The decision to include or not include a clause is usually based more on an intuitive than a numerical estimate regarding the cost-benefit of drafting (and negotiating) that section of the contract. Of course, contracting is not free and, depending on the type of transaction, it can be expensive. This phenomenon is commonly referred to as “transaction costs.” In the case of dispute resolution, parties often underestimate the risk of not agreeing on a procedure that is sufficiently agile, flexible, and specialized.

If no special procedure is agreed upon, the parties must turn to ordinary jurisdiction, and seeking alternative solutions after the dispute has arisen may not be as viable. This scenario represents an additional contingency on top of the one that already arises directly from the dispute itself. In addition to the depletion of resources required to handle litigation—such as funds and time—the parties may face a discouraging outlook in terms of uncertainty and unwanted publicity.

It should be remembered that contracts involving higher transaction costs usually refer to more complex transactions. Therefore, addressing a dispute arising from such matters also requires experience and knowledge that go beyond the typical issues of ordinary jurisdiction. More importantly, applying the regulations relevant to the subject matter of the dispute likely requires a multidisciplinary approach, which is difficult to find in the fragmented state administration system.

Therefore, focusing on the dispute resolution clause will allow for several efficiencies at the contract execution level. Firstly, the gradual nature of the agreed process can minimize the costs of claiming a contractual breach. Evidence of this is the growing trend of using “dispute boards” in the construction sector, which avoids costly arbitration procedures by addressing the technical considerations regarding the parties’ obligations in advance. As a result, there is already a benchmark for what to expect in arbitration, and consequently, some traceability regarding the possible outcome.

However, designing an effective dispute resolution clause also involves a certain level of complexity. It is important to understand how the parties’ business operates, the scope of contract performance, and its risks. Such information will help decide aspects such as the step-by-step nature of a clause, the designation of a neutral venue, the choice to go to arbitration—and if so, whether it will be institutional or not—the decision-making criteria, among other aspects adaptable to the needs of both parties.

The parties entering into the contract are not thinking about contingencies, but about the business opportunity, the competitive advantage they gain, or profit margins. Rarely are they thinking of a plan B if something goes wrong, and that is where the lawyer can make a big difference. Rather than complicating or prolonging negotiations, including a dispute resolution clause can be an opportunity to preserve the expected value of the contract as efficiently as possible.