Paying attention to the dispute resolution clause

Last updated June 25, 2024

goodcounsel, in its typical role of general counsel to our early-stage clients, is heavily involved in contract drafting and negotiation. In this post we’d like to address the sometimes neglected “dispute resolution” provision that is often in the boilerplate at the end of contracts. (You know, that legal mumbo-jumbo you have always ignored.) No one wants to think too much about dispute resolution, because no one wants to think there will be disputes. And, anyway, who even knows what a dispute will be about? All true, but there are important choices to be made about how disputes are handled, and they can make a big difference when parties cannot resolve their issues on their own.

The major decision is this: litigation or arbitration.

People are generally familiar with the concept of litigation. You go to the courthouse, a building filled with judges (many of whom, in Illinois, New York, and some other states, are elected). A judge is randomly assigned to your case and may not be experienced in the subject matter of your dispute, and before the matter can even be decided, “discovery” typically occurs. Discovery is the pre-trial process in which the parties request piles of information from each other, question or “depose” each other and any witnesses or experts, and typically argue a lot in front of the judge. It can be a lengthy, expensive, and frustrating process.

Arbitration, by contrast, is a form of private dispute resolution, and the parties may agree in advance to the terms of the process (in that provision you’ve always ignored). This can be as simple as agreeing on which arbitration forum will oversee the matter and proceeding under its standard rules. Or, the parties can specify the terms of the process in detail: the number of arbitrators and their required expertise (instead of a judge, you could have an industry expert who doesn’t even have a law degree!), the place of the arbitration, optional limitations on that costly discovery process, and so on.

Litigation and arbitration differ in important ways. Many clients are not aware that unlike judges, who are constrained by the rules of evidence, arbitrators may consider any evidence that they deem relevant. Arbitrators can issue awards based on their perception of fairness, and not necessarily on the established law (though consideration of prior arbitration decisions is becoming more common). Some clients might find this concerning. To others, it is refreshing. Don’t forget to factor in the cost of paying arbitrators; their compensation depends on how much time they spend, or work they do, on the case.

Moreover, unlike trial court decisions, the opportunities to appeal arbitration awards are limited unless an appellate process is agreed to beforehand by the parties. An arbitration decision can be challenged in court, but these challenges are generally only granted in cases of evident bias, fraud, corruption, or serious misconduct, and are not granted to overrule questionable reasoning of arbitrators. Those valuing faster adjudication and finality might prefer this; those desiring the safety valve of review by a higher court, beware.

Consider, also, that committing to arbitration as the dispute resolution mechanism in contracts may be less attractive following the Supreme Court’s recent decision in Smith v. Spizzirri. If a party brings its claim to district court instead of arbitration as is contractually required, the court must stay (instead of dismiss) the case. After staying a case, a district court will likely require periodic status reports and/or conferences with the parties, and after the matter is resolved, the case will become part of the public record. What this means for defendants is an increased chance of inconvenience and expenses and less confidentiality. Whether these and other differences are advantageous depends on factors such as the client’s risk profile and industry, the parties’ relative economic positions, how the client assesses the likelihood of dispute, and whether the client is more likely to be a claimant or defendant.

Dispute resolution is one of many important areas of contract drafting, and goodcounsel makes certain that its clients are properly advised on the risks and benefits of the available dispute resolution mechanisms