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Should you include a dispute resolution method in your contract?

You probably do not want to go into a deal with an energy company in California assuming that some kind of dispute is bound to arise. It is easier to believe that the contract you sign is going to create a stable and lucrative relationship. It may be better to prepare through a dispute resolution clause in your contract, but setting one method in stone could backfire.

According to the Oil & Gas Financial Journal, there are various benefits to litigation, arbitration and expert determination as forms of dispute resolution. Each of these involves having a neutral, fact-finding third party--judge, arbitrator or industry expert--review all aspects of the dispute based on evidence and arguments you and the other party provide. There are pros and cons to each.

  • Arbitration is the preferred mechanism for many because it can be done privately; ED also provides confidentiality. A large corporation may shy away from a court case because of the publicity.
  • While the outcomes of any decisions are enforceable if they are in your legal contract as such, you or the other party may appeal a decision after a court case. Arbitration and ED rarely provide an opportunity for challenging the outcome.
  • Addressing the dispute through litigation may permanently sever the ties you had with the company, which may not be the most financially advantageous option for you. However, a settlement through arbitration or ED may allow your contract and business relationship to continue unscathed.
  • When you present your side of the case, a judge views the evidence through the lens of the law. Like the individual chosen for ED, the arbitrator should be an expert in the field regarding the topic of dispute. Therefore, both will view the case through the lens of this specialized knowledge.

If you determine that these methods are not right for you, you may be able to present another preference and negotiate for its inclusion in your contract. There may be many other factors that are relevant to your situation, so this general information should not take the place of legal advice.

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