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Three Tips for Drafting a Dispute Resolution Clause
By Kristopher R. McClellan


When drafting a contract for a client, it can be tempting to resort to boiler-plate provisions for terms that, at the time, do not appear to be central to the client’s immediate goals and interests in the transaction. One such term is the dispute-resolution provision. At the outset of a new deal, it is often difficult for the parties to imagine that a dispute may arise, but it is nonetheless important to prepare for that possibility by selecting a dispute-resolution mechanism that makes sense for your client and the particular transaction or relationship your client is undertaking with the other party. After all, part of an attorney’s role in helping a client identify how to meet the client’s objectives is to “advise the client about the advantages, disadvantages, and availability of dispute resolution processes that might be appropriate in pursuing these objectives.”1   
 

The following is a list of common factors that may be useful when advising your client about how to choose from a range of dispute-resolution mechanisms, including traditional litigation in court, mediation, arbitration, or a hybrid “multi-tiered” dispute-resolution mechanism. As with the other terms of a contract, you will need to candidly explain the potential advantages and disadvantages of the dispute-resolution options with your client in order to make an informed choice that best responds to the client’s needs. Although this list is by no means exhaustive, it is a guide to the types of larger issues that you may need to address.
 

1. Client experience, industry expectations, and legal limitations
 

Understanding your client’s business will help you craft a dispute-resolution mechanism that addresses the needs and expectations of the industry. If arbitration is uncommon in the client’s industry or geographic area, customers and employees may be suspicious of attempts to include mandatory arbitration in the client’s contracts. On the other hand, if customers or employees have been dissatisfied with a court-based approach in the past, they may be more willing to consider other methods.

There may also be legal limitations to the client’s options for dispute-resolution processes depending on the client’s industry and the subject of the contract. There have been recent attempts to restrict arbitration for certain consumer transactions and for workplace harassment. For example, the Consumer Financial Protection Bureau announced a rule to ban the use of mandatory arbitration clauses and to restore consumers’ right to file or join class-action lawsuits.2 That rule was ultimately overturned by the Senate.3 A bill has also been introduced in the Senate to invalidate pre-dispute agreements to arbitrate sex-discrimination claims.4 It is important to ensure that your chosen dispute-resolution process does not run afoul of evolving laws governing alternative dispute-resolution practices.
 

2. Speed, finality, and process control
 

Two of the main benefits commonly associated with arbitration are (1) relatively faster results when compared to traditional litigation, and (2) increased ability to control confidentiality and other aspects of the dispute-resolution process. Arbitration also means that the parties select the arbitrators, which may allow a client to choose an arbitrator familiar with industry-specific practices and issues.5 
 

Arbitration can be faster than litigation, which is one reason that arbitration may be less expensive than traditional litigation.6 Arbitration also produces a result that is often confidential and final. However, your client needs to understand that there are fewer options for appealing an arbitral award, and the grounds for appealing to a court are narrow: fraud, “evident partiality” or “corruption,” refusal to hear material evidence, the lack of an arbitration agreement, and the arbitrator exceeding his or her powers.7 An arbitral award will not be disturbed, for example, when it is based on hearsay evidence, when the arbitrator misinterpreted the contract, or even when the arbitrator committed an error of law.8 
 

You should also consider that there is no guarantee that arbitration will be less costly or faster than other options. For example, although arbitrators can control discovery, they may be more willing to admit a wide range of evidence in order to defeat a potential claim that they failed to hear material evidence.
 

3. Maintaining a relationship
 

When your client wants to maintain a good relationship with the other party to a contract, whether a customer, supplier, contractor, or employee, it may be helpful to design a dispute-resolution process that includes mediation. Another option is a hybrid or multi-tiered dispute-resolution mechanism, which offers flexibility to address various types and degrees of disputes, while maintaining the parties’ contractual relationship over multiple transactions or a period of time. Hybrid approaches offer options to resolve smaller disputes quickly and at low cost without the adversarial nature of litigation, while also allowing the parties to litigate major conflicts.
 

For example, hybrid approaches can begin with the simple step of notifying the other party that a problem exists.9 A simple exchange of information may be enough to resolve the dispute. If not, the contract can provide for escalating methods tailored to the parties’ situation, perhaps including meetings between increasingly senior representatives from both parties, followed by mediation.10 If the lower-cost, lower-impact steps do not resolve the problem, the contract can still provide for ultimate resolution by the courts. But at least by that stage, the parties will have clarified the source of the dispute and relevant facts, and litigation may be able to proceed more quickly than if the parties had attempted to resolve the dispute by litigation first.11

You and your client should also consider how personal factors may impact the effectiveness of dispute-resolution processes. If contract negotiations reveal, for instance, that one of the parties lacks the temperament to participate in alternative methods such as mediation or collaborative law, those methods may not be appropriate for that particular contract.
 

In sum, the dispute-resolution provision in a contract should be a deliberate choice that is designed to meet the needs of your client in the context of the particular contract. By assessing these factors and the client’s business and interests, you can help craft a dispute resolution process that will protect your client in the event of a future conflict.
 

Kristopher R. McClellan is an attorney with Lawson and Silek, PLC. He can be reached at kristopher.mcclellan@gmail.com.

 

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1Va. Sup. Ct. R. pt. 6, sec. II, 1.2 and Comment 1.
 

2Consumer Financial Protection Bureau, CFPB Issues Rule to Ban Companies From Using Arbitration Clauses to Deny Groups of People Their Day in Court (July 10, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-rule-ban-companies-using-arbitration-clauses-deny-groups-people-their-day-court/.
 

3Jessica Siler-Greenberg, Consumer Bureau Loses Fight to Allow More Class-Action Lawsuits, N.Y. Times, Oct. 24, 2017, at A1, https://www.nytimes.com/2017/10/24/business/senate-vote-wall-street-regulation.html.
 

4 Ending Forced Arbitration of Sexual Harassment Act of 2017, S. 2203, 115th Cong. (2017).
 

5ABA Section of Dispute Resolution, Benefits of Arbitration for Commercial Disputes 2, 4-5, https://www.americanbar.org/content/dam/aba/events/dispute_resolution/committees/arbitration/arbitrationguide.authcheckdam.pdf
 

6Id. at 3, 7.
 

7Va. Code Ann. §§ 8.01-581.010, -581.011 (2017) ; see also 9 U.S.C. § 10 (2017).
 

8Farkas v. Receivable Financing Corp., 806 F. Supp. 84, 87 (E.D. Va. 1992).
 

9See, e.g., Dominion Transmission, Inc. v. Precision Pipeline, Inc., 2013 U.S. Dist. LEXIS 159164 at *2 (E.D. Va. 2013).
 

10Id. at *3.
 

11Id.