Alternative Dispute Resolution Clauses: How They Affect Your Demand Letter Strategy
When you’re preparing to send a demand letter, one of the first things I look for in the underlying contract is whether there’s an alternative dispute resolution (ADR) clause. Why? Because these clauses fundamentally change your strategy, leverage, and even the language you can safely use in your demand letter.
Most business owners treat ADR clauses as boilerplate—something the lawyers stuck at the end of the contract that’ll never matter. Then they find themselves in a dispute and realize that this “standard” clause has completely altered the playing field. In some cases, it strengthens your position. In others, it severely limits your options and can make a demand letter backfire.
I’m Sergei Tokmakov, a California attorney (Bar #279869) with over 13 years of experience drafting and negotiating commercial contracts for tech startups, SaaS companies, and international businesses. I’ve handled over 1,750 projects involving contract disputes, and I can tell you that ADR clauses are where sophisticated parties gain—or lose—tremendous leverage.
This article explains exactly how different types of ADR clauses affect your demand letter strategy, what mistakes to avoid, and how to use these clauses to your advantage rather than letting them trap you.
Understanding ADR Clauses: More Than Just “Arbitration Required”
Alternative dispute resolution clauses come in many forms, and each type creates different strategic considerations for your demand letter. The most common types are mandatory arbitration, optional arbitration, mediation prerequisites, multi-step dispute resolution procedures, and forum selection clauses that work in conjunction with ADR provisions.
The critical distinction most people miss is between binding mandatory procedures and voluntary alternative processes. A clause that says “the parties agree to arbitrate all disputes” is fundamentally different from one that says “the parties may elect to arbitrate disputes.” The first eliminates your right to sue in court. The second gives you options.
Similarly, a clause requiring mediation before litigation is different from one requiring arbitration instead of litigation. Mediation is non-binding—you try to settle but either party can walk away and file a lawsuit. Arbitration produces a binding decision that generally cannot be appealed.
Understanding these distinctions matters because your demand letter needs to acknowledge and work within whatever dispute resolution framework the contract establishes. Threatening to sue when you’re contractually bound to arbitrate makes you look either uninformed or willing to breach the contract yourself—neither of which strengthens your negotiating position.
How Mandatory Arbitration Clauses Change Your Demand Letter Approach
When your contract contains a mandatory arbitration clause, your demand letter strategy shifts significantly. You cannot threaten litigation in the traditional sense because you have no right to file a lawsuit in court. Any reference to “taking this matter to court” or “filing a complaint” undermines your credibility and signals that you either haven’t read the contract or don’t understand it.
Instead, your demand letter should acknowledge the arbitration requirement while making it clear that you’re fully prepared to initiate arbitration if the dispute isn’t resolved. The language changes from “we will file a lawsuit” to “we will initiate binding arbitration proceedings.” This isn’t just semantic—it shows you understand the contractual framework and are prepared to navigate it.
The economics of arbitration also change your leverage calculation. Arbitration is often faster than litigation, which can be an advantage if you need quick resolution. However, it’s also expensive upfront. While litigation costs build gradually, arbitration typically requires substantial filing fees, arbitrator compensation, and sometimes administrative fees to the arbitration organization. For smaller disputes, these costs can be prohibitive.
Your demand letter in an arbitration context should address these economics strategically. If you’re the claimant with a legitimate dispute, you might emphasize that arbitration costs will far exceed the settlement value you’re proposing. If you’re responding to a weak demand, you might welcome arbitration precisely because you know the other party will struggle to afford the process.
One tactical consideration that many business owners miss: mandatory arbitration clauses often specify which arbitration organization will administer the dispute—typically JAMS, the American Arbitration Association (AAA), or sometimes industry-specific bodies. Each has different fee schedules, rules, and procedures. Before sending your demand letter, review the applicable arbitration rules because they may contain provisions about preliminary conferences, discovery limitations, or expedited procedures that affect your strategy.
For example, AAA’s commercial arbitration rules allow for emergency interim relief in urgent situations. If your dispute involves ongoing harm—like a competitor violating a non-compete or a vendor misappropriating your data—your demand letter can reference your right to seek emergency arbitration relief if the behavior doesn’t stop immediately. This adds teeth to your demand without making empty threats about court filings you can’t actually pursue.
