The Case for Dispute Resolution Clauses in Contracts

I am fortunate enough to have some great clients. They do their jobs well, they run their businesses and organizations well. They do right by their employees. They go the extra mile for those they serve. They make the workplace better and the business field they operate in better. Because they are that way, it is satisfying to work with them and easier to represent them. Because they do things right, I have less “back end” (reactive) work from them because they don’t get many claims against them. That is partly because we work together on the “front end” (proactive) work of anticipating issues before they arise and preventively address them.

One way to be proactive is in drafting contracts and agreements. Partnership or operating agreements, homeowner-contractor contracts, employment agreements, non-competes, transactional and other kinds of agreements are the first steps in dispute prevention. A good contract lawyer will work with his clients to know their businesses well, anticipate the kinds of issues that will come up and address them in the contract. That’s what makes an agreement that a lawyer worked on valuable and very different than the boilerplate templates that people try to get online and then plug in their names. A good contract lawyer will make sure that the specific issues that are part of his client’s business are addressed with tailored clauses ahead of time, before they come to a head.

One issue to address early is what the contracting parties do if they get into a dispute. What approaches or processes will they use that will be best for the situations that might arise? It’s always more effective to discuss and decide what people will do before a dispute arises, while heads are cool and while the parties are working well together than after it happens and the added tension and stress is now a part of the equation.

I always recommend that my clients include a “tiered dispute resolution” provision in every agreement or contract. The first advantage of this is that the contracting parties can think about and discuss what they will do calmly, rationally and in a collaborative spirit. The second advantage is that the parties get to decide and design together how the dispute will be handled between them, rather leave that to chance or a third party. The third advantage is that doing this gives lawyers a good opportunity to educate their clients on exactly what the process options are, how they work and their pros and cons. After being educated on their options, they can make a truly informed decision, choose and design the best process for their circumstances.

Here’s what I mean in a story. A party found itself in a dispute, checked the contract and realized that the dispute resolution clause called for binding arbitration with certain provisions about how the arbitration was to be done and how it would be administered. The contract was silent about what the scope of pre-hearing discovery would be and the arbitration organization’s rules didn’t really address the scope of the discovery. I got called into the case later, and there were already plans for taking several depositions. This was supposed to be a “fast-track” arbitration according the rules, but it turned out to be anything but that. The client was not really aware of what the process in the contract entailed.

This “fast track” arbitration ended up including five depositions and took five hearing dates before it was completed. The costs and legal fees were disproportionate to the dollar value of the dispute award. Because of schedules, the hearing process took more than two months.
This case called for a structured negotiated settlement process that probably would have resolved the matter. If no resolution was reached, then it should have been followed by a single day arbitration hearing with a streamlined document exchange and some good pre-hearing briefs. There didn’t need to be depositions and hearing testimony taken of the same five people. This was not a dispute with complicated issues, and everyone involved was a working person that had to take all those days off from work to testify or be present at depositions and hearings.

As soon as the arbitration hearings were finally done, my first advice to my client was to include a tiered dispute resolution clause in all of their future contracts. And before doing that, I advised them to discuss with me what these options are, how they work, how long they take and their costs and then decide what they wanted the clause to include.

With these contracts with the provisions that ensure that any dispute will be handled the best way for my client, my client feels a lot better about the future work it does and secure in knowing ahead of time that any dispute will be handled in a way that it has chosen because it is best suited for the company’s circumstances and needs.

                       

Michael A. Zeytoonian

Michael A. Zeytoonian is the Founding Member and Director of Dispute Resolution Counsel, LLC and is a lawyer, mediator and ombudsman. He is formerly a partner and now Of Counsel at Hutchings, Barsamian, Mandelcorn & Zeytoonian, LLP, in Wellesley Hills, MA. He specializes in employment law, business law, special education… MORE >