Contracts that Prevent Disputes

During the course of complex contract negotiations, we hardly think about the possibility of a serious disagreement or contract breach that could arise during the implementation stage. Although we know that such conflicts are common.

When involved in contract negotiations, we need to imagine a range of possible scenarios, including the possibility that a dispute may arise that could escalate into a legal battle. Because no one wants to battle it out in court, there are a number of safeguards we can take to improve our odds by way of the implementation of preventive systems or through Alternative Dispute Resolution.

In contract negotiations, the following measures can help ward off a dispute or lessen its ill effects:

Including a dispute-resolution clause

In the event of a contract violation or a disagreement between parties, a dispute-resolution clause might require both sides to continue to meet their contractual obligations while a third party investigates the matter.?The dispute-resolution clause might also require parties to engage in early settlement through alternative dispute resolution mechanisms (ADR), such as mediation and/or arbitration, before going to a court.

When drafting a dispute-resolution agreement, we must include that mediation should be used to attempt to resolve relatively straightforward misunderstandings. In mediation, a neutral third party helps disputants come to consensus on their own. Rather than imposing a solution, a professional mediator works with the conflicting sides to explore the interests underlying their positions and encourages them to air their grievances. Mediators try to help parties to dig out a resolution that is sustainable, voluntary, and nonbinding.

Parties should agree to reserve arbitration for more serious contractual disputes or as a next step if mediation fails to resolve.?

In arbitration, a neutral third party serves as a judge who is responsible for resolving the dispute through a private adjudication process. The arbitrator listens as each side argues its case and presents relevant evidence, then renders a binding decision. Arbitrators can hand down decisions that are usually confidential and cannot be appealed, if agreed by the parties beforehand in contract clauses.?

Negotiate liquidated damages

Include liquidated damages clauses in your contract that specify the amount to be paid if the contract is breached.?

Consider that if you sue the other side for breach of contract, you will typically be awarded monetary damages rather than the specific goods or services that you lost. Therefore, if you negotiate up front that a supplier will pay you $1,000 for a missed shipment, for example, this liquidated damages clause will make any future dispute-resolution effort or court hearing much more straightforward.

Must include a dispute prevention clause

A negotiation tool known as dispute prevention can also help business partners deal with their differences more productively,??

Though such clauses are not yet used widely in business contracts, the construction industry has relied on dispute prevention for decades. Because companies entering into construction contracts are eager to avoid delays, the project’s developer, financiers, architects, and any other interested parties typically sign an agreement in which they vow to meet and communicate regularly, monitor progress jointly, and consult with WLA or FICM mediators to quickly resolve minor disagreements. Such carefully designed dispute-prevention systems have proven highly effective at warding off serious conflicts and delays, and can be quite useful in any long-term business relationship.