Another key strategic point: many arbitration clauses specify that the prevailing party recovers their arbitration costs and attorneys’ fees. If your contract includes this provision, your demand letter should explicitly reference it. Calculate and include a good-faith estimate of what arbitration will cost, emphasizing that these costs will be added to any award against the other party. This transforms arbitration from a defensive barrier into an offensive weapon—suddenly the other side isn’t just risking the underlying claim amount but also a substantial fee award.
Mediation Prerequisites: The Procedural Trap That Derails Aggressive Demand Letters
Many contracts require mediation before either party can file a lawsuit or initiate arbitration. These clauses typically state something like “the parties agree to mediate any dispute in good faith before pursuing other remedies” or “no action may be commenced until the parties have attempted to resolve the dispute through mediation.”
Here’s the trap: if you send an aggressive demand letter that immediately threatens litigation or arbitration without first proposing mediation, you’ve arguably breached the contract’s dispute resolution procedure. The other side can then refuse to engage, wait for you to file your claim, and immediately move to dismiss or stay the proceeding because you failed to comply with the mandatory mediation prerequisite.
I’ve seen this scenario play out dozens of times. A client receives a contract breach demand letter threatening immediate legal action. We respond by pointing out that the contract requires mediation first, the claimant failed to initiate mediation, and therefore any filing would be premature. This flips the power dynamic—suddenly the party making demands looks incompetent, and we’re in control of the timeline.
The correct approach when facing a mediation prerequisite is to make mediation the centerpiece of your demand letter. Your letter should explicitly invoke the contractual mediation requirement, propose specific mediators or mediation services, suggest dates and formats, and make clear that you’re attempting to fulfill this contractual obligation in good faith.
This approach has multiple advantages. First, it demonstrates procedural compliance, protecting you from dismissal or delay if you eventually need to file a formal claim. Second, it positions you as reasonable and cooperative—important if the dispute does end up before an arbitrator or judge who will evaluate both parties’ conduct. Third, it creates a paper trail showing you tried to resolve the matter amicably, which can affect fee awards and damages calculations.
The language in your demand letter might say: “Pursuant to Section 12 of our Agreement, which requires good-faith mediation of disputes, we propose retaining a mutually acceptable mediator from JAMS to facilitate resolution of this matter. We are prepared to participate in mediation within the next 30 days and suggest the following dates…”
One sophisticated move: even if the contract doesn’t strictly require mediation, you can offer it as an alternative to formal proceedings. This costs you nothing and potentially saves substantial time and money if accepted. Your demand letter might include: “While we are prepared to initiate arbitration proceedings under Section 12 of our Agreement, we would prefer to resolve this matter more efficiently through mediation if you’re willing to engage in good faith.”
This language accomplishes several things simultaneously. It shows you’ve identified the ADR clause and are prepared to follow it. It offers a less expensive alternative that makes you look reasonable. And it puts the other party in the position of either agreeing to mediation or appearing obstinate if they refuse—which helps your position if you eventually end up before a decision-maker.
Multi-Step Dispute Resolution Procedures: Navigating Executive Escalation and Tiered ADR
Some contracts—particularly those between sophisticated commercial parties—contain multi-step dispute resolution procedures. These clauses might require negotiation between executives, then mediation, then arbitration, with specific timeframes for each stage. These provisions are designed to maximize settlement opportunities before expensive formal proceedings begin.
When your contract contains a tiered dispute resolution clause, your demand letter must explicitly acknowledge and navigate each required step. Skipping steps gives the other party grounds to refuse engagement or seek dismissal of any premature filing.
A typical multi-step clause might read: “In the event of any dispute, the parties shall first attempt resolution through good-faith negotiation between executives having authority to settle. If not resolved within 30 days, the parties shall mediate through a mutually acceptable mediator. If mediation is unsuccessful, either party may initiate binding arbitration.”
Your demand letter strategy here involves triggering the first step while keeping later steps in view. The letter should identify which step you’re initiating, who should be involved from each party, and what timeline applies. You’re essentially documenting compliance with each procedural requirement as you progress.
