the matter to mediation, or such longer time as the parties may agree, the mediation process shall cease.

Contract drafters cannot know what type of a dispute, if any, may arise from performance of the contract, so the best mediation dispute resolution clauses are often the simplest ones.

Designating an Administrator and Rules for the Mediation

Providers of ADR services—who maintain rosters of qualified neutrals, maintain rules and procedures to govern mediation (and arbitration proceedings), and offer facilities where the parties meet—typically administer mediations. Mediation clauses in pre-dispute contracts often identify an administering ADR provider and identify the rules that will govern the mediation. An example of such additional language for dispute resolution clauses is below:

The Company and Vendor shall endeavor to resolve their Disputes by a mediation process administered by The American Arbitration Association (AAA) in accordance with its Mediation Procedures for Large, Complex Commercial Disputes in effect as of the date of this Agreement, or another mutually agreeable alternative dispute resolution firm.

Identifying an ADR provider to facilitate the mediation in the pre-dispute contract is generally a good idea. The provider’s rules and procedures eliminate doubt as to the proper process for initiating a mediation and assist with the selection of a qualified mediator from the panel list of neutrals that they maintain.

The AAA’s website (www.adr.org) contains a variety of useful information, including rules and procedures, and lists of qualified neutrals. Other ADR service providers such as JAMS (www.jamsadr.com) and the International Institute for Conflict Prevention & Resolution (“CPR”) (www.cpradr.org) also have highly regarded mediation rules and procedures that are similar to those found on the AAA website.

Post-Dispute Submission to Mediation

Even if mediation is not prescribed by contract dispute resolution clauses as a precondition to filing an arbitration demand or lawsuit, parties can agree to submit disputes to mediation after they have arisen. Most ADR service providers’ websites provide forms and procedures through which parties can agree to submit disputes to mediation even absent a pre-dispute mediation clause.

Guided Choice Dispute Resolution

Guided Choice Dispute Resolution (“Guided Choice”) is a novel approach to traditional mediation pioneered by Paul M. Lurie.[1] Traditional mediation often terminates over impasse issues after a single day and the involvement of the mediator ends. In response, parties often say that the mediation was “too early” and default into arbitration or litigation. This construct is limiting and results in extra time and expense. Most commercial cases eventually settle before trial or arbitration. However, the cost of pretrial activity including discovery can be very expensive. The Guided Choice process can significantly reduce the cost of settlement by using procedures to achieve early settlements.

Under the Guided Choice process, the mediator does not just schedule a “mediation date” and ask for legal briefs. Rather, the mediator, using the confidentiality privilege, which is unique to mediation, interviews representatives of the parties to help diagnose the causes of the impasse and helps the parties customize a settlement process based on that diagnosis. Design features of the process may include collaborative information exchange, identification of outcome-determinative legal and expert opinion issues, identification of the personality characteristics and biases of the ultimate decision-makers, and identification of decision-making factors resulting from the nature of the involved entities.

More information on Guided Choice, including contract dispute resolution clauses, can be found at www.gcdisputeresolution.wordpress.com.

ARBITRATION

Arbitration is a private, informal process in which parties agree to forego litigation, the default form of non-binding dispute resolution, and allow their dispute to be conclusively resolved by an impartial person or persons who will render a final, binding decision.

Unlike contract clauses for non-binding ADR, which can take many forms, dispute resolution clauses requiring parties to submit their disputes to binding arbitration must have certain features to achieve the desired binding result. Arbitration is a process governed by the parties’ agreement. If there is no agreement, a court can refuse to compel arbitration if a party objects on the grounds of non-arbitrability.

General Considerations for Drafting Arbitration Clauses

At a minimum, well-drafted arbitration dispute resolution clauses should:

● contain a clear intent to arbitrate; state that the parties “shall” arbitrate, not “may” arbitrate.

● identify the kind of disputes that are subject to arbitration, i.e., “any and all disputes arising out of this Agreement.”

● provide that a judgment on the arbitration award may be entered by any court having jurisdiction (in the United States).

● be self-enforcing so the arbitration can continue despite a party’s objection, unless it is stayed by a court order.

● incorporate rules and procedures for initiating the arbitration, serving notices, selecting arbitrator(s), and for administration of the arbitration.

● require arbitration to be initiated in writing before the applicable statutes of limitation or repose would bar the claim.

Drafters of arbitration clauses may also wish to address these issues:

● number and identity of arbitrators.

● venue, timeframe, and maximum duration of the arbitration proceeding.

