Including an alternative dispute resolution clause in your contracts can save time, money, and distraction.
Important Tip If the other party drafts your contract and it doesn't contain an ADR provision, don't hesitate to insist that one be added if you believe it's best for your business.

If you run a small business, you’re entering into commercial agreements all the time.  Do you know what happens if a contractual dispute arises?  Of course, you’ll try and work things out in friendly fashion.  But what happens if those efforts fail?  Litigation is one option; an expensive, time consuming, and unpredictable one at that.  But there are alternatives to litigation, and by including an alternative dispute resolution provision in your contracts, you can save your small business a great deal of time and money should you ever have a contract dispute.

What are the drawbacks of litigating in court?  Among others, it is pricey.  These days, discovery (the process by which parties exchange documents and obtain witness testimony) can consume months, and in some cases, years.  Since many e-mails and electronic documents may be archived, there are often lots of documents to be exchanged.  That’s just the tip of the discovery iceberg though, because before discovery occurs, parties often spend inordinate amounts of money just fighting over which documents should be produced or which witnesses must provide testimony.  Given the time and money consumed by litigation, it distracts managers from doing what they do best – running a business.  Also inherent in litigation is an element of uncontrollable risk – no matter whether you think you're right, it is the judge and jury who will decide your fate.

Parties to a contract may contractually agree to forgo litigation and resolve disputes through one of several alternatives.  What are your choices?  One popular option is arbitration.  In arbitration, a neutral arbitrator hears evidence and arguments from each side, and then makes a decision.  Depending on the parties’ choice, the arbitrator’s decision may or may not be binding.  Arbitration is less formal than a trial, and the rules of evidence are often relaxed, with less money being wasted on discovery.  There is generally no right to appeal an arbitrator’s decision.

Another alternative to litigation is mediation.  A neutral mediator helps the parties try to reach a mutually agreeable resolution on their own.  Unlike arbitration, the mediator does not decide who wins; rather, he or she tries to help the parties communicate so they can broker an agreement themselves.  Thus, in mediation, the parties retain more control over the process and outcome.  Mediation is often a good choice when parties have a relationship they want to preserve.  It is less helpful when one side has a significant advantage in power over the other, since mediation requires the parties to compromise.

Yet a third alternative to litigation is for the parties to present their case to a neutral evaluator.  The neutral evaluator evaluates both sides’ positions and gives an objective opinion on their respective strengths and weaknesses.  The evaluator’s opinion is not binding, but provides each side with a realistic idea of the strengths and weaknesses of their position, and hopefully helps them negotiate a resolution without having to go to court.

All of these options are available, and by drafting your contracts appropriately, parties can require that these alternatives be followed instead of, or before resort to, litigation.

Here are a couple examples of the kinds of alternative dispute resolution clauses that could be included in your contract:

For a lease agreement:

In the event that any dispute or claim (collectively, “Claim”) arises regarding any provision of this Agreement, the party raising the Claim shall provide written notice of such Claim within five (5) days.  Lessor and Lessee agree to engage in good faith efforts to informally resolve the Claim.  If, after thirty (30) days, Lessor and Lessee fail to resolve the Claim through good faith informal negotiation, Lessor and Lessee shall attempt to resolve the Claim through mediation, to be conducted by a mutually agreed upon mediator.  In no event shall Lessor or Lessee institute litigation regarding any Claim unless and until the later of (1) sixty (60) days from the time written notice of the claim was submitted or (2) the mediator’s determination that the Claim cannot be resolved through mediation.

For binding arbitration, the American Arbitration Association suggests inserting the following clause:

Any controversy or claim arising out of or relating to this contract or the breach thereof, shall be settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof.

Additional Information
Important Tip: 
If the other party drafts your contract and it doesn't contain an ADR provision, don't hesitate to insist that one be added if you believe it's best for your business.
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