For the executive negotiation step, your demand letter might be addressed directly to the designated executive and might say: “This letter initiates the dispute resolution procedure under Section 14 of our Agreement. As required by that provision, I’m addressing this matter to you as [title] of [company] for good-faith negotiation. Per the contractual timeline, we have 30 days from the date of this letter to resolve this matter before proceeding to mediation.”
This approach creates a clear record of when the clock started ticking on each procedural step. If the other party refuses to engage, you’ve documented their non-compliance. If they engage but negotiations fail, you’ve preserved your right to move to the next step. And if they try to stall by dragging out negotiations indefinitely, you’ve established the contractual deadline that limits their ability to delay.
One tactical consideration with multi-step procedures: should you propose settlement terms in your initial demand letter, or wait until formal mediation? There’s no universal answer, but here’s my framework. If the dispute involves clear-cut facts and damages, put settlement terms in your initial letter—it may resolve things at the lowest-cost stage. If the situation is more complex or involves significant factual disputes, your initial letter might focus on triggering the procedure and identifying issues, reserving specific demands for mediation where you’ll have a neutral facilitator and more information.
For international contracts or deals with significant value, tiered dispute resolution can include even more steps: internal escalation committees, expert determination of technical issues, cooling-off periods, and various procedural safeguards. These clauses sometimes span multiple pages. When facing these provisions, create a procedural roadmap before sending any demand letter. Identify every required step, timeline, notification requirement, and decision-maker. Your demand letter should demonstrate that you’ve mapped this procedure and are prepared to methodically pursue it if the dispute doesn’t resolve early.
Forum Selection and Its Interaction With ADR Clauses
Forum selection clauses specify where disputes must be resolved—often a particular city, county, or state. These clauses interact with ADR provisions in ways that significantly affect demand letter strategy.
A contract might say “the parties agree to binding arbitration in Los Angeles, California” or “any litigation shall be in the courts of New York County, New York.” These provisions determine not just the dispute resolution process but also its location, which has practical and strategic implications.
Location matters more than most business owners realize. If you’re in California and your dispute requires arbitration in New York, you’re facing substantial travel costs, potential difficulty finding local counsel, and unfamiliarity with local procedures. Conversely, if the clause requires arbitration in your home jurisdiction, you have significant home-court advantage.
Your demand letter should acknowledge the forum selection provision, particularly if it’s favorable to you or creates barriers for the other party. If your contract requires arbitration in your jurisdiction, your demand might note: “As specified in our Agreement, any arbitration would occur in Los Angeles under California law. We have retained local counsel and are prepared to initiate proceedings immediately if this matter does not resolve.”
This language serves multiple purposes. It reminds the other party that pursuing formal proceedings will require them to engage with your jurisdiction—potentially creating inconvenience and expense for them. It demonstrates you’ve done the groundwork to proceed. And it suggests you have local knowledge and relationships that give you an advantage.
Forum selection also affects choice of law. Many contracts pair a forum selection clause with a choice-of-law provision: “This Agreement shall be governed by California law, and disputes shall be arbitrated in Los Angeles, California.” When both provisions exist, your demand letter should reference both because the applicable law affects substantive rights and remedies.
If the choice of law is favorable to your position, emphasize it. For example, California has strong consumer protection laws, strict rules about contract formation, and specific requirements for certain types of agreements. If California law applies to a dispute where those protections help you, your demand letter should cite specific statutes or doctrines that strengthen your case under the chosen law.
One sophisticated strategy involves using forum selection and choice-of-law provisions to pressure settlement even before formal proceedings begin. If you’re in California with a contract requiring New York arbitration and New York law, you might offer in your demand letter to waive the forum requirement and arbitrate locally if the other party will negotiate seriously. This removes a barrier to resolution while appearing reasonable—and it may save both parties money even if settlement isn’t reached.
Conversely, if the forum selection clause is in your favor and you want to apply maximum pressure, your demand letter can emphasize the inconvenience and expense the other party will face. This isn’t about making threats—it’s about helping them understand the realistic costs of not settling, which include not just the merits of the dispute but also the procedural costs of fighting in your chosen forum.
