Business contracts of all kinds, ranging from sales agreements to merger agreements, often contain “dispute resolution” provisions. These provisions generally govern what happens if a claim or dispute arises in connection with the settlement. In essence, the dispute resolution clause is a contractual agreement on how the parties will resolve any differences that may arise.
Having litigated commercial contracts of different types for many years, one observation is that the parties often do not pay sufficient attention to these provisions at the time the contract is drafted. At the time the contract is drawn up, the parties are often focused on price and other key business terms. Furthermore, by the time a transaction is finalized, both parties often expect a mutually beneficial relationship. In short, by the time a contract is finalized and signed, neither party tends to believe that something will go wrong. As a result, the dispute resolution provision, if it is considered at all, is often left for the last round of discussions.
Dispute resolution provisions often address two potentially important points: (1) Where a claim or dispute will be decided, and (2) hWow the dispute will be decided. Both issues require careful consideration.
Where the dispute will be decided. Dispute resolution provisions often have forum selection clauses, which are also known as venue selection provisions. These provisions specify which court or courts will decide the dispute and often provide that the court or courts of a particular jurisdiction exclusively decide the dispute. Although there are sometimes exceptions, the courts have generally enforced these provisions.
It’s easy to see why site choice is important. To use a sports analogy, the forum selection clause may require that the dispute be decided (literally) in the other party’s home court. Of course, it is still possible to win in the other party’s jurisdiction, but the fight will almost always be more difficult and expensive. If the other party is, for example, a large employer in the other jurisdiction, it can be difficult to choose an impartial jury. It will also be necessary, at least, to hire a lawyer in the jurisdiction to work with the company’s usual lawyer. This adds a layer of expenses.
How the dispute will be decided. Dispute resolution provisions may also contain provisions that require the dispute to be resolved by binding arbitration, rather than in the court system. In arbitration, most of the time the case is decided by a single arbitrator or a panel of three arbitrators. Arbitrators are usually lawyers with some experience in the substantive area or non-lawyer industry experts.
Many companies, particularly international companies, prefer arbitration to litigation. There are pros and cons to arbitration, and whether arbitration is right for a particular party requires consideration of the particular circumstances. If the parties to a commercial contract agree to arbitration, the agreement is generally enforceable. Furthermore, and although there are exceptions, it is extremely difficult to appeal an arbitration award through the court system.
If arbitration is chosen, the dispute resolution provision may also address important issues, such as how arbitrators will be selected and where the arbitration will take place. The dispute resolution provision may require that a particular organization, such as the American Arbitration Association or the International Chamber of Commerce, administer the arbitration. These organizations (and other administering organizations) also have rules that will often be specified to govern arbitration. The choice of a managing organization can be important. Using a managing organization adds a layer of spending in the form of various fees. In addition, the parties must pay the fees of the arbitrators, which can be quite expensive.
Conclusion. The purpose of this article is not to advocate a particular type of dispute resolution provision, but rather to point out the need for parties to consider them carefully before entering into a contract. In most cases, the dispute resolution provisions will never come into play. However, when there is a dispute, they become extremely important.