Take, for example “Waivers of Subrogation.” (It is not a heavy-metal band.) To understand it, let’s break it down to its components.
“Waiver” is the voluntary giving up of a right. “Subrogation” is the right of one entity to take over the rights of another.
For example, a prime contractor drives a truck over the foot of an employee of a subcontractor on the project.
If both the prime contractor and the subcontractor agreed to the Waiver of Subrogation clause (and their insurance companies agreed to it) the subcontractor’s worker comp carrier would pay the damages for its employee’s flattened foot, but the sub’s worker comp company could not sue the prime contractor, as it normally would, to recover the amount they had to pay to the employee because it was the general contractor’s employee who was at fault.
On one hand, this clause a good idea because it prevents ping-ponging lawsuits and protracted litigation. It lets everyone get on with their lives. On the other hand, you could argue it does not encourage the parties to be as careful as they could be towards each other. Your decision, now that you understand the risk you are weighing or trying to insure your way around.
Now what contract is complete without an “Arbitration Clause?” As you might know, this clause mandates that all parties agree to fight any disputes in front of a private judge, versus the local courthouse. This clause is in almost every modern contract. Just about everybody blindly agrees to it, having no clue of its implications (other than you patient readers, of course).
Even experienced contractors signing arbitration clauses don’t know that the arbitration of a dispute could require an up-front payment of about $9,000, shared by the parties, and a private judge billing $1,000 per hour. Add onto that your attorney’s fees. Compare this to a free judge at your local courthouse, and a relative pittance of a lawsuit filing fee (about $400).
Knowing this, imagine this scenario: you do work for General Motors to provide razzle-dazzle digital signage and a control system for their latest Chevy Volt display at a big auto show. You did a superb job. But overnight, the Volt mysteriously bursts into flames. GM blames you, of course, and refuses to pay you money they owe you for your work.
Unless you have big bucks to spend to counter the army of attorneys at GM’s disposal, you will be buried in litigation paper if you litigate this at your local courthouse. Worse, you might have to litigate in federal court. (Federal court is a more costly proposition, because of fast-track rules and less tolerance for error, nor the legal shenanigans often tolerated in state court systems.)
In arbitration, litigation is less complicated, and thus less expensive. So in an arbitration with you versus General Motors, the playing field is more even. On the other hand, if GM counter-sues against you for damages due to the Chevy Volt fire the claim was your fault, your liability insurance coverage should kick-in and pay your attorney’s fees, at least on the issue of whose fault the fire was. (Lawyers do know how to draft lawsuits to make insurance coverage operative.)
If you hate traveling, closely examine the “Forum Selection” clause in any contract you sign. This clause sets the venue (the location of a county) for any lawsuit that might occur between you and the other party. This “venue” might be in a court literally thousands of miles away from where you live and work. Such “venues” are rarely in Maui or anywhere scenic. They’re more likely in Detroit. So if you do not have the bargainingpower to alter an offensive forum clause, pack a toothbrush or pass on the job—or heavily insure around it.
