Paying attention to the dispute resolution clause

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 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.

Obviously, 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. Some clients might find this concerning. To others, it is refreshing.

Moreover, unlike trial court decisions, arbitration awards are generally non-appealable. Those valuing faster adjudication and finality might prefer this; those desiring the safety valve of review by a higher court, beware. (Note that most arbitration forums now offer optional appellate processes — if agreed to beforehand by the parties).

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.

Categorised as: Dispute Resolution