A contract's dispute resolution clause sets out the way the parties will resolve disputes. It provides a neutral set of agreed-upon guidelines that will help maintain a good business relationship and minimize the amount of time and money spent working out issues.

A dispute resolution clause can also help resolve issues before resorting to legal action.

What Should a Dispute Resolution Clause Contain?

The dispute resolution clause needs to set out a clear and precise process for each party to follow.

It also needs to be well-defined, with each step of the process agreed to and signed off on prior to any need for the clause. If there is any uncertainty or lack of definition in the dispute resolution clause, then it is unenforceable. It is also unenforceable if any part of the clause requires future agreement between the parties before continuing.

While the dispute resolution clause is meant to settle disagreements to avoid formal court proceedings, it must not prevent such legal action if necessary.

A standard dispute resolution clause specifies:

  • How the party raising the dispute initiates a conversation, giving the exact nature of the disagreement. This is usually in writing.
  • How the parties begin dispute resolution, whether by a meeting, or some other agreed-upon strategy. There should also be a timeframe within which to resolve the disagreement prior to arbitration (e.g., thirty calendar days).
  • The next phase of dispute resolution should the first fail. Typically this involves calling in a mediator. The clause should clearly indicate:
    • Who will mediate, or how the parties will choose a mediator.
    • The timeframe within which the parties will select a mediator (e.g., fifty calendar days from the initial notice of dispute).
    • Any directions on how the mediator should conduct the process (e.g., according to the rules set out by the American Arbitration Association).
    • How the cost of mediation will be covered by the parties.
    • How the final results of mediation are communicated to the parties.
  • If legal proceedings are necessary, the jurisdiction in which they will take place, and how the reasonable costs of litigation are to be allocated. Normally, the prevailing party will recover costs from the non-prevailing party. If the parties prefer an alternative arrangement, this can be included as part of the contract's dispute resolution clause.

The Benefits of a Dispute Resolution Clause

A dispute resolution clause is beneficial for both contracting parties since it enables them to control how they resolve disputes. It also provides for an alternate resolution which can be both a time and cost saving. This clause saves time since the terms of dispute resolution are set in the contract and not open to further negotiation. It also saves money since it helps avoid litigation and orients the parties' focus back onto their business.

There are several advantages to including a dispute resolution clause in a business contract:

  • It gives the parties an opportunity to consider and discuss how they want to resolve disputes in a respectful, rational manner, and not in the heat of disagreement. Dispute resolution is always better discussed early in the contract process. It is much easier to come up with a resolution strategy in an atmosphere of friendly agreement and collaboration. It's much harder to negotiate terms under the stress, tension, and ill-feeling of disagreement.
  • It allows the parties to formulate their own approach to dispute resolution and not leave it up to a third party, or chance.
  • It provides an opportunity for the parties' lawyers to educate them on the dispute resolution process and their options for settling disagreements. As a result, the contracting parties will be able to make educated decisions and craft the process that is best for them.
  • The dispute resolution clause helps prevent disagreements ending up in court. In some cases, contracting parties will have to go through some kind of dispute resolution process prior to court proceedings.

Ideally, the parties to a contract will never need to leverage the dispute resolution clause. But should the need arise, it is in the best interests of all concerned that the parties agree upon the terms by which they settle disputes well in advance.

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