In the throes of finishing a commercial transaction, one contractual clause often put off until the very last minute, if considered at all, is the dispute resolution provision. Perhaps this is human nature. At the time of making a deal, most of us are thinking about opportunity and profit, not claims and disputes. As both a commercial litigator and business lawyer, I have a more cynical view: Dispute resolution provisions matter, and they really matter when they matter, which is, of course, when a claim has been made or a lawsuit filed. Dispute resolution provisions can be the difference between winning or losing a claim or dispute. Thus, dispute resolution clauses deserve meaningful attention on the front end when the contract is being drafted. Here are a few thoughts.
Forum Selection Clauses
Clauses that specify that litigation relating to a contract must be conducted in a particular location are known as forum selection clauses and are generally enforceable. It is almost always advantageous to specify the courts of your home jurisdiction if possible. It can also be important not to agree to the other party’s home jurisdiction. Sometimes no forum selection clause is better than agreeing to the other party’s chosen forum.
Arbitration or Litigation?
Binding arbitration is a dispute resolution option in almost any commercial contract. Arbitration allows arbitrators— who should have some familiarity with the general subject matter of the dispute—to decide cases instead of judges and juries. Arbitration awards are binding and can be overturned only on limited grounds. Arbitration is often an attractive alternative in international transactions, as international companies are leery of the U.S. judicial system, and particularly the jury system. Arbitration is also often used in the construction industry. However, arbitration can be required in almost any commercial contract through including an arbitration clause requiring claims and disputes to be decided by arbitration. Zealous arbitration proponents say it is better, cheaper and faster than the court system. I take this view with a grain of salt, especially the “cheaper and faster” part. However, arbitration allows persons with expertise to decide the matter, is generally confidential, and is a particularly good alternative in the areas noted above.
The Arbitration Clause: Is Simpler Better?
I sometimes see arbitration clauses that read like the tax code. These clauses try to specify the procedure in considerable detail. Many I have reviewed appear to have been drafted by persons with no litigation or arbitration experience.
Here are two contrasting examples. Some arbitration clauses used in complex commercial contracts specify that the arbitration must be conducted under the American Arbitration Association’s Expedited Procedures, which provide a very summary proceeding that would seldom seem appropriate for a case of any complexity or magnitude. On the other hand, one also sees arbitration clauses providing for discovery to the full extent provided in the Federal Rules of Civil Procedure. Discovery in arbitration is traditionally more streamlined, and discovery in court is one of the primary reasons litigation is so expensive.
My evolving view is that simpler arbitration clauses are generally better: Specify the governing rules, the administering organization (if there is one), where the arbitration is to be held and the number of arbitrators. Simpler clauses are also probably less likely to be challenged regarding their enforceability. Note that others may disagree, and each situation should be considered on its own merits.
Is a Multi-Tiered Process Better?
Multi-tiered dispute resolution processes specify an escalating procedure for resolving disputes, often specifying negotiation by principals, followed by mediation, and then arbitration if necessary. Provided they do not end up looking like the tax code, multi-tiered approaches can have value. This is especially true if the parties have a long-term business relationship they want to maintain. The problem with multitiered provisions is that they may delay resolution, particularly of simple matters such as a claim for payment.
The most important point is that dispute resolution provisions deserve respect, and respect requires meaningful attention when the contract is being drafted. It is critical to consider what types of disputes are likely to arise and how they would be best handled. It is important to understand how mediation, arbitration and the court system work and the strengths and weaknesses of each. If arbitration is being considered, it is also helpful to have at least a basic understanding of the differing arbitration organizations and their rules. It may be useful to get a consultation from a litigator. The bottom line regarding the dispute resolution clause is simple: Understand what it means and how it works before signing.