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By Sanjeev Kumar
Founding Attorney

Understanding and using Alternative Dispute Resolution (ADR) clauses in business contracts is an effective tool because these clauses are designed to provide a mechanism for resolving disputes outside of traditional court litigation. These provisions can be particularly beneficial in Texas by offering a quicker, more cost-effective means of addressing conflicts arising in business. 

Legal Framework For These ADR Clauses 

The Texas Alternative Dispute Resolution (ADR) Procedures Act (enacted in 1987) provides a comprehensive framework for ADR practice in Texas. It outlines simple procedures to encourage early settlement of lawsuits while preserving all existing client rights and protections. Under the Act, ADR procedures may be used before a lawsuit is filed as the first step in settlement negotiations or late litigation. However, all ADR procedures subject to the ADR Act are generally nonbinding, confidential, and flexible. If the ADR proceeding does not produce an agreement acceptable to all, the parties maintain the option to proceed to trial. Under the Act, the communications relating to and any record made at an ADR proceeding are afforded confidentiality protection. This key protection provides a secure climate that frees participants to speak with candor and to negotiate in good faith. 

Types of ADR Clauses to Consider Drafting As a Business Owner

  • Mediation Clause: This requires the parties to attempt to resolve their disputes through mediation before pursuing other forms of dispute resolution. Mediation is a facilitated negotiation process with the assistance of a neutral third party.
  • Arbitration Clause: Parties agree to submit their disputes to one or more arbitrators for a binding decision rather than going to court. Arbitration can be faster than court proceedings and allows for a specialized arbitrator.
  • Negotiation Clause: Some contracts include a clause that requires parties to engage in direct negotiation for a specified period before escalating the dispute to mediation or arbitration.

Designing Effective ADR Clauses

When you decide to draft an ADR clause in your business contract, you first want to make sure all of the terms are clear.  You will want to specify the ADR process clearly in the contract, including how mediators or arbitrators will be selected, the rules governing the ADR proceedings, and any deadlines for initiating the process. You should define what types of disputes are subject to ADR. Some contracts require ADR for all disputes, while others might limit it to specific types of conflicts.

In addition, deciding whether the ADR outcome will be binding is advisable. Arbitration results are typically binding, whereas mediation is usually non-binding unless the parties agree on a resolution. Lastly, you will want to draft in the agreement that the resolution will be confidential. ADR can keep dispute resolution private, which is advantageous for preserving business relationships and protecting sensitive information.

Advantages Of ADR Clauses 

One of the primary advantages of designing ADR clauses in your business contracts is the cost-effectiveness involved. Generally speaking, ADR is less expensive than court litigation. There is also a speed element involved, as resolving disputes through ADR can be faster than going through the traditional court process. An ADR clause allows for more flexible procedures tailored to the parties’ specific needs. These types of clauses are less adversarial than court litigation, helping maintain business relationships between the parties.

Challenges and Considerations Involving ADR Clauses

The effectiveness of an ADR proceeding can depend significantly on the quality and expertise of the mediator or arbitrator chosen. In some cases, ADR may not be appropriate where there is a significant imbalance in power or resources between the parties. In addition, keep in mind that ADR does not create legal precedents, which can be a disadvantage if establishing a legal principle is important to a party.


Including practical ADR clauses in business contracts in Texas can significantly aid in efficient dispute resolution, but careful drafting aligned with legal requirements is key to their success. Consulting with a local attorney experienced in drafting ADR clauses and familiar with Texas law is crucial for ensuring that such clauses meet legal standards and are tailored to your specific circumstances. The Kumar Law Firm has experienced business law attorneys who can tailor ADR clauses in your business contracts to your particular business. Contact our office for an initial consultation regarding your business needs.

About the Author
Sanjeev Kumar is the founder and principal at the Kumar Law Firm, which provides a wide range of legal services to entrepreneurs and business owners in the area of business & corporate law and intellectual property along with related areas of interest to clients such as business succession planning, wealth preservation through estate planning, and alternate dispute resolution.