Like many other agreements, contracts with overseas companies or subject matter often contain standard arbitration clauses designating the governing law and the forum where disputes will be arbitrated. The choices embedded in these clauses are often made with little thought or in hasty accommodation of one side or another in the final stages of negotiation. However, special care should be given to include and carefully draft such clauses in the context of entertainment industry deals.
Choice of Forum and Choice of Law
In disputes involving contracts for international distribution or marketing, it is possible that the same standard choice of forum and choice of law clauses in attorneys' or companies' forms could lead to very different outcomes depending upon how much weight the chosen forum, and the chosen legal system, give to general industry custom and practice.
One example is presented by "pre-sale" distribution contracts. Film makers often use such contracts to finance the production of a film by granting a distributor the rights to a film before it has been produced in exchange for an advance with an agreement to pay the balance upon delivery of the film. In the film industry, often the terms of a pre-sale agreement are first agreed upon, then other details are worked out in a more detailed contract.
Industry Custom and Practice
If negotiations of the formal agreement break down, one party may assert that the preliminary agreement is unenforceable. The party seeking to enforce the deal would then point to the custom and practice of the film industry, which tends to give these preliminary agreements the same binding effect on parties as a formal, comprehensive contract.
In the United States, courts have evolved legal principles which give considerable weight to industry custom and practice. For example, the Restatement (Second) of Contracts states that: "Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof."
The Restatement's comments to this section add that in determining whether a contract has been concluded, triers of fact can examine, among other things, "whether it is a common or unusual contract, [and] whether a standard form of contract is widely used in similar transactions." This standard permits the introduction of evidence to establish the custom and practice of a particular industry to recognize preliminary agreements as binding. Individuals may expect industry practice to be determinative if a dispute later arises about the meaning of a contract term.
Contract Interpretation under Foreign Law
Such expectations can, however, be misplaced if the agreement is interpreted under foreign law or by a tribunal drawn from practitioners in a different system. Forums outside the U.S. often do not consider industry custom and practice if it appears to contradict the plain language of the agreement or if it does not incorporate what would be considered to be every essential term of the agreement.
Arbitrators from jurisdictions that do not look to industry custom and practice to resolve contract disputes, even if called upon to apply the law of a forum that does, may, because of their legal background and training, nonetheless have some difficulty determining and effectuating such custom and practice. The result at the end of an arbitration may therefore turn out to be quite different from that anticipated at the outset of negotiations on the contract.
It is therefore crucial in drafting arbitration clauses, or any other dispute resolution clause, to consider carefully how certain forums, legal systems, and types of arbitrators weigh industry custom and practice. In this area, an ounce of prevention truly is worth a pound of cure.