Carve-Outs and Exceptions to ADR Clauses
Most sophisticated ADR clauses contain exceptions—situations where parties can pursue court remedies despite a general arbitration requirement. Common carve-outs include intellectual property claims, injunctive relief for ongoing harm, and small claims court matters.
Understanding these exceptions is critical for demand letter strategy because they may give you procedural options that wouldn’t exist under a pure arbitration requirement. Your demand letter should identify when exceptions apply and how you might invoke them if the dispute doesn’t resolve.
A typical IP carve-out reads: “Notwithstanding the arbitration requirement, either party may seek court remedies for infringement of intellectual property rights.” This exception exists because IP disputes often require fast injunctive relief or involve public policy interests that favor court jurisdiction.
If your dispute involves trademark infringement, copyright violation, or patent issues covered by a carve-out, your demand letter can reference this exception while still proposing informal resolution. You might say: “While Section 15 of our Agreement preserves court jurisdiction over intellectual property disputes, we prefer to resolve this matter without litigation if you will cease the infringing conduct and compensate damages as outlined below.”
This language shows you’re aware of your procedural options while remaining open to efficient resolution. It also creates subtle pressure—the other party knows that if they refuse, you have a direct path to court rather than being limited to arbitration.
Injunctive relief carve-outs serve similar purposes. Many arbitration clauses allow parties to seek temporary restraining orders or preliminary injunctions from courts even when arbitration is mandatory. This exception recognizes that some situations require immediate court intervention that arbitration procedures can’t provide quickly enough.
If you’re facing ongoing harm—a former employee soliciting your clients in violation of a non-compete, a vendor continuing to misuse your confidential information, or a contractor actively damaging your property—your demand letter should reference both the arbitration requirement and the injunctive relief exception.
The language might be: “Pursuant to our Agreement, disputes are subject to binding arbitration. However, your continuing breach causes irreparable harm that requires immediate cessation. We reserve all rights to seek emergency injunctive relief in court while pursuing arbitration of our claims for damages.”
This puts the other party on notice that you understand the procedural framework and can pursue parallel remedies if necessary—arbitration for monetary damages and court intervention for immediate relief.
Small claims carve-outs are particularly useful for lower-value disputes. Many arbitration clauses allow either party to pursue matters in small claims court if the amount in controversy falls within that court’s jurisdictional limits. In California, small claims court handles disputes up to $10,000 for individuals and $5,000 for businesses (with some exceptions).
If your dispute qualifies for small claims and your contract has this exception, your demand letter gains leverage because small claims court is fast, inexpensive, and doesn’t require an attorney. You might note: “Our Agreement preserves the right to small claims court for disputes within that court’s jurisdiction. Given the $8,000 at issue here, we can obtain a judgment within 60 days through this streamlined process if you choose not to pay the amount owed.”
This is effective because small claims court eliminates many of the economic barriers to pursuing smaller matters. The other party can’t hide behind expensive litigation tactics, and you’ve demonstrated a credible, low-cost path to enforcing your rights.
How Class Action Waivers in ADR Clauses Affect Collective Disputes
Many consumer and employment arbitration agreements include class action waivers—provisions stating that disputes must be arbitrated individually and cannot be brought as class actions. These clauses have been controversial but are generally enforceable under federal law following the Supreme Court’s decision in AT&T Mobility v. Concepcion.
Class action waivers fundamentally change the economics of disputes and therefore affect demand letter strategy, particularly for businesses dealing with multiple similar claims.
If you’re a business facing what could become a class action (multiple customers claiming similar harm from the same practice), a valid arbitration clause with a class action waiver transforms your risk profile. Instead of facing one lawsuit with potentially millions in exposure, you face individual arbitrations with limited damages per claimant.
Your response to demand letters from customers or employees should acknowledge the arbitration requirement and class action waiver where applicable. If someone threatens a class action lawsuit, your response can note: “Section 18 of our Agreement requires individual arbitration and expressly waives class proceedings. While we dispute your claims, any dispute resolution must occur through individual arbitration as contractually required.”
This language shuts down class action threats and forces claimants to evaluate whether pursuing individual arbitration is economically viable for them. For smaller-value claims, this often ends the matter because the cost of individual arbitration exceeds the potential recovery.
