Are dispute resolution clauses right for your business contracts?

The whole point of taking the time to carefully prepare business contracts prior to signing them is to mitigate the risk of litigation, which can not only hurt a company’s bottom line and reputation, it usually takes months or even years to resolve. As such, business owners will often turn to their legal counsel to help guide them toward contract features that can help reduce the risk of litigation and help facilitate resolutions.

One such tool business owners can use to avoid litigation connected to contract and business disputes is a dispute resolution clause -- also referred to as an arbitration clause. If negotiated effectively and customized to the contract and parties involved, a dispute resolution clause could become one of your company’s most value assets.

What should a dispute resolution clause contain?

While it’s always best to tailor a dispute resolution clause to the needs of the parties involved, the most effective dispute resolution clauses will contain carefully worded directions that outline the process by which issues and disputes must be raised to the parties of the contract, which type of alternative dispute resolution method will be used, and any expectations for each party -- such as how each party is to behave or how timely matters should be resolved.

Is it better to specify arbitration or mediation?

The decision of whether to use mediation rather than arbitration is an incredibly difficult question to answer because no business’s situation is ever the same as the next, meaning the decision to include one over the other in a dispute resolution clause depends on what makes the most sense for your business and its bottom line. Naturally, there are as many benefits to arbitration as there are with mediation and certain drawbacks with either method as well that must be carefully considered.

Are dispute resolution clauses allowed in California?

Thanks to the outcome of Grafton Partners v. Superior Court, 36 Cal. 4th 944 (2005), dispute resolution clauses are possible in California contracts and can go a long way to avoiding lengthy litigation and potentially costly pro-plaintiff verdicts that are common with jury-trial verdicts.

However, as with any contract, it’s best to discuss the pros and cons of including a dispute resolution clause with experienced counsel as they often have a better idea of which dispute resolution method works best in specific situations and can help you make more informed decisions in regards to your business.

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