Drafting an Effective Dispute Resolution Clause

dispute resolution clause

Being able to draft a well-written dispute-resolution clause is the foundation of successful dispute-resolution procedures. Dispute resolution clauses are crucial to every ADR (alternate dispute resolution) agreement. The use of these agreements is encouraged to ensure that the important elements of a dispute resolution proceeding are provided for. And to avoid any ambiguity which may later lead to difficulties and delays in the dispute resolution process

The most recent survey concerning the use of an alternative dispute resolution clause by Fortune 1000 companies found that 98% used mediation, 83% used arbitration, and 51% used mediation arbitration within the last three years. More than half of the respondents said their motivation for doing so was a contractual requirement. Therefore, one would expect to find that dispute resolution clauses are a common feature of business contracts and that such clauses would be discussed in the academic literature for the guidance of alternative dispute resolution users and contract drafters alike.

With rare exceptions, however, studies on ADR in contracts focus on arbitration, choice of law, and choice of forum clauses. The use of arbitration clauses varies widely not only by the type of contract but also by the study consulted.

Dispute Resolution Clause

Arbitration clauses seem to be most often present in international commercial agreements, although the results are inconsistent (rates as high as 90% and as low as 19.% reported) in pre-printed consumer agreements (between 71% and 35% of which contain mandatory arbitration provisions, depending on the study consulted, employment agreements (35% of which contain mandatory arbitration provisions) and commercial contracts, i.e. sale and servicing agreement (between 10% and 31% of which contain contractual arbitration clauses).  Contracts with at least one non-US party are twice as likely to contain an arbitration clause.

Surprisingly, the use of mandatory ADR is less common in business-to-business contracts. Even when business-to-business contracts are supposedly mandatory, negotiated changes or elimination of the dispute resolution clause is often allowed in a business-to-business context.

Despite these limitations, the available data focusing on ADR clauses rather than simply arbitration reveals a number of striking weaknesses in current contractual drafting practices. The remainder of this article will discuss these weaknesses and what an ideal ADR clause should contain.

The Frequent Failure to State an Adequate Scope for the Application of the ADR Clause

The language of the ADR dispute resolution clause studied is significant because the scope of that language limits the arbitrator’s jurisdiction to determine a given controversy. A given dispute is arbitrable only if the language of the agreement makes it so.  Approximately 60% of the agreement used some minor variation of the conventional language assigning dispute resolution clauses as “arising out of or relating to the contract” to arbitration – and therefore to any other dispute resolution procedures contained in the ADR clause.

Although the language of the dispute resolution clause and arbitration rules might be called classic, it is by no means ideal. The courts have called such arbitration clauses “broad.”  But while they are broad enough to encompass other related contracts, they will not apply to causes of action that are either not based on a contractual theory or significantly related to the contract.

Torts and statutory claims, as well as controversies arising out of unrelated contracts or pre-dating the subject contract, would not be considered arbitrable. Of course, this could be the result of a deliberate choice. The parties may prefer that a court determine non-contractual claims. Counsel should use the broadest possible language in local contract laws, consistent with the intent of the parties.

Drafting Dispute Resolution Clauses

Seventy-five percent of the contractual dispute resolution clauses studied were escalation clauses. That is, there was more than one step in the process of resolving conflict.  However, only about seven percent of escalation clauses in the data set included mediation. The rest went directly from some form of negotiation to arbitration.

(This is consistent with the survey findings related to Fortune 1000 companies’ use of mediation. Only 10% of mediation was triggered by contractual provisions, With 40% being voluntary, 29% being court-mandated and 9% being triggered by company policy.)

The failure to use mediation as a precondition to arbitration is a serious error. Research shows that rights-based dispute resolution processes cost more than interest-based approaches. While imperfect information leads to the “negotiator’s dilemma“ (sharing interests may lead to agreement or even increase the available profits, doing so exposes the open party to the risk that a rival won’t reciprocate, using the information to claim value instead, A trained mediator can both promote parties’ use of interest-based bargaining and keep sensitive information confidential.

