The Clause That Can Cost The Most If You Get It Wrong

The most expensive clause in a contract may be the one nobody notices until a substantial disagreement arises — the dispute resolution clause.

A poorly chosen forum or process can add years of delay and millions in cost. Likewise, the choice of law and expert determination provisions, if not carefully chosen, can result in serious disadvantages.

In this article, we encourage business leaders to prioritize discussions about the resolution of potential conflicts and embrace a strategic mindset when drafting dispute resolution provisions.

As recent scholarship and best practices make clear, there is no "one size fits all" approach to dispute resolution. Use of a boilerplate clause is ill advised and likely to lead to expensive problems down the line. The optimal approach depends on the type of business involved, the relationship between the parties and their relative bargaining power, as well as the nature and size of any anticipated disputes, enforcement needsand confidentiality expectations.

Sophisticated parties should treat dispute resolution clauses as a strategic tool and make every effort to align them with their commercial objectives from the outset.

To Arbitrate or Not?

To arbitrate or not is a vital consideration that must be analyzed carefully. By default, unless an arbitration agreement is entered into by the parties or a treaty is implicated that provides for arbitration, any disputes that arise between the parties will be litigated in court.

Litigation provides parties with a structured, formal process of adjudication, including strict rules of procedure and evidence and certain rights of appeal. In contrast, arbitration is a private and consensual process selected by parties to resolve disputes on account of its purported speed, informality, flexibility and confidentiality.

In evaluating whether to enter into an arbitration agreement, parties should consider a range of strategic factors, including enforceability of the dispute resolution agreement and resulting judgments or awards; confidentiality of proceedings: the need for appellate review; efficiency and expedition: expertise and even-handedness of the decision-maker; and the ability to address multi-party and multi-contract issues.SeeGary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing (6th ed. 2021). These considerations must be weighed in the context of the specific transaction(s) and counterparty, as no single mechanism is universally optimal.

To illustrate, consider three model clauses from international arbitral institutions.

International Centre for Dispute Resolution ("ICDR") Standard Arbitration Clause
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules.

Clauses,International Centre for Dispute Resolution,Clause Drafting | International Centre for Dispute Resolution.

ICC Standard Arbitration Clause
All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of the Arbitration of the International Chamber of Commerce by one or more arbitrators in accordance with said Rules.

Standard ICC Arbitration Clause,Arbitration Clause - ICC - International Chamber of Commerce.

JAMS Standard Arbitration Clause for International Commercial Contracts
Any dispute, controversy or claim arising out of or relating to this contract, including the formation, interpretation, breach or termination thereof, including whether the claims asserted are arbitrable, will be referred to and finally determined by arbitration in accordance with the JAMS International Arbitration Rules. The Tribunal will consist of [three arbitrators/one arbitrator]. The place of arbitration will be [location]. The language to be used in the arbitral proceedings will be [language]. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Alternative Dispute Resolution (ADR) Clauses,JAMS,ADR Clause Workbook | JAMS Mediation, Arbitration, ADR Services.

Party Preferences, Relationships and Likely Disputes

It is possible for parties to adopt a "hybrid" approach to dispute resolution, with certain matters subject to arbitration and others subject to litigation. The key is to be as clear as possible in your drafting to avoid ambiguity and/or opportunities for the other side to erect obstacles by waging costly and timely jurisdictional battles.

Parties may also implement a tiered dispute resolution clause that escalates from negotiation, to mediation, and then to arbitration or litigation (or both), depending on the nature of the dispute and the relationship between the parties.

A sample provision might read:

Tiered Dispute Resolution Clause (Escalation Clause):
1.1. In the event of any dispute, controversy, or claim arising out of or relating to this Agreement (a "Dispute"), the parties shall first attempt in good faith to resolve the Dispute by negotiation between senior executives of each party, who shall have authority to settle the Dispute. 1.2. If the Dispute is not resolved within [30] days after either party gives written notice of the existence of the dispute ("Notice"), the parties shall attempt to resolve the Dispute through mediation administered by [Name of Institution] under its [applicable rules].1.3. If the Dispute is not resolved within [45] days following the filing of a request for mediation, then either party may submit the Dispute to [arbitration/litigation] as set forth below.

This approach may be ideal for long-term collaborations or joint ventures. It creates a structured, time-bound escalation process, encouraging business solutions before adversarial proceedings. It reflects the strategic guidance that dispute resolution should reinforce cooperation and preserve relationships where possible. Business leaders may wish to consult with their legal teams to analyze the benefits and drawbacks of a stepped approach to alternative dispute resolution (ADR) under the particular circumstances.

One could opt for a two- or three-step process or consider some other variation. When considering the use of a stepped clause, parties should carefully delineate the time frames associated with the prior steps to minimize potential confusion and/or delay. It may also be advisable to include language that contemplates a simultaneous ADR approach with arbitration and/or provides the parties with an clear exit ramp to the stepped ADR procedures if one party expressly refuses to participate in either the negotiation or mediation. While the parties are always free to negotiate or mediate regardless of the insertion of a clause to that effect, the presence of a stepped clause may encourage useful dialogue amongst the various counterparts so long as guardrails exist to prevent delay.

