This contract tip is about required negotiation periods in dispute resolution provisions.
Some contracts mandate a structured negotiation period before the parties can file for mediation, arbitration, or litigation.
I'm not talking about court-mandated negotiation. I'm talking about provisions that say if there is a dispute, the senior executives must spend a period of time (usually 30 to 60 days) trying to resolve it before filing for any kind of dispute resolution.
A lot of lawyers really like these provisions. I know that because I see them all the time in the contracts I review. And I respect that.
But personally? I am not a fan. I never include these in my contracts and delete them when I can. Let me explain why.
1. What if my client has a strategic need to sue ASAP? This need could be to get equitable relief or secure a preferred forum. Yes, I could draft around it, but then I still have hoops to jump through. Why reduce my client’s options and put my client in potential breach of the agreement?
2. What if my client is using litigation as part of a business strategy? This approach is not common, but it does happen. Businesses may have a reason that they need to sue a competitor or other entity without delay. In these cases, there is no interest in resolving the issue.
3. Except in cases of #1 and #2, the practical reality is that business people ALWAYS (as in 99.9999999999% of the time always) try to reach a settlement before filing a lawsuit or for arbitration.
I've been working on commercial contracts for 25+ years, representing big and small companies, and I have not once encountered a business executive who preferred the expense, distraction, and risk of arbitration and litigation over a fair settlement. They ALWAYS want to try to resolve and be done with it UNLESS they have a reason to pursue the dispute.
If that happens organically, why should lawyers impose an artificial construct on how they choose to do so? Let the business team - who know the people, business, and issues in that moment with the advice of the lawyer who has the same information - decide how best to handle it. To me, that's a much better approach than having contract lawyers draft a process months or years before any problem arises.
I do want to add one last point. I LOVE mediation as a tool to help resolve disputes when both parties want to use that approach. If the parties want to mediate, they can agree to do so regardless of what the contract says. For the same reasons that I don't like forced negotiation, I do not like forcing business mediation on the parties (outside a court's structured mediation).
What do you think about required negotiation periods? I welcome other perspectives on this point.
