Key Contract Terms Part 5: Navigating Dispute Resolution Provisions in Business Law Contracts in North Carolina
Our Business Law Blog Series on Contracts has covered the key elements of a well-written business contract. To review, we started with the importance of a well-defined scope, followed by precise pricing provisions, establishing time for performance, how and when a contract can be modified, and handling a contract termination. Our final installment of the series focuses on the recourses available when there is a disagreement or dispute amongst the parties involved in a contract.
Disputes are an unfortunate but often inevitable reality for those engaging in business transactions. To mitigate the potential consequences of conflicts, savvy business owners should ensure their contracts include well-crafted dispute resolution provisions that promote the most efficient and effective paths available to end conflicts. These paths include good faith negotiation, mandatory mediation, arbitration, and court litigation. In this blog, we will explore these elements and shed light on how they operate in contracts.
Negotiation
Ideally all disputes would be resolved equitably through good faith negotiations between the actual parties or appointed representatives of the parties who have the requisite knowledge and experience to act on behalf of each party to reach a resolution. Engaging in good faith negotiations means that disgruntled parties should bring their grievances to the other party before escalating the dispute by engaging in formal mediation or litigation in the form of arbitration or court action. While such amicable resolutions are not always possible, requiring this attempt before a party can resort to litigation it is the most cost-effective resolution, avoids the adversarial nature of lawsuits, and encourages the preservation of valuable business relationships.
Mediation – What is Mediation and when is it used for dispute resolution?
Negotiations, while ideal, are often ineffective if a party proves unresponsive or uncooperative. Additionally, even after good faith negotiations, the parties may find themselves unable to reach a resolution. In these cases, mediation is the next escalation in available dispute resolution procedures. Mediation involves a neutral third party, the mediator, who facilitates communication between the disputing parties to encourage negotiation and agreement. The presence of a third party can help both parties find common ground, or consider new approaches or alternatives that they might not have otherwise considered based on how their negotiations progressed between themselves. Unlike arbitration or litigation, mediation does not result in a binding decision; instead, it empowers the parties to reach a mutually acceptable resolution. Mediation promotes a collaborative atmosphere and allows parties to maintain control over the outcome. It is a confidential process, which can be beneficial for preserving business relationships and avoiding public exposure. While mediation is non-binding until a formal written agreement is signed, parties may choose to incorporate a provision stating that a settlement reached during mediation and confirmed in a contemporaneous settlement memorandum will be enforceable in court.
An example of using mediation is when business partners are unable to reach a solution by negotiating amongst themselves. Instead of heading to court, they opt for mediation. A neutral third-party mediator facilitates the conversation between the two parties, guiding them through discussions, reminding them of potential consequences, and assisting them in identifying common ground. With the mediator’s help, they are able to explore various options, address misunderstandings, and ultimately modify the contract to reflect their agreed-upon resolution.
Arbitration – What is Arbitration and what are some advantages (and disadvantages) of the arbitration process?
Arbitration is a popular alternative to traditional litigation. Parties to a contract may opt for arbitration by including an arbitration clause in their agreement. In North Carolina, the Revised Uniform Arbitration Act governs arbitration proceedings, and the American Arbitration Association rules for mediation and arbitration are common in the construction industry as a whole. Arbitration offers several advantages, including speed, privacy, and flexibility. It allows parties to select their arbitrators and determine the procedures for the resolution of disputes. Furthermore, arbitration decisions are typically binding and enforceable by law and subject to limited judicial review. However, it is crucial to note that arbitration may restrict access to full discovery such as depositions, as well as under oath interrogatories that are available in court proceedings, as well as certain legal remedies and the right to appeal, depending on the terms of the arbitration agreement.
Proceeding to arbitration may be the next step when the business partners were unable to reach a resolution through negotiation or mediation. An arbitrator, chosen by mutual agreement, will review evidence presented by both parties’ respective attorneys and render a binding decision that resolves the dispute. The arbitration process is typically faster and more flexible than litigation, providing a quicker resolution while avoiding the formalities of a court trial.
Litigation is the traditional process of dispute resolution, but usually the last recourse.
Litigation, the traditional process of resolving disputes through the court system, remains a significant recourse for business owners in North Carolina. When both parties do not value reaching a mutual agreement, and their contracts do not provide for binding arbitration, court intervention and litigation becomes necessary. Court litigation follows a well-defined legal procedure, including filing a complaint, extensive and broad discovery options such as under oath depositions of key witnesses, formal verified responses to interrogatories, document productions, and pre-trial motions to address the sufficiency of the parties respective claims and the evidence that will be allowed at trial, then a trial that is scheduled by the Court to occur at the courthouse required by the jurisdiction of the parties dispute. When the trial is over, both parties have the right to appeal the decision to a higher court if they feel the trial court judge or jury committed an error. Once the court’s decision is final, it is binding, and the losing party must comply with the judgment. Litigation provides a formal and structured environment for dispute resolution, but it is a public process that is frequently time-consuming and costly.
Follow our earlier examples, when the business partners are unable to reach a mutual agreement through alternative dispute resolution methods such as negotiation or mediation, the parties can proceed to court. Businesses are required to be represented by an attorney in court. Each party’s attorney will develop their client’s case and evidence to comply with the rules of the court and present the party’s position before a judge in a court of law, providing evidence and arguments to support their positions. This process takes at a minimum several months and can carry on for several years depending on the complexity of the legal claims at issue and how each party desires to proceed with discovery procedures, as well as the Court’s availability for scheduling preliminary motions and eventually the final trial to complete the process. Either a judge or a jury evaluates the merits of each parties’ respective evidence and argument for each claim and renders a legally binding decision, determining the outcome of the dispute.
What are Good Faith Requirements?
North Carolina, like many jurisdictions, imposes an obligation of good faith on parties to business contracts. The duty of good faith requires parties to act honestly, fairly, and reasonably in their dealings with one another, including during dispute resolution processes. Good faith encourages parties to engage in open communication, negotiation, and sincere efforts to resolve conflicts. A failure to meet the good faith standard may result in legal consequences, such as a breach of contract claim or the unenforceability of an arbitration or mediation provision. Of course, there is no objective standard that we can rely upon as to what a judge or jury may determine was not in good faith and rises to the level of bad faith in handling business transactions. As in most things in life extreme examples are the easiest to determine but a majority of the matters in dispute and the parties conduct fall in a gray area, particularly when evaluated in the context of each party’s next best alternatives, or when they are responding to conduct by the other party that was also questionable.
Including dispute resolution provisions in a contract is key.
When entering into business contracts, it is crucial to include dispute resolution provisions that align with the parties’ goals and priorities based on the subject matter of the business transaction. Another important consideration to be made is whether there is a need to have differing procedures to resolve disputes that may arise during the performance of the scope of the contract, as well as other procedures when the parties performance of their obligations under the contract is complete or the contract has been terminated by one of the parties. By proactively addressing potential conflicts through well-crafted dispute resolution provisions, businesses can enhance their ability to navigate legal challenges efficiently and effectively.
To ensure your contract includes the appropriate dispute resolution clauses for your business transaction, contact the business law attorneys at Skufca Law at (704) 376-3030.