The Business Contract – Part Two

Continued from Basic Business Contract Provisions – Part One.

Mediation/Arbitration Clauses: Mediation and arbitration are alternative methods of conflict resolution. ADR (“Alternative Dispute Resolution”) has grown in popularity of late especially with judges. For the most part, ADR relieves pressure on overcrowded courts, reduces litigation costs and results in faster resolution. It’s important that parties understand the consequences of mediation and arbitration clauses. Mediation, the tamer of the two, may require that the parties submit their case to a mediator (experienced attorney or retired judge) who will help the parties navigate through the realities of their respective positions. It often results in early resolution, but the mediator’s findings are not binding on the parties. Mediation is not cheap. The parties generally share the cost and if the mediation fails, the parties still face all of the additional costs of full scale litigation. Those with limited resources may want to consider forgoing mediation clauses in their contracts. The scenario with non-binding arbitration is similar to that of mediation except that the procedures differ.

1207444_courtroom_1.jpgBinding arbitration on the other hand has significant consequences, not the least of which is that the parties waive their right to a jury trial and, except in limited circumstances, waive their right to appeal. Foregoing these fundamental rights leaves parties at the mercy of arbitrators who are typically more business oriented and conservative than juries. It’s not surprising then that big business routinely includes arbitration clauses in their contracts. Nonetheless, resolving disputes without the significant costs associated with litigation is an appealing alternative to many businesses regardless of their size. Binding arbitration provides an affordable venue for dispute resolution that is otherwise unattainable for some due to the costly nature of full scale litigation.

Applicable Law Clauses: All contracts should clearly define the applicable law to be followed should a dispute arise. This is especially so where the parties (whether individuals or corporate entities) reside in different states. It is best for San Diego businesses that their contracts be governed by California law.

Jurisdiction and Venue Clauses: These clauses often go hand in hand with Applicable Law clauses. It is common for national corporations and other large businesses that operate in multiple states to include jurisdiction and venue clauses calling for actions to be filed in the company’s home state. This can create significant problems for San Diego businesses. It is always best that disputes are litigated in a party’s home territory, as it requires considerable resources to litigate a case in a foreign state. Of course, this may not always be practical. Generally, the party with the greater bargaining power will insist that disputes be heard in its home state. However, where possible, parties should seek jurisdiction and venue clauses that favor their place of residence.

Continued in Basic Contract Terms – Part Three.

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