● any limits on the type or amount of discovery permitted.

● expedited procedures for resolving simple disputes and additional rules and procedures for resolving complex disputes.

● circumstances where the parties can seek injunctive relief in court.

Using the amount of a claim to determine whether a dispute will be arbitrable is ill advised, as litigation frequently ensues over whether the dollar amount has been met.

Sample Arbitration Clauses

An example simple arbitration clause is included below:

If mediation has not resolved the Dispute within sixty (60) days of the submission of the matter to mediation, or such longer time as the parties may agree, all controversies will be decided by arbitration by the American Arbitration Association (“AAA”) or by a mutually agreed upon arbitrator. The arbitration shall take place at Owner’s facilities and be conducted in accordance with the AAA’s Commercial Arbitration Rules and Mediation Procedures (including the Procedures for Large, Complex Commercial Disputes) then applicable, or a mutually agreed upon set of arbitration rules. This agreement to arbitrate, and any other agreement or consent to arbitrate entered into in accordance herewith, will be specifically enforceable under the prevailing arbitration law of any court having jurisdiction. Notice of demand for arbitration must be filed in writing with the other parties to this Agreement and with the dispute resolution tribunal. The demand must be made within a reasonable time after the controversy has arisen. In no event may the demand for arbitration be made after institution of legal or equitable proceedings based on such controversy would be barred by the applicable statute of limitations. The arbitration award shall be specifically enforceable in any court of competent jurisdiction.

Drafters may wish to address additional subjects, such as:

The Arbitrator shall have authority to order specific performance including, without limitation, interim injunctive relief prior to the Dispute being resolved. The Arbitrator shall have the authority to decide all issues concerning the fulfillment of any condition precedent to the arbitrability of a claim or defense, the amount of damages to be awarded, if any, and the arbitrability of the issues presented. The Arbitrator is not empowered to award damages in excess of compensatory damages such as punitive damages. Notwithstanding anything to the contrary, the term “Arbitrator” as used herein shall consist of one arbitrator, regardless of the size of the claim or counterclaim. An arbitrator eligible to hear the Dispute shall have at least five (5) years’ experience as an arbitrator with the AAA and/or another neutral organization, be familiar with construction industry practices, and be a practicing lawyer.

Good arbitration dispute resolution clauses also provide rules for the joinder or nonjoinder or additional parties to the arbitration proceeding. One example of a clause that restricts the ability to add additional parties is:

No arbitration, arising out of or relating to this Agreement, shall include, by consolidation, joinder or in any other manner, any additional person not a party to this Agreement, except by written consent containing a specific reference to this Agreement and signed by the Company, the Vendor, and any other person sought to be joined. Any consent to arbitration involving an additional person or persons shall not constitute consent to arbitration of any Dispute not described herein.

A vendor may wish to use such restrictive dispute resolution clauses if it foresees the possibility of a simple arbitration to collect past-due accounts receivable.

Dispute resolution clauses that more freely permit joinder of additional parties to arbitration proceedings might look like this:

Any arbitration hereunder may include by consolidation, joinder or otherwise, any person or entity not a party hereto if it is shown that at the time the Demand for Arbitration is filed (i) such person or entity is substantially involved in a common question of fact or law, (ii) the presence of such person or entity is required if complete relief is to be accorded in the arbitration, and (iii) the interest or responsibility of such person or entity in the matter is not insubstantial; and with the consent of each such person or entity, such person or entity shall be joined as a party to such arbitration. The Vendor hereby consents to be joined as a party in any arbitration concerning or related to the subject matter of the Agreement or any part thereof in which the Owner is a party.

A purchaser of goods and services may wish to include such a clause so it can join the vendor to an arbitration proceeding initiated by the purchaser’s customer so the vendor can be held directly liable for claims resulting from its goods or services.

Law Applicable to Arbitration Proceedings: FAA v. IUAA

In Illinois, the baseline arbitration law is our State’s version of the Uniform Arbitration Act, 710 ILCS 5/1, et seq. (“IUAA”). If the subject of the contractual agreement “evidences a transaction involving interstate commerce” within the meaning of the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (“FAA”), the FAA may apply to both state and federal court proceedings. Jurisprudence under the FAA and IUAA is similar, and state courts applying the IUAA frequently rely on federal FAA precedent. However, there is much more developed caselaw under the FAA, particularly favoring the arbitrability of arbitration agreements. When contract drafters want to increase the likelihood of arbitrability, stating in the pre-dispute arbitration agreement that the FAA governs is advisable.