However, several caveats apply. First, some states restrict class action waivers in certain contexts—particularly consumer contracts involving small amounts. California has been particularly aggressive in challenging these waivers. Your demand letter strategy must account for whether the waiver will be enforceable in your specific situation.
Second, even with enforceable class action waivers, facing hundreds of individual arbitrations is expensive and operationally challenging. If a business practice generated widespread harm, individual arbitration of many claims can cost more than defending a single class action. Smart businesses recognize this and consider policy changes or informal settlement programs rather than invoking arbitration against every claimant.
Third, consumers and employees increasingly use informal coordination strategies that function like class actions even when formal classes are unavailable. They share demand letters, strategies, and legal representation while pursuing technically individual claims. Your response to individual demands should consider whether similar claims are likely and whether a broader resolution strategy makes sense.
If you represent a claimant and the contract has an arbitration clause with class action waiver, your demand letter should focus on why individual arbitration is still worthwhile—either because your client’s damages are substantial enough to justify the process, or because you’ve identified weaknesses in the waiver’s enforceability.
Strategic Timing: When to Send Demand Letters Relative to ADR Deadlines
Many ADR clauses include timing provisions that create strategic considerations for when to send demand letters. Common timing issues include limitations periods that start running at specific events, deadlines for initiating ADR procedures, and notice requirements with specific timeframes.
Some contracts require written notice of a dispute within a certain period after the claim arises. For example: “Any claim arising under this Agreement must be asserted in writing within 90 days of when the party knew or should have known of the claim.” Miss this deadline and you may lose your right to pursue the claim at all.
Your demand letter must be sent within such contractual deadlines even if you haven’t completed investigating the matter or calculating damages. It’s better to send a preliminary notice preserving your rights, followed by a detailed demand later, than to let a deadline pass while gathering information.
The language for a preliminary notice might say: “This letter provides notice, as required by Section 11 of our Agreement, of claims arising from [brief description]. We are continuing to investigate the full scope of damages and will provide detailed information within [timeframe], but we provide this timely notice to preserve all rights under the contract.”
This approach satisfies the notice requirement while giving you flexibility to develop your full case. It also starts the procedural clock on any ADR requirements, allowing you to control the timeline rather than letting the other party delay.
Other timing considerations involve statutes of limitations and how ADR procedures affect them. In California, most contract claims have a four-year statute of limitations. Sending a demand letter and engaging in negotiation or mediation doesn’t toll (pause) this statute. If you spend months in ADR procedures and then need to file a formal claim, you must ensure the statute hasn’t expired.
Your demand letter should create a clear timeline and push for resolution within a timeframe that preserves your ability to file if ADR fails. You might say: “We propose mediating this dispute within 30 days. Given the statute of limitations applicable to these claims, we must reach resolution or initiate formal proceedings by [specific date].”
This language puts appropriate pressure on the process without making aggressive threats. It demonstrates you’ve done the legal analysis and won’t let procedural manipulation cause you to lose your rights.
Some ADR clauses include accelerated deadlines for specific types of claims. Payment disputes might require notice within 30 days of an invoice. IP infringement claims might require notice within 10 days of discovery. Warranty claims might have specific cure periods. Review your contract carefully for any claim-specific timing requirements before sending any demand letter.
Drafting Demand Letter Language That Works With (Not Against) ADR Clauses
The actual language in your demand letter must be calibrated to your ADR obligations. Generic demand letter templates often contain language that conflicts with arbitration requirements or fails to invoke required procedures properly.
Ineffective language in an arbitration context: “If we do not receive payment within 10 days, we will file a lawsuit in superior court and seek all available remedies including attorneys’ fees and costs.”
This language is problematic when your contract requires arbitration because you cannot file a lawsuit in superior court—you can only initiate arbitration. Making this threat undermines your credibility and may give the other party ammunition to argue you’re not negotiating in good faith under the contract’s dispute resolution procedures.
Effective language in the same situation: “Our Agreement requires binding arbitration of disputes. If we cannot resolve this matter within 10 days, we will initiate arbitration proceedings under the AAA Commercial Arbitration Rules, seeking the $50,000 payment owed plus arbitration costs and attorneys’ fees as provided in Section 14.”
