Disputes arise for many reasons and in many areas of life; unfortunately, they are becoming increasingly common for businesses. When people enter into a contract, there are alternative ways to resolve these disputes other than going to court. These non-court options fall under the umbrella of Alternative Dispute Resolution and can encompass multiple activities.
This article will discuss a few of the most common alternative ways to resolve disputes and how to include them in a contract. Dispute resolution clauses play a crucial role in amicably resolving disputes, saving both parties the time and cost of going to court. If you have questions about what the best type of dispute resolution clause is for you, contact our attorneys at Newburn Law today to understand each clause.
What is a dispute resolution clause?
A dispute resolution clause is a provision in a contract that outlines what the parties promise to do if an issue should arise concerning the contract. Essentially, it will pre-select a method of alternative dispute resolution that the parties will agree to participate in if they need to resolve a contractual conflict.
A dispute resolution clause is typically agreeing to either:
- Mediate the dispute;
- Arbitrate the dispute;
- As the last cause, litigate the dispute; or
- Simply promise to make a good faith effort to communicate with each other before making any formal moves towards litigation.
Why is a Dispute Resolution Clause beneficial to parties?
The great thing about creating a contract is that the parties are free to agree to any provision acceptable under the law. Since there are many forms that a dispute resolution clause can take, parties can cooperate to formulate a clause that meets the needs of each party.
There is no standard or single template for arbitration clauses. Still, a provision should always cover all scenarios in which a party may want to arbitrate, and the agreement's language must be fair and reasonable.
Common Types of Contracts that use Dispute Resolution Clauses
Most well crafted contracts will include a dispute resolution clause. Which clause is chosen by the parties is often dependant on the type of agreement or contract.
Employment contracts often include an arbitration clause because arbitrations are typically cheaper and quicker than lawsuits. Employment Agreements may also require dispute resolution through mediation prior to arbitration under certain labor union agreements.
Commercial transactions involve parties that are operating businesses and want to avoid the expense and delay of litigation. Dispute resolution clauses create readily available dispute resolution procedures that allow both parties to resolve a dispute quickly and efficiently. Meeting or mediation clauses are common and arbitration is typically the preferred approach if parties can't come to an agreement.
Landlord and Tenant Agreements
Many contracts between landlords and tenants agree to mediate disputes before taking them to court. Arbitration is not typically used because most landlord-tenant disputes are resolved in small claims court, which is cheaper and quicker than arbitration.
Website Policies and Privacy Policies
Many companies that have websites have dispute resolution clauses in all of their website policies and privacy policies. These often state that the user must mediate and then arbitrate a dispute and the user agrees not to sue the company through litigation.
Independent Contractor Agreements
When independent contractors run their businesses and have clients, they often include dispute resolution clauses that state that the client will enter into mediation discussions or arbitration proceedings before litigation.
Do I need a dispute resolution clause?
It should be noted that dispute resolution clauses are not a required component of most common-law contracts. You do not have to include one if you would rather reserve your right to take an issue straight to court.
Be prepared, however, for a judge to inquire about any attempts to settle the problem before litigation or, in some cases, for a court to require you to make at least one attempt at alternative dispute resolution, like mediation, before beginning a lawsuit.
Why are dispute resolution clauses important?
From the court's perspective, mediation and arbitration are highly favored as they reduce the case burden of overworked court systems. Thus, a court will typically uphold a dispute resolution clause in a contract and encourage the parties to use alternative methods to a settlement instead of using the court's time and calendar.
In some cases, even if there isn't a dispute resolution clause, a judge might order the parties to attempt mediation at least once before they will hear the case. This is very common in small claims court, eviction cases and minor contractual disputes.
Having a dispute resolution clause in your contract, no matter what the contract is about, can save you from further arguments and costs if something goes wrong with the original agreement. It can also make you look more favorable in front of a judge or jury if you were the party to insist on the dispute resolution clause.
The non-profit organization World Commerce and Contracting reported that almost 10 percent of contracts experience some form of official claim or dispute. The report found that Engineering and Construction are the sectors with the greatest frequency of claims and disputes (21% of all contracts).
With one in ten contracts being challenged, being prepared for a contractual dispute is simply part of doing business and being involved with transactions of all forms. These numbers are likely higher now, given this study was eight years ago, increasing the value of including a dispute resolution clause in your contracts.
The Costs of Contract Disputes
Contract disputes can be very costly. It is expensive to hire an attorney, file a lawsuit, hire experts, and/or submit evidence, and conduct investigations and depositions, not to mention the court fees each time you file something with the court. You also have to pay someone to serve all the legal paperwork to the other party, and you may even have to pay back the fees and costs incurred by your legal opponent if you lose!
