Recent Court Decision Provides an Important Lesson for Businesses

I just read an interesting opinion from the Court of Appeals. The case involved  a dispute between a property management company and an out of state construction company.

You can check out the case here New River Construction LLC v National Field Network

Why this case was interesting to me…

This case illustrates a classic example of why you should read your contracts before and after you sign them.

The Facts…

The case involved a typical business dispute. National Field Network (NFN) hired New River Construction (New River) to perform property preservation work for real estate located in Michigan.

The Court notes at very beginning of its opinion (to emphasize the importance of this fact) at the onset of the relationship the parties signed an Agreement..

The parties’ Agreement included a “choice of law provision” and “arbitration” clause.

About two years ago I wrote a post about the merits of including arbitration clauses in contracts – you can check that post out here. My post provides business owners with points to consider when deciding whether or not to include such a clause in your standard business contracts.

But back to our story…

The business relationship deteriorated at some point. NFN began making “partial payments” on invoices to New River, protesting that it had not performed services properly.

NFN demanded arbitration in New Jersey, pursuant to the arbitration clause in the Agreement.

New River ignored the demand for arbitration and filed a lawsuit in Michigan claiming $728,740.89 in damages.

There were some interesting exchanges between the lawyers on both sides, which resulted in what the Trial Judge called “a race to the courthouse” but ultimately New River “won” that race and ended up with a default judgment for  $578,688.71 – about $150,000 less than it claimed it was owed. No explanation given as to why New River claimed a lesser amount..

NFN’s counsel filed a motion to set aside the default judgment.

It was denied by the Trial Court who upheld the default judgment.

The Court of Appeals REVERSED.

It held that the plain language of the arbitration clause was good cause enough to dismiss the case in its entirety. New Jersey law, like Michigan law favors resolving disputes through arbitration. the parties signed the Agreement and should be bound.

Important Lesson:

1. Understand Your Contract Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case New River did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to arbitrate, and to arbitrate in an inconvenient forum.

2. Understand  Your Contract After Signing.

Your business contract will dictate what your rights and duties are.  Here, New River had the contractual duty to pursue its dispute in arbitration, and in New Jersey. Its attempt to avoid abiding by the contract was a costly mistake.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

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