Finally, research shows that 80% of cases submitted to mediation are resolved there, eliminating the need for more expensive and time-consuming arbitration.

Choice of Forum

When drafting a dispute resolution clause, the first step should always be deciding which forum to choose for the resolution of any dispute arising under the agreement.  There are a few options and the parties involved can elect one forum or a combination of various forums.


As you can guess, an arbitration award is easier to enforce than court judgments. Every state varies in degrees of enforceability so ease of enforcement will usually depend on the reciprocal arrangements in place between the jurisdiction of the particular court giving the judgment and the state in which such dispute is brought.


In arbitration, contracting parties are generally free to agree on a suitable dispute resolution method and procedure, hold hearings in a neutral court’s jurisdiction, and appoint arbitrators who are of a different nationality compared to such parties.


In contrast to court trials and processings, arbitration hearings are held in private and the documents produced and awards issued are confidential.

Multiple Parties and Multiple Agreements

Where there are multiple parties and multiple agreements there is a risk of parallel proceedings and inconsistent outcomes. Even though arbitral institutions have revised their rules to permit joinder and consolidation, an arbitral tribunal does not have the power to order a third party that is not a party to the arbitration agreement to join an arbitration without the consent of that third party.

Quality of the Judges

The quality of an arbitral tribunal is a little more variable given the freedom of the parties to choose arbitrators. As a result, arbitral tribunals lack the “safety check” that the appeal system is afforded.

Market Knowledge

If a dispute is likely to raise technical or scientific issues of fact, arbitration permits the parties to choose a tribunal with the relevant technical expertise in order to accurately come to a disputed determination.


While the arbitration process may have been quicker than litigation, this is no longer the case.  The arbitration processing has slowed down to match the pace of the courts. Unless there is an appeal of a court judgment, in which case arbitration will be significantly faster than litigation given the fact that there is little possibility of appealing an arbitration award.

Summary Determination

Arbitration has no equivalent to the summary judgment procedure that is available in litigation. This means a party may apply for a quick determination without a full hearing. In contrast, the courts are usually happy to determine matters at an early stage – whether by way of preliminary issue or summary judgment.

Finality of Decision

The circumstances in which an arbitrator’s award can be appealed are generally very limited. Unlike a first-instance court judgment, which can be appealed relatively easily in most jurisdictions.


In international contracts particularly, there is a perceived disadvantage in having a dispute referred to the “home” court of a prevailing party, particularly if the counterparty is a state entity. Arbitration permits the parties to refer their disputes to a neutral forum.  As well as the seat of the arbitration and the location of any hearing, are neutral.

No Precedent

An arbitration award is for most purposes confidential to the parties involved.  Furthermore, it does not give rise to any binding precedent.  Therefore, for those seeking a final and generally binding ruling on the meaning of a standard form contract is required, court litigation will be preferable.

The Absence of a Delegation Clause and the Incorporation by Reference Issue

Despite the fact that arbitration is intended to be an alternative to court, there are several issues that will require judicial intervention if the ADR dispute resolution clause is not well drafted. Arbitration rules include the enforceability of the arbitration agreement, the arbitrability of the dispute, compliance with any contractual preconditions to arbitration, and waiver of the right to arbitrate.

But where the agreement unmistakably states that these are for the arbitrator to decide the intent of the parties’ controls. A dispute resolution clause that requires arbitral rather than judicial decision-making is called a  delegation clause. It is a critical feature of any alternative dispute resolution process that includes arbitration.

Startlingly, less than five percent of the contractual data set contains a delegation clause. It is suggested that most international contracts incorporate institutional provider rules by reference. Those rules generally contain language that has been treated as a delegation provision by American courts. However, the same might not be true in a domestic context, and both domestic and international provider rules are subject to change.

