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How to Include an Effective Dispute Resolution Clause in Your Contract

When it comes to contract disputes, most people think of going to court as the legal remedy. However, there are other available options that can be more cost-effective and time-efficient than litigation. One such option is alternative dispute resolution (ADR) — a shorthand term for a variety of methods that don’t involve a judge or jury but instead rely on impartial third parties to settle differences.

Texas law, notably through the 1987 enactment of the Texas Alternative Resolution Procedures Act, encourages the use of ADR, especially in commercial matters. ADR methods are less expensive and time-consuming than court proceedings and often can be accomplished solely through the actions of attorneys, with a minimum amount of business disruption.

ADR can be used in any type of contractual dispute, including those affecting employment agreements, sales and services contracts and leases. To get the most out of ADR, it’s advisable to draft an effective clause that governs how the process will work.

Here are a few key elements that should be included in an ADR clause:

  1. The ADR method — Parties to a contract can choose between several dispute resolution forums, including mediation, arbitration, mini-trial and moderated settlement conference. Which type of ADR will work best may depend on your industry type and company size and other particulars of your situation.
  2. Who will pay for ADR — In some contracts, each party may agree to split the cost evenly, while in others, the cost may be apportioned based on specified criteria.
  3. When ADR can be used — Your contract may stipulate when the ADR method kicks in, such as after other attempts at resolution have failed.
  4. The rules of ADR — The procedures that govern the ADR process can vary depending on the type of ADR used and the time frames that are set.
  5. The outcome of ADR — It’s important to be clear about the intended or expected outcome of ADR. For example, will it be binding or can a dissatisfied party still go to court?
  6. The governing jurisdiction — The clause should specify which state’s or country’s laws will govern contractual interpretation. Even if a dispute arises in another state or country, you can specify that Texas law will apply.

Above all, your ADR clause should be drafted clearly and concisely to avoid ambiguity or misinterpretation. An experienced business litigation lawyer should be consulted for advice on how the clause might be adjusted to work efficiently in actual practice.

Based in Plano, Texas, the Law Offices of Kevan I. Benkowitz can help you draft a commercial contract with an effective clause that can help you get the most out of ADR. To schedule a free initial consultation, please call 972-464-2645 or contact us online.


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