The parties to a contract can agree to whatever form and method of dispute resolution they prefer in the event of a dispute. These decisions may include:
- Mediation: parties can agree to undertake mediation prior to filing a lawsuit.
- Arbitration: parties may require (or provide the option for) binding arbitration of all disputes, preventing either party from filing a lawsuit in court.
- Attorneys’ fees: parties may permit the prevailing party in a dispute to collect reimbursement of attorneys’ fees from the other party.
- Governing law: parties may specify the jurisdiction under whose laws the contract will be interpreted and disputes will be decided.
When entering into a deal with another party, each of the issues identified above carries strategic and tactical considerations. Certain contractual provisions on dispute resolution can alternately incentivize or discourage litigation between parties. Negotiating for or against certain contractual provisions related to dispute resolution enables a party to allocate the risks and rewards of entering into an agreement.
For example, many large institutions and businesses require binding arbitration of all disputes. If you agree to mandatory arbitration in a contract and if a dispute arises, you must arbitrate the dispute pursuant to the terms set forth in the contract. This raises two big issues, one of strategy and one of tactics:
- Strategically speaking, agreeing to mandatory arbitration can effectively prevent one or both parties from filing a claim for dispute resolution. Arbitration is costly, and those costs can make pursuing arbitration prohibitively expensive for at least one of the parties to an agreement. Before agreeing to (or rejecting) a mandatory arbitration clause, it is important to consider the likelihood of a dispute arising between the parties and the risks inherent therein.
- Tactically speaking, since arbitration is a matter of contract between the parties, the parties can specify the arbitration forum, the applicable rules, and the requirements of the arbitration panel. If you are facing a demand from the other side to accept mandatory arbitration, you may be able to allocate risk by drafting of the arbitration clause to include rules or other provisions that would be beneficial or preferable to you in the event of a dispute.
I plan to continue these thoughts in a forthcoming post. Stay tuned to this blog for more on dispute resolution and other contractual issues facing small businesses.