The Hobbit Contract, Part 5

After the first four parts of our ongoing series about the contract in The Hobbit movie we’re finally entering the home stretch.  Today we’ll take a look at a group of clauses dealing with disputes arising under the contract.  This is an important part of many contracts.  If you’re going to the trouble of creating a formal legal agreement, then you might as well contemplate what might happen if the deal goes bad.

I. Mandatory Binding Arbitration

Somewhat anachronistically, the contract contains an arbitration clause:

Disputes arising between the Contract Parties shall be heard and judged by an arbitrator of the Company’s choosing

I say “somewhat anachronistically” because although arbitration has a long history in the common law—going back at least as far as 1609—it was for centuries frowned upon by the courts.  One early case, Vynior’s Case, held that mandatory arbitration clauses (i.e. requiring a party to a contract to submit to arbitration) were revocable.  In other words, parties could submit to arbitration but only by ongoing, mutual agreement.  It was not until the 1800s that mandatory arbitration really became acceptable in either England or the US.  See, e.g., Burchell v. Marsh, 58 U.S. 344 (1854).

The other issue is that the clause allows the Company to choose the arbitrator.  This is highly unusual and may actually invalidate the arbitration clause.  In order  to comport with due process, a mandatory arbitration agreement must, among other things, provide a neutral, impartial decision maker.  Typically this is done by allowing the parties to jointly select an arbitrator or to have an impartial third party (such as an arbitration agency) select one.

II. Choice of Language

The next part of the arbitration paragraph is a rarity for an American lawyer:

… and all pleas shall be pleaded, shrewed [sic], defended, answered, debated and judged in the Dwarvish Tongue

Obviously this is a significant disadvantage for Bilbo, as he evidently cannot read (and presumably cannot speak) Dwarvish.  Choice of language clauses like this one are much more common in international contracts than in contracts between parties in the United States.  They are also much more common in contracts that contain arbitration agreements rather than forum selection clauses (e.g. “any disputes arising under this contract will be heard in the courts of Capital City, State X”) because in most many countries the courts only deal in one official language, making a choice of language clause redundant.  But when the case will go to arbitration, the chosen arbitrator could potentially speak multiple languages.

However, the most common reason for a choice of language clause is when the contract itself is translated into multiple languages for the benefit of the parties.  In that case it is common for the contract to specify that one version is the “authoritative” version

III. The (Non-Existent) Choice of Law Clause

The one thing that leaps out at me about this contract is that it doesn’t contain a choice of law clause.  Such a clause allows the parties to specify what jurisdiction’s law will govern the contract.  This is particularly useful when multiple jurisdictions may potentially apply.  The area of the law that deals with figuring out which court has jurisdiction and which law applies is known as conflict of laws.  Conflict of laws is a complex subject.  Typically it is a stand-alone course in law school.  So we won’t go into too much detail here, but suffice to say that arguably both the law of the Shire and the law of the Dwarven Kingdom could conceivably apply to this contract.  Some of the factors that a court might consider include:

• The parties are a Hobbit of the Shire and a group of Dwarves.
• The contract was signed in the Shire.
• The contract concerns services to be performed in the Dwarven Kingdom.
• The most likely source of the breach of the contract occurs in the Dwarven Kingdom.

Since the applicable law is debatable, this is precisely the kind of case in which a choice of law clause makes sense, so its absence is notable.

IV. Attorneys’ Fees

Finally, the contract includes a clause regarding attorneys’ fees*:

In the event of a dispute arising in relation to the terms of this agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable fees and costs resulting therefrom.

This clause is notable because it tells us something about the (actual, non-fictional) writer of the contract.  They were very likely either been an American or at least were copying from an American contract.  In essentially every other Western country, the default rule is that the losing side pays (or at least contributes to) the winning side’s costs.  This is commonly called the English Rule, in contrast to the American Rule in which each side bears its own costs by default.  There’s nothing unusual about a clause like this in an American contract; in fact, they are pretty common.  But I think it would be unusual elsewhere.

* The precise spelling of “attorneys’ fees” is a matter of some dispute.  See Communities for Equity v. Michigan High School Athletic Assoc., 2008 WL 906031, n.1 (W.D. Mich. 2008).

We’ve probably only got one or two more posts about the contract to go.  If any of our readers have questions about the contract (maybe you bought a copy or read about it elsewhere) please let us know before we wrap up the series and we’ll try to include it.