This article is courtesy of TechRepublic Premium. For more content like this, as well as a full library of ebooks and whitepapers, sign up for Premium today. Read more about it here.
A contract dispute with a vendor can be quite costly and time consuming. But with a bit of knowledge and careful scrutiny, you can take steps to prevent it.
In 1945, the case of International Shoe vs. State of Washington went to the U.S. Supreme Court. The issue was whether a shoe company based in Missouri that was exhibiting samples of its products and soliciting orders in a state (Washington) other than its home state would be subject to the laws and the court rulings of the state that it was operating in. International Shoe argued that it shouldn't be subject to the rules and the jurisdiction of a state that was not the home state of its company, but the court saw otherwise. In the court's view, the commercial activities that International Shoe was engaging in created sufficient ties and contacts to make it "reasonable and just, and in conformity to the due process requirements of the Fourteenth Amendment, for the State to enforce against the corporation an obligation arising out of such activities."
Why should this matter to both vendor and non-vendor business executives in IT and other fields?
Because if you get into a contract dispute with a vendor or a customer and the two of you can't resolve it, you may have to go to court or at least to arbitration or mediation. And if that happens, you or your legal representation could encounter significant travel and other expenses in addition to litigation because you have to argue your case in an inconvenient and distant state or locality.
Corporate legal counsel understands this. That's why virtually every vendor has a clause in fine print in its contracts that specifies that its home state will be the venue for any contract dispute that has to be resolved.
Enjoying this article?
Download this article and thousands of whitepapers and ebooks from our Premium library. Enjoy expert IT analyst briefings and access to the top IT professionals, all in an ad-free experience.Join Premium Today
Surprisingly, though, few business executives (and their legal counsel) signing these contracts question or contest this legal venue clause. They simply sign on the bottom line. When you're entering into a contract with a vendor and are enthusiastic about the products and the services you are getting, the last thing you're thinking is that the two of you could end up in court.
Unfortunately, disputes happen.
The US averages 15 million civil lawsuits annually—and many of these involve companies.
I remember assuming a CIO position and reviewing a contract for a vendor my company had inked six years earlier. The vendor had never performed any of its contractual commitments, but it had regularly collected monthly payments from an accounting department that didn't realize that the services were not being received by IT—which had no one in charge of reviewing contracts.
When I read the fine print in the contract, wishing to terminate it, I discovered that there was no termination clause and that the contract appeared to be perpetual. I met with legal counsel, questioning whether a perpetual contact is even practicable—since companies go in and out of business, and there is no guarantee that they will last forever. Under California statutes at that time, the rule was that perpetual contracts can exist but that they can also be terminated at any time. We sent a letter to the vendor and said that we were terminating the contract—and we stopped paying. That was the end of the matter, but it didn't have to be. The vendor was in another state and there was a venue clause in the contract that said that the law and the jurisdiction of the vendor's state would govern in a contract dispute. We did not know how the vendor's state's statutes read on the termination of perpetual contracts, although certainly a venue and jurisdiction in the vendor's state could have been challenged, given the International Shoe decision.
A new reality
The bottom line is that you don't want the headaches and you don't want to lose the time it takes when you suddenly and unexpectedly find yourself in the midst of a contract dispute. If you are a customer and your client wants your business badly enough, it is easy to substitute the state of venue to be your own—and to have the vendor initial and accept this change, as most will. If you are a vendor, you should be aware that insisting on your home state as the venue for any contract dispute may be a thing of the past.
As one attorney commented to me last week, "With the internet and its omnipresence, it is becoming more and more doubtful whether any state or locality is off limits for a lawsuit—because with internet sales portals and outreach, a commercial company and its activities can literally be found anywhere."