Drafting Alternative Dispute Resolutions Clauses — General Considerations

Last week I discussed some of the major types of alternative dispute resolution. Today I’ll talk about some issues to consider if you’re going to DIY an alternative dispute resolution clause in one of your startup’s agreements, or, preferably, if you’re working with legal counsel to draft an agreement. First I’ll talk about some general alternative dispute resolution clause considerations, before moving into issues specific to arbitration clauses on Friday.

The first primary consideration in drafting alternative dispute resolution clauses is to consider what the dispute will be and what part your company will play in it. For example, if you think you’ll be defending against a claim, you may want a streamlined mediation-arbitration process that will end the dispute as quickly and cost-effectively as possible. Conversely, if you think your company will be the one bringing the claim, and it will be fact-intensive, you may want a formal, structured arbitration process with discovery so that you can obtain the facts you will need to prove your claim. Or, if you think injunctions or equitable relief will be necessary, you may want to make provisions to be able to go into a court of law to get it. If you’re in the position of drafting the alternative dispute resolution clause for your agreement with another party, you should always consider the kind of dispute you and the other party(ies) may get into and choose a dispute resolution process that suits the dispute.

Other general considerations for alternative dispute resolution clauses include:

– Venue: Generally the best idea is to set venue to your company’s hometown so that dispute resolution is of the most convenience to you; however, again consider what the dispute will involve — if you think you will need physical evidence and witnesses to prove your claim, and they’re located in another city, it may actually be a more cost-effective method to set venue in that city.

– Confidentiality: A startup generally won’t need confidentiality of the dispute or the settlement terms/arbitrator’s award — it can make for an awkward situation in due diligence during venture capital financing when you cannot reveal an ongoing dispute or the amount of settlement or award. However, if you feel confidentiality is absolutely necessary in this particular dispute, it is something that can be considered.

– Costs: In negotiation and mediation, costs are normally split between the parties; however, if the dispute goes to arbitration, costs can be otherwise allocated. They can again be split down the middle, or the loser can be forced to bear the costs — not exactly ideal if you end up being the surprise loser of an arbitration. Instead, you can empower the arbitrator to allocate costs (including legal fees) according to his or her discretion.