2 Contractual Clauses You May Want to Avoid
Before you sign a contract, watch out for these two common stipulations. They may sound innocuous (or even beneficial) to you, but they could hurt you more than you thought.


“I am selling one of my three lube and tire stores to a large national chain that has similar shops all over my part of the country. Their attorney prepared the sales agreement. Our family’s lawyer pointed out two paragraphs he did not like:
- Arbitration: Instead of going to court, private arbitration is required in the event of a dispute over anything in connection with the sale or activities of the parties afterward.
- The loser to pay the other side’s attorney’s fees.
“I thought that having an arbitrator settle a contractual dispute could be much quicker and less expensive than going to court. Also, I have been totally honest in this sale and will honor the terms of the agreement, so if the buyers sue me, I know that I would win and certainly would expect them to reimburse me for my attorney’s fees.
“Why would my lawyer suggest not agreeing to these two clauses in the contract? Thanks for your help, ‘Jeff.’”

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A Business Trial Lawyer Gives His Opinion
“Jeff’s family lawyer gave him very good advice,” San Francisco-based business litigation attorney Matt Kenefick says. “There are many good reasons to exclude these clauses from a contract. For a small-business owner selling his company to a large corporation, arbitration can have more cons than pros,” he notes, listing common reasons against agreeing to arbitration:
- Arbitration can increase litigation costs, since, in addition to paying your lawyer, you are paying for the arbitrator’s fees and the costs of the arbitration service provider. Some arbitrators charge over $800 an hour.
- Arbitration eliminates the right to a jury trial. In certain circumstances, this can be important as juries can be sympathetic in David and Goliath situations.
- Arbitration can make provisional remedies difficult to obtain. For example, when a dispute is subject to arbitration, obtaining a restraining or attachment order to preserve the status quo will require a much higher standard of proof.
- Arbitration eliminates most appellate rights. Generally speaking, you cannot appeal even if the arbitrator rules contrary to law!
- Venue: Arbitration clauses can specify an inconvenient location for the arbitration proceedings.
“There are, however, times when arbitration makes sense,” Kenefick underscores. “For example, if you want to eliminate the right to a jury trial, arbitration allows the parties to pick an arbitrator with specific expertise and experience related to their dispute. With some matters, the parties can choose a panel of several arbitrators. Arbitration reduces the risk of relying on just one person — a judge — or an overly sympathetic jury. Also, arbitration could make sense if you want an expedited proceeding. Always keep in mind that the devil is in the details — so you need to be very careful to be sure that what is in your arbitration clause matches your needs and expectations.”
So, the bottom line on arbitration is this: “It is not necessarily an evil — but it can be an evil. Experience has shown that arbitrators are far less apt to be moved by sympathy for the little guy. So, if you are the little guy in a business transaction, arbitration can be an evil and you could very well stand a better chance of a favorable outcome in a courtroom. But if you are Goliath in a David and Goliath struggle, you probably would be best served by having an arbitration clause.”
Attorney’s Fees Clauses - Watch Out What You Wish For
It often comes as a surprise when a small-business owner is served with a summons and complaint. Often the first reaction is, “When I win this thing, those guys are going to pay for my lawyer!” Well, not so fast.
In the United States, the American Rule of Attorney Fees states that, “Unless provided for by law, without an attorney’s fees clause each party pays its own legal fees and litigation costs, regardless of who wins the lawsuit.”
The American Rule contrasts with the English Rule, which almost every other country on the planet follows, requiring the loser to pay for the winner’s lawyers and costs.
Kenefick lists two situations where this clause can be dangerous:
- Parties who are emboldened to file a lawsuit because they believe they will recover their attorney’s fees.
- An attorney’s fees clause can significantly raise the stakes in litigation, because the amount in controversy will be increased by each party’s respective claim for their fees. For a party with deeper pockets, they can use this to leverage a settlement against an adverse party who cannot risk being court-ordered to pay the other side’s attorney’s fees.
“So, a party who is more likely to be the defendant in a future dispute will not want to include an attorney’s fees clause in their agreement; whereas, a party who anticipates that they will more likely be the plaintiff in a future dispute will want to include a fees clause.”
Easily Creates Unfairness in Contract Disputes
“Prevailing party attorney’s fee clauses can lead to unfairness in contract disputes, unless the parties are both strong, financially,” he observes. “They can make it difficult for the financially weak to enforce their claims for fear of losing the case and being hit with the winner’s attorney’s fees and court costs.”
Kenefick concluded our discussion with this warning:
“Both arbitration and attorney’s fees clauses can be volatile and therefore should not be taken lightly.”
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, "You and the Law." Through his column, he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."
-
Ten Cheapest Places to Live in Texas
Property Tax Looking for a cheap place to live in Texas? Look no further. These counties have the lowest property tax bills in the Lone Star State.
-
AI Is Missing the Wisdom of Older Adults: What It Means for You
AI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
The Three C's to Financial Success: A Financial Planner's Guide to Build Wealth
Consistency, commitment and confidence in your chosen strategy are more critical to your financial success than finding the 'perfect' financial plan.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key Pieces
If retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?
If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or Relocate
Homeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and Friends
What starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What Happens
Combining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.
-
721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden Risks
Potential investors need to understand the crucial distinction between a REIT's option to buy a Delaware statutory trust's property and its obligation.
-
I'm an Insurance Expert: Yes, You Need Life Insurance Even if the Kids Are Grown and the House Is Paid Off
Life insurance isn't about you. It's about providing for loved ones and covering expenses after you're gone. Here are five key reasons to have it.