Avoiding and Resolving Contract Disputes
Updated: Sep 3, 2020
Contract disputes don't always end up in court. But even if they don't, they are more expensive and take longer to resolve than they should. Unfortunately, most contract disputes end up costing more in legal fees than the amounts at stake. If resolving a dispute costs more than the dispute is worth, is it worth pursuing?
Sometimes it is: some disputes are over a very large dollar value or involve bet-the-company issues, so they are important to see through regardless of cost. But the vast majority of contract disputes do not fall into this category. And in those sitations, the cost of litigation far outweighs the benefit, regardless of who ends up winning.
So what is a business to do? Setting aside different negotiation strategies that hopefully will lead to early settlement, the single most important thing businesses can do to avoid disagreements is having effective contracts.
What makes a contract effective? Not to be snarky, but an effective contract is one that works. It should be written in a way that clearly defines the scope and each party’s rights and duties. The reality in business is that the parties sometimes disagree. When a dispute happens, the parties will look to the contract to see who was supposed to do what, when and how.
It’s obvious that contracts are key to resolving business disputes. But it’s interesting to note that dispute resolution clauses are rarely included in contracts. And that is a big mistake. Though no one enters into a contract expecting a dispute, when a dispute happens, it is good to have a roadmap for how to resolve it. And that’s what a dispute resolution clause provides – a guideline for resolving misunderstandings or differences in a fair way.
There are four primary methods for dispute resolution: negotiation, mediation, arbitration and litigation. Litigation is the traditional formal lawsuit, and it should be avoided if possible. Arbitration might be a bit faster and simpler than litigation, and it avoids courtroom drama. Mediation is even less formal, and involves hiring a mediator who will help the parties reach settlement. And negotiation is the least expensive and most informal method that allows the parties themselves to resolve their dispute.
An effective dispute resolution provision will involve multiple stages, starting with the least costly method of negotiation, then proceeding to mediation and, if all of that fails, to either arbitration or litigation. The way the clause is worded is important. It should clearly define a specific process for providing notices and conducting discussions. All contracts should include a simple and well-worded dispute resolution provision to help resolve disputes as quickly and cheaply as possible.