Internet Resources for ADR Clauses

Useful guides for drafting ADR clauses have been posted on the internet by these organizations at these addresses:

●AAA: https://www.adr.org/Clauses

● JAMS: http://www.jamsadr.com/clauses/

● CPR: https://www.cpradr.org/resource-center/model-clauses/mediation-model-clauses

In addition, the AAA’s ClauseBuilder (www.clausebuilder.org) tool assists drafters develop clear and effective arbitration and mediation agreements. This tool provides parties with the AAA’s standard arbitration agreement, in addition to an array of options parties may consider when drafting ADR clauses, including specifying the number of arbitrators; arbitrator qualifications; locale provisions; governing law; the duration of arbitration proceedings; and whether to use arbitration, mediation, or both.

LAWSUITS

Litigation in a court of competent jurisdiction is the “default” method of binding dispute resolution. Unless the parties agree by contract to arbitration or some other form of binding dispute resolution, disputes arising from the agreement will be resolved in a court with subject matter jurisdiction and personal jurisdiction over all necessary parties.

Jury Waivers

Risk-adverse corporate interests often look for ways to avoid the uncertainty associated with juries. The right to a trial by jury is a fundamental right guaranteed by our federal and state constitutions. People v. Bracey, 213 Ill. 2d. 265, 269 (Ill. 2004). However, the Illinois Constitution has been construed by our Supreme Court to mean the right of trial by jury as it existed at common law and as enjoyed at the adoption of the constitution. People ex rel. Cizek v Azzarello, 81 Ill. App. 3d. 1102, 1105 (1st Dist. 1980). It does not mean a jury trial shall be had in every case, or preclude all restrictions on the exercise of that right. Although the right to trial by jury is fundamental, it can be knowingly and voluntarily waived by contract. In re Reggie Packing Co., Inc., 671 Scup. 571, 573 (N.D.IL 1987]).

In Illinois, the validity of a jury trial waiver is determined by fundamental principles of contract law. JF Enterprises, LLC v Fifth Third Bank, 824 F. Supp. 2d. 818, 824 (N.D.IL. 2011). Illinois courts have invalidated waiver clauses that are not conspicuous reasoning that the waiver may not have been knowing or voluntary. In re Reggie Packing Co., Inc., 671 F. Supp. 571, 574 (N.D.IL 1987). Illinois courts may also regard inequality in bargaining power as evidence that a contractual waiver of jury trial was neither knowing nor intentional. In re Reggie Packing Co., Inc., 671 F. Supp. 571, 573 (N.D.IL. 1987).

Jury waivers should be clear and conspicuous, and set apart from the remaining text of the contract using caps, boldface, and underlined print. Jury waivers sometimes call for a party’s initials and are frequently placed right above the signature block to make them more conspicuous. Even if a jury waiver is enforceable, courts may still find that the dispute in question falls outside of their scope. Therefore, jury waivers should be sufficiently broad to sweep up the disputes to which they are intended to apply.

An example waiver of the right to trial by jury follows:

THE PARTIES EACH IRREVOCABLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS ARISING UNDER OR RELATED TO THE TERMS AND PROVISIONS OF THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A JUDGE OF THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS, AND NOT BEFORE A JURY.

Governing Law

In general, choice of law provisions are honored by Illinois courts. Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill.2d. 325, 351 (Ill. 2002). However, treatment of contractual choice of law provisions has not been consistent in the Illinois state and federal courts. In addition, the Full Faith and Credit Clause of the U.S. Constitution, and the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution, preclude states from applying the law of the state if it has no significant contacts with the parties or the transaction in question. Allstate Insurance Co. v. Hague, 449 U.S. 302 (1981) (state violates constitution when it applies its law to parties or transactions with which it has no significant aggregation of contacts). Courts are, in general, more likely to enforce choice of law provisions in commercial contracts than in consumer contracts.

A sample choice of law provision follows:

This Contract, and all amendments and modifications hereof, and all documents and instruments executed and delivered pursuant hereto or in connection herewith, shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to principles of conflict of laws.

The last phrase above addresses the choice of law problem termed “renvoi,” which occurs when one jurisdiction’s conflict of law rules point to another’s conflict of law rules, creating the possibility of a circular argument identifying no substantive law.

