Dispute Resolution and Default Clauses in Commercial Contracts

Dispute Resolution and Default Clauses in Commercial Contracts

Business transactions close principally because of the relationship between the parties.  While seemingly crucial, parties frequently neglect to see past the strength of their relationship to determine what potential risks lie ahead should the business deal turn sour.  When formalizing business transactions in writing, parties are often hesitant to include language that could “upset the other side” or that they think could cause the deal to fall through.  Accordingly, the parties may leave out important language in contracts addressing, for example, a party’s failure to perform, believing it could never happen.  Yet, the decision to exclude such contractual provisions could lead to time consuming and costly litigation.

Contracts traditionally address dispute resolution through arbitration or mediation, but there are other creative solutions.  Any dispute resolution provision should be tailored specifically to the transaction after careful consideration of what would happen if either side breaches the contract.

An arbitration clause requires the parties to proceed with resolution of their disputes outside of the court system.  Arbitration is a confidential proceeding presided over by individuals who are typically selected by the parties who have a particular expertise in the relevant industry.  The arbitrators will hear the case and formulate a decision based on the evidence presented.   Arbitration can be more efficient and less expensive than litigating in court because it is a less formal process without the motion practice, pleadings, discovery, and rules of evidence typically involved in litigation.

Additionally or alternatively, the parties could agree on a mediation provision.  A mediation provision would compel the business owners or other company representatives to confer in-person or via video conference and make a good faith effort to resolve their disputes before either party may file a lawsuit.  In addition to litigation avoidance, such a provision often ensures contract longevity through renewed communications between the same individuals who originally negotiated the contract.

Another way to prevent hair-trigger filings of breach of contract suits is through a default clause. A default clause requires the complaining party to first provide notice of the obligation they believe the other party failed to meet and an opportunity to cure that default. Contract terms are usually agreed to once the “why” behind them is communicated appropriately with the other party.

Levin Ginsburg prides itself on carefully and effectively negotiating contracts on behalf of its clients and helping contracting parties understand why certain provisions are in place to protect their interests. If you would like to schedule a consultation to prepare, review or negotiate your commercial contracts or to discuss any other business-related matter, please contact Joseph A. LaPlaca at (312) 368-0100.