A key topic addressed in any commercial contract is how the parties will resolve any future disputes. For judicial remedies, the parties to a contract may specify the litigation venue, the choice of law to be applied, and limits to the time period for bringing a dispute under the contract. Planning appropriately for dispute resolution is a prudent way to manage risks and expectations – one of the fundamental purposes of written contracts.

A second fundamental purpose of making written contracts is to help the parties resolve disputes more quickly and easily, should any dispute arise. That added efficiency lowers the cost to your business of addressing disputes, leaving more capital available to engage in core business activities. It is beneficial to the bottom line of the business to draft contracts in a manner that best prepares for the dispute resolution process.

Although litigation is a common and obvious choice for resolving disputes, several other methods are available, from mediation to arbitration. Generally speaking, arbitration is a fast and cheap way to resolve disputes, relative to litigation. In arbitration, a neutral third party hears arguments, evidence, witnesses, and even opening and closing statements from both sides. Some of the legal protections for reliability and credibility of witness testimony are built into arbitration proceedings, such as direct and cross examination of witnesses. However, instead of a judge issuing a ruling at the end of the proceedings, the arbitrator will release a decision that is binding on both parties if binding arbitration was contractually agreed.

In order to maximize the effectiveness of an arbitration clause, the clause should specify the qualifications required of arbitrator(s) and the period of time allotted for the arbitrator to decide a dispute. It’s also important to address whether arbitration is mandatory or voluntary. Equally important is the method of arbitration to be used. There are various approaches to arbitration that create different incentives and penalties for each party. One popular and well-reasoned approach is the “baseball” method.

The baseball method of arbitration requires each party to independently submit a final, best offer (or amount/valuation, depending on the nature of the dispute). The arbitrator then considers both offers and selects the one that most appropriately resolves the dispute. This method is all or nothing, meaning the arbitrator cannot cobble together pieces of both offers but must instead select one in its entirety. This creates a strong incentive for both parties to draft fair settlement offers that balance the interests of both parties, instead of drafting one-sided and wholly self-serving demand sheets. Arbitration clauses can therefore be valuable tools that produce fair dispute outcomes for a much lower cost than litigation. An experienced attorney is your best ally to identify an alternative dispute resolution approach works for your business.