Venue

On December 3, 2013, the United States Supreme Court issued its unanimous opinion in Atlantic Marine Construction Co., Inc. v. U.S District Court for the Western District of Texas, et al., 134 S. Ct. 568 (2013) concerning the validity of forum selection clauses. While the Supreme Court found that forum selection clauses should ordinarily be enforced as the parties agreed, it did recognize that, in certain circumstances, application of a forum-selection clause may be defeated. It noted that the party seeking to challenge a valid forum-selection clause for which it has bargained must show a compelling reason why the agreement should not be enforced. The Supreme Court remanded the case to the lower court to determine whether there are any “public-interest” factors that would justify avoiding a forum-selection clause.

In Illinois, forum selection clauses in a contract are prima facie valid and should be enforced by courts unless the opposing party shows that enforcement would be unreasonable under the circumstances. Compass Envtl., Inc. v. Polu Kai Services, LLC, 379 Ill. App. 3d 549, 554-55 (1st Dist. 2008). A choice of forum that is made during an arm’s-length negotiation in a commercial transaction will be enforced by Illinois courts absent some “compelling and countervailing reason.” Calanca v. D & S Mfg. Co., 157 Ill. App. 3d 85, 88 (1st Dist. 1987). To meet this standard, a litigant would have to show serious inconvenience “to the point of being deprived of his day in court.” Id., at 90.

A sample forum-selection clause is below:

Subject to the Arbitration Clause, all judicial actions or proceedings brought against any Party with respect to this Contract may be brought in any state or federal court of competent jurisdiction located in Cook County, Illinois and, by its execution and delivery of this Contract, each Party accepts, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. Each Party irrevocably waives any objection that it now or hereafter may have to the bringing or prosecution of any such action or proceeding with respect to this Contract or the documents and instruments contemplated hereby in the State of Illinois.

In some cases, contractual choice of law and venue provisions are barred by statute. For example, the Illinois Building Construction Act, 815 ILCS 665/1, et seq., renders void and unenforceable a provision in a construction contract or be performed in Illinois that make the contract subject to the laws of another state, or requires dispute resolution proceedings to take place in another state. 815 ILCS 665/10. No Illinois courts have addressed the apparent conflict between this statute and the FAA. However, a U.S. District Court in Minnesota held, under the Supremacy Clause, that the FAA preempted the Illinois statute, and permitted an arbitration to proceed in Minnesota. M.A. Mortenson/Meyne Co. v Edward E. Gillen Co., 2003 WL 23024511 (D. Minn. Dec. 17, 2003).

Consent to Service of Process

A logical adjunct to forum selection clauses is one in which the party consents to service of process for lawsuits filed in the selected venue by specific means. Under Illinois law, parties may contractually agree to the method and manner of service exercised upon them, and may waive all defenses, including lack of personal jurisdiction, by private contract. E. Sav. Bank, FSB v. Flores, 364 Ill.Dec. 753, 757 (1st Dist. 2013) (mortgagor validly waived service in underlying foreclosure proceeding through execution of forbearance agreement). A sample consent to service clause for use with the above forum-selection clause is:

Each Party hereby irrevocably consents to the service of any and all process in any action or proceeding by mailing a copy of such process to such Party at the address for such Party set forth in this Contract.

OTHER DISPUTE RESOLUTION CLAUSES

Contractual Statutes of Limitation

Contractual statutes of limitations are often highly negotiated among commercial parties of equal bargaining power. Vendors like to limit the duration of their liability exposure, particularly if long statutes of repose apply, by contract. Buyers, on the other hand, must have enough time to file claims and seek redress in the event of latent defects. In Illinois, it is well established that parties to a contract may agree upon a shortened contractual limitations period to replace a statute of limitations, as long as it is reasonable. Country Preferred Ins. Co. v. Whitehead, 365 Ill.Dec 669, 678 (Ill. 2012).

Contractual limitations periods are very common in the design and construction industry, especially on warranty issues. Limitations clauses are found in industry standard-form contract documents. For example, the American Institute of Architect’s (AIA) popular A201-2007, General Conditions of the Contract for Construction, contains several kinds of limitations periods. First, Section 12.2.2 provides a one (1) year callback period for correction of work discovered to be not in accordance with the requirements of the contract. That correction period is to be distinguished from Section 3.5 of the A201-2007, which provides a prescriptive warranty concerning the quality of the work that is not limited to any time period. Last, Section 3.7 of the A201-2007 contains a statute of repose-like provision that limits the time for bringing claims to the time specified by applicable law or ten years after the date of project substantial completion, whichever is shorter.

