In business, good contracts are the key to avoiding a lot of problems – and this is never more true than in construction.

But contracts are highly complicated vehicles. People often don't know exactly what they should and shouldn't include in a contract, nor what's considered “reasonable and fair” to their clients. That causes some contractors to skip some clauses that are very important – like issues surrounding the dispute resolution process and legal fees.

If there's a dispute with your subcontractor or client, how does it get resolved?

This is not a question that you want to leave to chance or the other party's feelings at the moment – which are likely to be hostile and rather determined.

A smart contract can address dispute resolution in steps. For example, you can:

• ● Stipulate that all parties to the dispute meet within a set period of time (usually within a few days) to try to resolve the issues informally, through open negotiation.
• ● If that fails, the next step can be mediation, which is designed to help the opposing parties each see the other's perspective and find a compromise solution. Mediation isn't binding, however, so it may or may not be successful.
• ● If mediation fails, the parties can either agree to binding arbitration or litigation as the next step. While some prefer arbitration, there are pitfalls with that approach because it generally leaves the losing party without appeal rights.
• Who is going to pay for what part of the dispute resolution process?
• Regardless of how you choose to structure your dispute resolution agreement, you should also clearly spell out how legal fees will be handled.
• For issues that go to mediation, parties will generally agree to share the costs, although they may want to negotiate a bit on how the mediator is chosen. Issues that go to arbitration or litigation are, by their very nature, more costly, and it's a mistake to think that the “winner” will get their legal fees reimbursed.
• It's wise to spell out not only what defines a “win” in any given dispute, and how the legal fees will then be divided.
• Don't let your company lose its edge because of poor contracts. Experienced legal guidance is available.