Arbitration Clauses Should Work For You, Not Against You

Most people who are (luckily) not familiar with litigation believe alternative dispute resolution (or “ADR”) clauses in their contracts are essentially boilerplate language that’s recycled again and again in every contract. However, well-drafted ADR clauses can not only give you a huge advantage if an issue comes up, they may also cause your counterparty to back away from litigation completely. If done right, arbitration clauses should work for you, not against you.

Backing up – ADR provisions usually state that if an issue or dispute arises, the parties need to first work in good faith to find a solution, mediate, and/or arbitrate before or instead of filing a lawsuit. And our team of litigators agree: the ADR provisions we’ve been seeing in recent years are getting more creative and sometimes, more difficult to abide by for our clients. Unfortunately, we’ve seen some clauses that are really awful for our clients in that it requires a process that can be dragged out for years before an arbitration proceeding or lawsuit can even be filed. This is a problem because arbitration clauses should work for you if done right. Some common examples we’re seeing are:

The provision requires that the parties try to resolve any disputes on their own. Sometimes, we see language like “in good faith” to indicate the parties shouldn’t be using this as a delay tactic, but that kind of language is vague and very hard to enforce. Other times, we see language indicating how long the parties need to do this, but it can vary from 30 days to as long as 1 year – and trust us, if you’re not making much progress on working through your issue in 30-60 days, the chances of you making much more progress in 1 year is slim to none. Our recommendation here: if you’re going to include this step, make sure a short timeline is included.
The provision requires that if the parties can’t resolve the issue on their own, they’re required to mediate. In one of the most egregious examples, a client brought me a contract that required him to mediate 3 separate times before he could file a lawsuit. Remember, mediation can be a great option, but it can also be expensive. A mediator also has no authority or power to make parties settle – the best a mediator can do is get the parties to see as much common ground as possible, see the flaws in their positions, and realize that settling the case early (but at a discount) may still make the most economic sense. Our recommendation here: again, if you’re going to include this step, make sure you’re not committing yourself to numerous mediations and make sure the forum, steps for initiation, etc. are all spelled out.
The provision requires arbitration but is super vague on the mechanics of the arbitration. Arbitration is also a great option to consider instead of initiating a public lawsuit, but arbitration can also be a very expensive process. In arbitration, you’re not only paying for attorney time, you’re also paying for arbitrator time (and additional costs to the forum that’s running the arbitration, which typically does include an initiation fee). Our recommendation here: make sure the agreement spells out exactly how to initiate an arbitration, where it’s going to be held, how many arbitrators you’re going to use, etc.

The bottom line is, don’t skirt over the ADR clause when drafting your contracts. Nobody wants to think about their business or partnership going awry in the future, but the more you consider how you’re going to handle potential disputes down the line, the more you’re protecting yourself and potentially saving tons of money down the line. And because we’re increasingly seeing ADR provisions that are designed to make the process confusing and impractical, it’s more important than ever to make sure your ADR clauses work for you, not against you.

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