Either the rules must be checked immediately before entering into the agreement or (more practically) a robust delegation clause should expressly be made part of the contract.

The Failure to Provide for Appropriate Carve-Outs in Arbitration Proceedings

In the parlance of arbitration, a “carve-out “ is an express exception to arbitration for a proceeding or class of cases. Where a dispute or proceeding has been carved out, it is not arbitrable. and remains under the jurisdiction of the courts.

A carve-out may be made as to any class of disputes if the parties deem the advantages of arbitration are outweighed by economic or other concerns.  But carve-outs are risky, which may explain why 40% of contracts do not use them at all.

They inject courts into the parties’ relationship, becoming sources of delay, expense, increased conflict, and reduced privacy.  Further, these provisions must be carefully drafted, or resolving disputes over arbitrability may take months or even years.  Common carve-outs are:

  • Small claims or other routine, low-dollar disputes.
  • Complex high-stakes disputes where the availability of appellate review is especially desirable (“Bet-the-company” litigation)
  • Applications for emergency relief
  • Requests for injunctive or other equitable relief
  • Intellectual property disputes.

Dispute Resolution Clause in Arbitration Agreements

Developments in final and binding arbitration practice have potentially made some of these carve-outs unnecessary. Modern rules of major institutional arbitration providers contain exceptions for small claims matters and streamlined rules for smaller cases. (Of course, the parties may still wish to specify the use of a judicial forum for cases where arbitration is not deemed cost-effective.)

Appellate review on the merits is generally not available in arbitration.  Normally, this is considered an advantage, promoting, speed, economy, and finality of the judgment. However, in high-sex litigation, the option of appeal may be seen as imperative. A few courts have allowed parties to contract for such review.

However, the United States Supreme Court has ruled it is not available under the Federal Arbitration Act. Certain arbitration providers also allow review by appellate panels, This may be much more expensive and as time-consuming as a judicial appeal.

Arbitration Rules

Emergency relief is problematic in arbitration. While courts are nearly always open during business hours, the appointment of an arbitrator or arbitral panel takes time, as does the coordination of hearing dates. Some institutional providers have established procedures for emergency hearings within a few days, but courts will still be quicker. Additionally, arbitral emergency relief will not bind non-signatories to the agreement. But only thirty-seven percent of contracts contain carve-outs for emergency relief, which carries risks of its own.

US governing law is clear that an arbitrator may award injunctive or broad equitable relief. But as with emergency orders, only signatories and those who take through them are bound. A court may bind others consistent with due process.  Further, court-ordered equitable relief is more predictable, being limited by a well-developed body of governing law that does not constrain arbitrators.  Despite this, only about 17% take advantage of the carve-out.

The carve-out for intellectual property is only slightly more popular, at 18% of the contracts reviewed.  In most jurisdictions, intellectual property is of limited arbitrability, and in some cases is arbitrable. In most jurisdictions, including the US, the parties agree and may arbitrate rights between themselves but not affect the overall rights granted by the state.

An arbitral processing and determination of intellectual property rights made in one jurisdiction might not be enforced elsewhere on public policy grounds.  Parties sometimes choose to litigate in US courts because they have a well-developed case law that makes outcomes predictable.


An effective dispute resolution process should take into account the needs of the parties and their likely disputes. Rather than defaulting to arbitration, the process should first attempt negotiations and mediation unless there is a clear reason not to. Structuring the provision this way will resolve most disputes short of costly arbitration.

If the dispute arises and does reach arbitration, the contract language should include a broad delegation clause and not rely on incorporation by reference.  Any carve-outs from the delegation clause must depend on the circumstances of your parties at not rely on boilerplate. But at a minimum, the desirability of appellate review, and the need for and availability of appropriate emergency and injunctive relief should be considered.

To learn more about dispute resolution clauses, dispute resolution proceedings, arbitration rules, and more, contact ADR Times today!

ADR Times
error: ADR Times content is protected.