PREVAILING PARTY CLAUSES

In Illinois, a successful litigant generally may not recover litigation expenses absent a statute or a contractual agreement between the parties permitting recovery of such fees. Goldstein v. DABS Asset Mgr., Inc., 381 Ill. App. 3d 298, 302 (1st Dist. 2008). This is known as the “American Rule.” However, if a contractual agreement expressly authorizes an award of attorney fees, the court may award fees “so long as they are reasonable.” McNiff v. Mazda Motor of Am., Inc., 384 Ill. App. 3d 401, 404 (4th Dist. 2008). Contractual provisions providing for recovery of attorneys’ fees are strictly construed by Illinois courts. Negro Nest, LLC v. Mid-N. Mgt., Inc., 362 Ill. App. 3d 640, 642 (4th Dist. 2005).

One common type of contract clause that provides for the award of attorneys’ fees is known as a “prevailing party” provision:

If a dispute arises hereunder, the prevailing party shall be entitled to receive from the other party any and all costs and expenses, including reasonable attorneys’ fees, incurred by the prevailing party in connection with such dispute.

In the event of any litigation arising hereunder, the unsuccessful party shall pay the reasonable attorneys’ fees of the prevailing party.

The difficulty in enforcing prevailing party clauses is determining which party, if any, has “prevailed” for purposes of an award of attorneys’ fees. Illinois courts have ruled that a “litigant does not have to succeed on all its claims to be considered a prevailing party.” Peleton, Inc. v. McGivern’s Inc., 375 Ill. App. 3d 222, 227 (1st Dist. 2007). If a dispute involves multiple claims and parties have won and lost on different points, it may be inappropriate to find that either party is the prevailing party. Other Illinois courts have held that a party can be considered a prevailing party for the purposes of awarding fees “when he is successful on any significant issue in the action and achieves some benefit in bringing suit, receives a judgment in his favor, or obtains some affirmative recovery.” Naperville S. Commons, LLC v. Nguyen, 375 Ill.Dec 395, 400 (3rd Dist. 2013) appeal denied, 2013 WL 7157255. The inquiry is inherently factual, which leads to unpredictability about whether there is a prevailing party.

For this reason, some contract drafters prefer to provide more guidance to the decision-maker as to which party should be considered the prevailing party:

The prevailing party in any lawsuit shall be entitled to recover from the other party reasonable attorneys’ fees and expenses incurred by it. For purposes of determining the prevailing party, the judge shall take into consideration which party prevailed on the major issues present without reference to any monetary award with respect to those issues. The judge shall also consider the parties’ settlement offers and demands made prior to the trial, which offer of settlement shall be admissible following the entry of judgment in support of either party’s motion for an award of attorneys’ fees and costs. The term “costs” as used herein shall include any and all costs incurred in the court proceedings by the prevailing party, including experts’ fees, filing costs, and court reporting costs. To the extent that the Company has withheld payments from the Vendor and the judgment is less than the amounts withheld, the fact that Owner has withheld amounts greater than the amount of the judgment can be considered in determining which party is prevailing.

Drafters should also be aware of the caselaw of the applicable jurisdiction, and may wish to adopt or exclude certain rules of law in defining who is the prevailing party.

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Jeremy S. Baker initially prepared this article for an Illinois Institute of Continuing Legal Education (IICLE) Seminar Entitled “Negotiating Contract Dispute Resolution Clauses” on March 21, 2014. Citations to caselaw have not been updated and should be verified.

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This publication is prepared for the general information of friends of Baker Law Group LLC in Illinois. It is not legal advice for you, or legal advice regarding any specific matter. Jeremy S. Baker is licensed to practice law only in Illinois. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered attorney advertising material. Prior results do not guarantee a similar outcome.


[1] Paul M. Lurie. Esq. is a partner at Schiff Hardin LLP, a commercial mediator and arbitrator, and a Fellow of the College of Commercial Arbitrators, the International Academy of Mediators and is an International Mediation Institute Certified Mediator.

Dispute resolution clauses in contracts should be drafted to promote the negotiated resolution of disputes in a fair, timely, and cost-effective manner.

Dispute resolution clauses in contracts should be drafted to promote the negotiated resolution of disputes in a fair, timely, and cost-effective manner – before clients experience the cost and hassle associated with arbitration and litigation.

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Baker Law, Design & Construction Counsel

Jeremy S. Baker is an experienced Chicago-based attorney who provides transactional, dispute resolution, and general counsel services to the design and construction industry. He uses creative project structuring and intelligent contracts, plus dispute avoidance and early cost-efficient claim resolution techniques, to help his clients complete challenging projects.

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