Avoiding Software License Woes — Arbitration Clauses

Jul 16, 2007  |  Michael Wurzer

This is the third in a series of posts about negotiating software license contracts, initiated by our mistakes with GeoJet.  The first post explained why it’s important to plan up front for short-term extensions at the end of the contract in the event you need time to transition to other software.  The second post suggested an alternative to one-sided jurisdiction provisions.  In this post, I’ll take on arbitration clauses, a favorite of the ’80s but not a good idea today.

A lot of template contracts will contain a provision that requires that disputes be resolved through arbitration instead of or at least before going to court.   The theory is that courts are too time-consuming and expensive, so some alternative is necessary.   Arbitration is said to be less expensive and quicker, because the rules for discovery (where you get to ask the other side questions before the trial or hearing begins) and evidence are less burdensome and you can hire private judges with better schedules for your needs.

The problem is that the different rules create a lot of unpredictability and so, over the years, more and more rules have been added to the arbitration process, such that it now is often just as complex and expensive as litigation.  At the same time, differences remain in the rules and so the results of arbitration are often dictated by the arbitration panel more than the evidence.  For this reason, when I was practicing law, we often joked that the “arb” in arbitration stood for arbitrary.

For these reasons, I always try to avoid arbitration provisions in software license contract swhenever possible.  Instead, I recommend that the contract require mediation first, and then, if that fails, go directly to court.  Mediation is basically where an independent third party is brought into the picture to try to help the parties find a middle ground to resolve the dispute.  If that fails, though, there is little point to fussing around with arbitration, which will just waste time and money.  Instead, let the parties slug it out in court and hope the threat of the expenses brings everyone to their senses so they can resolve the dispute early.

If you find yourself forced into an arbitration provision, at least try to make sure that the arbitration panel selected has expertise in both software law and software creation, if possible.  These are both specialized areas and the result of the arbitration will be much better with experts in the subject matter.

2 Responses to “Avoiding Software License Woes — Arbitration Clauses”

  1. Matt Cohen says:

    Michael – since I’m often brought in to resolve these types of disputes via mediation, I can’t say I disagree with your recommendation 😉 however, in the ideal world the contract has been structured to have processes that help avoid even mediation.

    I know it’s impossible to account for every eventuality that may cause conflict – and in such eventualities I agree that mediation is a good path – but there are so many conflicts that are so easily avoidable with a well written contract.

    For example, one of the main reasons an MLS will contact my company to mediate a dispute is when they can’t find a way to agree on whether system performance – either speed and/or uptime – is acceptable. If the contract already provides for practical and fair mechanisms for testing and measuring speed and uptime, exactly what constitutes unacceptable performance, and mechanisms for resolving issues, it is better all around.

    I love your perspective on contracts so far, Michael.

  2. Matt, absolutely, every contract should define performance and remedies as clearly as possible to avoid disputes in the first instance. The basic purpose of any contract is to memorialize the parties intent and help ensure that each side knows what they are getting and what they are not. As you say, hitting every possibility is not easy, and that’s where good lawyers are worth every penny (or dollar or thousands of dollars). 🙂