Contract Dispute Resolution Provisions Are Not One-Size-Fits-All

As businesses focus on growth in the post-COVID future, this is a good time to take stock of legal affairs. It is important for companies to review their legal health and contracts from time to time to ensure that all appropriate legal protections are in place and properly documented. When contracts are updated or new ones drafted, however, the focus is often centered on key terms involving payment and scope of work. Although these terms are vital, it is a mistake to ignore “boilerplate” terms as unimportant or “standard.” Dispute resolution clauses are critical and one size does not fit all. Having the right contract language can save significant cost and headaches later.

A dispute resolution clause is a written understanding between parties about what will happen if a disagreement arises and outlines steps for resolving issues before they escalate. Including dispute resolution clauses in contracts helps prevent parties from immediately running to the courthouse to resolve disagreements, which is an expensive and often lengthy process. Too often, however, parties insert a standard dispute resolution clause simply requiring arbitration and think that is sufficient. Arbitration, however, is not always the best option, and there are other options to consider before or in place of arbitration.

Parties must first decide the forum to resolve disputes. Contracts with a multi-tiered approach are becoming popular. These provide a mechanism to resolve disputes informally prior to filing arbitration or litigation. For example, the parties can first require informal negotiations between business representatives (with or without lawyers) after formal written notice of a dispute is provided. This often helps resolve disputes more quickly and cost-effectively and allows the parties to craft appropriate business resolutions before becoming entrenched in conflicting legal positions. Also, for longer-term contracts, requiring upfront informal negotiations helps parties quickly mend and maintain future working relationships. 

Either in lieu of informal negotiations or as a second step if negotiations fail, parties can require mediation prior to further action. In mediation, a neutral third party helps the parties facilitate negotiations, generally during a half- or full-day meeting. A skilled mediator frequently helps parties resolve disputes and reach decisions that are mutually beneficial to both whereas the decision by a judge or arbitrator favors one party over the other. Parties can also hire a mediator with expertise in a particular industry, if needed. 

If a dispute cannot be otherwise resolved, the parties may require arbitration instead of litigation. Whether arbitration is preferred to litigation depends on several factors, including the type of dispute. 

For instance, in simple contract disputes, arbitration may be favored as it can be faster, more efficient and more flexible than litigation. Also, if the dispute involves technical or specialized expertise, the parties can retain arbitrators with knowledge in the desired field rather than a judge unfamiliar with the issues. Arbitrations are also confidential, which may be important depending on the dispute and whether avoiding public attention is desired.

Unless the parties otherwise agree, however, arbitration decisions cannot be appealed like court decisions. Thus, parties risk being stuck with a negative decision and no recourse. Arbitration is often more fact-driven, so cases with primarily legal issues (e.g., interpreting contract language) may be better for judges. Although arbitrators can make early legal rulings, many seem to favor deciding cases at the factual hearing after weighing all the evidence and reach a decision that “splits the baby” in some regard. Courts are also better suited for emergency relief, such as restraining orders and injunctions. It is also generally more expensive to file an arbitration demand because the national arbitration associations impose significant filing fees (often thousands of dollars vs. hundreds to file a lawsuit). The parties must also pay the arbitrator’s hourly fees. Thus, despite common misconceptions, arbitration is not always better, faster or cheaper. Businesses should carefully consider the nature of likely disputes under contracts and the appropriate dispute resolution mechanism for them.

Parties can also draft contract language that may discourage litigation and increase risks for filing frivolous claims. Such provisions include requiring lawsuits to be filed in a business’s home jurisdiction, waiver of jury trials, damages limitations and requiring the losing party to pay the prevailing party’s attorneys’ fees. 

A well-drafted dispute resolution clause can save businesses significant resources when legal disputes arise, and allows for a more collaborative approach to resolve disputes so that parties can get back to doing business. An effective and experienced attorney is critical to ensure businesses have dispute resolution clauses that meet their needs.  

Attorney Andrea Marconi serves as vice chair of Business Litigation at Fennemore. Her areas of practice include business litigation, healthcare and real estate.