When a multi-party or multi-contract relationship is contemplated, one may seek to exert some control over a dispute resolution provision. Key drafting considerations for multi-party/multi-contract relationships:

• Strive for consistency across all related contracts in the following areas: arbitral institution/rules, seat, number of arbitrators, language, confidentiality, and any bespoke procedures. (Partial alignment across subsets of contracts is better than none.)
• Select institutional rules that fit your objectives for multi-party/multi-contract disputes (e.g., availability and thresholds for consolidation and joinder; ability to file a single request for multiple contracts; tribunal/institution powers and timing).
• Include an express consolidation clause in each related agreement, drafted consistently, and define what constitutes "related" disputes, or consider an umbrella agreement which provides for arbitration arising out of subordinate and/or subsequent agreements.
• Designate who decides relatedness (e.g., tribunal, if constituted).
• Address joinder expressly, noting that joining a non-signatory generally requires consent and/or a clear contractual pathway (e.g., affiliates, assignees, and identified third-party beneficiaries).
• Be cautious with stepped or split clauses as misalignment can frustrate consolidation.

For complex transactions involving multiple agreements and parties, an alignment clause may be considered:

Multi-Contract and Multi-Party Alignment Clause:
The dispute resolution provisions of this Agreement are intended to be consistent with, and shall be interpreted in harmony with, the dispute resolution provisions of [list related agreements]. All parties to such agreements consent to joinder and consolidation of disputes arising out of or relating to the same transaction or series of transactions, to the fullest extent permitted by the [applicable rules and law]. The term "party" as used in this clause includes affiliates, permitted assignees, and third-party beneficiaries expressly identified in this Agreement, who shall be bound by and entitled to invoke these dispute resolution provisions.

This reduces the risk of fragmented proceedings and ensures all relevant parties are subject to the same dispute resolution mechanism.

Strategic clauses should also anticipate the types of disputes most likely to occur between the parties. For example, technical disagreements may be better addressed by expert determination, while payment disputes may benefit from streamlined arbitration.

The following sample provision illustrates expert determination for technical or valuation issues:

Expert Determination Clause:
Any Dispute arising out of or relating to [e.g., price adjustments, technical specifications, valuation] shall be referred for final and binding determination to an independent expert jointly appointed by the parties. If the parties cannot agree on the expert within [number] days, the expert shall be appointed by [naming authority]. The expert shall act as an expert and not as an arbitrator and shall determine the Dispute based on written submissions and supporting documents, unless the expert requests further information or a meeting. The expert's determination shall be final and binding, except in the case of fraud or manifest error, which may be corrected by the expert within [number] days of notification by either party.

Choice of Forum

"Where" a conflict is going to be adjudicated can become the most hotly contested issue. After all, jurisdictions have varying systems of law and procedural rules that may impact the ultimate resolution of a conflict.

To address forum selection, parties may include an exclusive jurisdiction clause for litigation or specify the seat and institution for arbitration. For example:

Arbitration Clause (with Strategic Features):
Any Dispute not resolved pursuant to the escalation procedures above shall be finally resolved by arbitration administered by [Name of Arbitral Institution] in accordance with its [applicable rules] in effect at the time of commencement of the arbitration, except as modified herein. The seat of arbitration shall be [City, Country]. Hearings may be conducted in person, by video conference, or at any location agreed by the parties or determined by the tribunal. The tribunal shall consist of [one/three] arbitrator(s). Arbitrators shall have [specify expertise, e.g., at least 10 years' experience in commercial contracts/industry-specific knowledge/language proficiency]. The language of the arbitration shall be [Language]. The existence of the arbitration, all proceedings, submissions, evidence, and awards shall be confidential, except as required by law or to enforce or challenge an award. Parties that opt for arbitration should keep in mind that the venue chosen for their arbitration will dictate the procedural law that will govern their arbitration (e.g., if New York is selected as the seat of your arbitration, New York procedural law will govern the arbitration).

Court Jurisdiction Clause (Litigation):
Subject to the provisions for negotiation and mediation above, the parties irrevocably submit to the exclusive jurisdiction of the courts of [Jurisdiction] for the resolution of any Dispute not resolved by the above procedures. Each party waives any objection to venue orforum non conveniensand agrees not to contest the enforceability of this clause. To the extent permitted by law, the parties waive any right to a trial by jury in any Dispute. One caveat that should be noted in relation to a court jurisdiction clause is that the danger exists that the clause may not be enforced as written, especially where the chosen forum (court) has little relationship to the parties' operations or dispute. Parties opting for litigation that might have an international nexus may also want to consider the inclusion of a waiver of service provision.

While the aforementioned clauses aim to promote predictability, efficiency, and enforceability, it is highly recommended that business leaders consult with their legal teams to specifically tailor them to meet their needs and objectives.See alsoPaul D. Friedland, Arbitration Clauses for International Contracts (2d ed. 2007) (providing a wide variety of sample clauses).

Choice of Law

The law that governs the parties' dealings, both prior to and following contract formation, can have an enormous impact on how a conflict is resolved. Selecting a particular state law to govern the dispute, regardless of where the underlying events took place, needs to be carefully weighed given the context and nature of potential disputes.

Strategic drafting should expressly state the substantive governing law for the contract and, where arbitration is chosen, the law that will apply to the arbitration agreement should also be designated. This minimizes uncertainty and supports predictability. The arbitration clause above can be supplemented as follows:

Governing Law Clause:
This Agreement shall be governed by and construed in accordance with the laws of [Jurisdiction]. The law governing the arbitration agreement shall be [Jurisdiction], and the arbitration agreement is separable from the main contract and shall survive its termination or expiration.

Such clarity is essential to avoid disputes about validity and scope at the outset, adding cost and delay.

Conclusion

There is no "one size fits all" in dispute resolution. The diverse nature of agreements, jurisdictional requirements, and party preferences demand customized mechanisms. By treating the dispute resolution clause as a strategic tool — aligned with relationship dynamics, likely disputes, enforcement needs and procedural preferences — parties can maximize enforceability, predictability, and value.

Carefully drafted provisions can prevent, manage, and resolve conflicts efficiently and effectively. Failure to negotiate such provisions may be costly — if not disastrous.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.