There are also the costs of taking time off work, potentially losing revenue to your business, and the personal toll a lawsuit can bring. The entire process can be extremely stressful and take a very long time. People have been known to report both physical and mental health concerns surrounding litigation procedures. Alternatives to in-court dispute resolution can save you time, money, and personal ache.
What is Mediation?
In short, mediation proceedings are a less formal way to resolve disputes than arbitration. They can be binding, but they are much more flexible. Mediation is a confidential process by which parties can openly discuss their concerns, needs, wishes, interests, and issues with the guidance of a neutral mediator.
The mediator is not a judge, they do not analyze evidence or legal matters, and they do not make any decisions or give advice. They remain impartial throughout the process and help the parties by facilitating the conversation toward a settlement. If the parties reach a settlement, the mediator may draft an official contract that both parties sign and that becomes legally binding and enforceable. Mediations are more affordable in general than arbitration or litigation, and they do not require the use of attorneys although having an attorney present can be very helpful to present a party's legal case in the bst possible light.
Downsides of Mediation
One downside of mediation is that no one is there to analyze the issues from a legal standpoint. Unless the parties happen to know the law or are accompanied by a lawyer, they can be prone to high emotions and little progress.
Additionally, although a mediation agreement can result in a legally binding contract, if the parties do not agree, the process can end without the dispute being resolved forcing the parties into arbitration or litigation.
All that said, mediations are a great place to start when dealing with disputes. They can uncover and deal with issues and feelings by either party that may not get the same attention in a legal proceeding. And, again, they are relatively affordable, and occasionally free such in some small claims courts.
What is Arbitration?
Arbitration, on the other hand, is a quasi-legal proceedings where parties have their dispute heard by a qualified arbitrator or panel of multiple arbitrators. Most arbitrations are governed by the Federal Arbitration Act, although parties may agree to alternative governing rules and some industries have specific arbitration rules established. Assuming the arbitration clause in the underlying agreement was binding, the resulting arbitration ruling is binding on the parties in the same manner as the agreement.
Although it is more expensive and formal than mediation, arbitration is still typically cheaper than in-court litigation and can save a lot of time.
Arbitration does typically require an attorney, as it is the most similar to a lawsuit of all the alternatives to dispute resolution. Parties can conduct discovery to get more information from either side and submit evidence, and the process itself includes a hearing and is set up much like an in-court hearing.
Downsides of Arbitration
One drawback to arbitration, or, more specifically, mandatory arbitration clauses, is that they recently have come under scrutiny for potentially violating litigants’ constitutional right to be heard in a court of law. If the underlying contract provision requiring arbitration is found to be invalid or unenforceable so too will the results of the arbitration.
Many employment agreements with mandatory arbitration clauses are called adhesion contracts. These adhesion contracts essentially remove the power to negotiate from one party (i.e., the employee) if the agreement is a condition of employment. While the US Supreme Court has upheld the validity of these mandatory arbitration clauses, many state courts have taken the opposite route and found such agreements to be invalid as contrary to public policy.
Arbitration vs. Litigation
Arbitration is still typically preferable to litigation. A well-drafted arbitration clause will cause parties to give a second thought to the costs of litigation, making alternative routes to resolution seem more palatable. Further, the drafter of an arbitration clause might avoid constitutional challenges to enforcement by using language that also preserves the option of using the law courts rather than being compelled to arbitrate.
Additionally, an arbitration clause that outlines the responsibilities of the losing party to pay costs and fees (referred to as a “prevailing party provision”) will help remind the parties of the high litigation costs and make out-of-court settlement a preferred option.
Drafting A Dispute Resolution Clause
There are many ways to explicitly include how the parties will resolve a dispute in the dispute resolution clause. Many times, parties will have multiple options. For example, a contract may contain the following requirements:
- First, the parties will engage in good-faith negotiations for 30 days to resolve the dispute.
- If the good-faith negotiations fail, then the parties will enter into mediation. A key component of the clause will be who chooses the mediator and how the mediator will be chosen.
- If mediation fails, then the parties must enter into binding arbitration proceedings.
These options are great alternatives to suing the other party and entering into lengthy and costly litigation.
You should always consult with an experienced contract attorney who can help you understand how a dispute resolution clause can help you.
Our lawyers here at Newburn Law have years of experience helping our clients draft and comprehend the dispute resolution clauses in their contracts. Contact us today for a free consultation.