This language acknowledges the ADR framework, specifies the applicable procedures, identifies what you’ll seek, and references the contractual fee-shifting provision. It’s professional, accurate, and creates appropriate leverage without making empty threats.
When mediation is required, your demand should invoke the mediation requirement explicitly and propose specifics: “Section 8 of our Agreement requires good-faith mediation before pursuing formal proceedings. We propose retaining [specific mediator or service] to facilitate resolution of this dispute. We are available for mediation on [dates] and request your availability within the next 30 days. If mediation does not occur or is unsuccessful, we will proceed to arbitration as contractually required.”
This language demonstrates procedural compliance while making clear you’ll escalate if necessary. It also shifts some burden to the other party—if they refuse mediation or fail to engage, you’ve documented their non-compliance with the contract’s dispute resolution procedures.
For multi-step ADR procedures, your demand letter should explicitly track the procedural step you’re invoking: “This letter initiates Step 1 of the dispute resolution procedure in Section 12: good-faith executive negotiation. Per that provision, I’m addressing this matter to you as CEO for resolution within 30 days. If we cannot reach agreement, we will proceed to Step 2 (mediation) as required by the Agreement.”
Being this explicit serves multiple purposes. It shows you’ve read and understand the contract. It creates a clear record of procedural compliance. And it signals that you’re prepared to methodically pursue each step—suggesting you’re serious and not making empty threats.
Using ADR Clauses Offensively in Your Demand Letter Strategy
While ADR clauses often feel like restrictions, sophisticated parties use them offensively to create leverage. Understanding how to do this separates effective demand letters from generic ones.
One offensive strategy involves emphasizing the cost implications of arbitration when you have a strong case. If your contract allows fee-shifting to the prevailing party, your demand letter should include a detailed calculation of what arbitration will cost the other party if they lose.
“Under our Agreement’s fee-shifting provision, the party who doesn’t prevail in arbitration must reimburse the prevailing party’s arbitration costs and attorneys’ fees. Based on the complexity of this matter, we estimate arbitration will cost $75,000-$100,000 in fees and costs. You’re facing potential liability of $200,000 for the underlying breach plus up to $100,000 in fees and costs, or total exposure of $300,000. We’re offering to settle for $150,000, which represents 50% savings compared to your likely outcome after arbitration.”
This framing transforms arbitration from an obstacle into a weapon. You’re not threatening something you can’t deliver—you’re helping the other party understand the economics of not settling.
Another offensive approach involves offering to waive or modify ADR requirements in exchange for favorable settlement terms. If you’re confident in your position but want quick resolution, you might offer: “While our Agreement requires arbitration in New York, we’re willing to waive that requirement and submit to jurisdiction in your home state if you’ll agree to mediation within 30 days with these settlement parameters…”
This makes you appear reasonable while potentially saving both parties money. It also creates subtle pressure—you’re making concessions they didn’t ask for, which may create psychological momentum toward settlement.
A third strategy involves using ADR procedures to conduct discovery before formal proceedings. Many arbitration and mediation procedures include preliminary information exchanges. Your demand letter can request specific documents or information “in preparation for mediation under Section 9” or “to facilitate good-faith negotiation as required by our Agreement.”
This frames your information request as procedural compliance rather than an aggressive demand. It’s harder for the other party to refuse to provide information that’s explicitly contemplated by the ADR procedure they’ve agreed to.
Common Mistakes That Undermine Demand Letters When ADR Clauses Exist
I’ve reviewed hundreds of demand letters that failed because they mishandled ADR provisions. Here are the most common mistakes and how to avoid them.
Mistake one: Ignoring the ADR clause entirely. Some demand letters read as if no ADR provision exists, jumping straight to litigation threats. This immediately undermines credibility because it suggests you either haven’t read the contract or don’t understand it.
The fix: Always begin your analysis by identifying what dispute resolution procedures the contract requires. Your demand letter should explicitly acknowledge these procedures even if you’re hoping to resolve the matter without invoking them.
Mistake two: Making threats you legally cannot execute. Threatening to “file a lawsuit” when you’re contractually bound to arbitrate is a classic example. So is threatening to pursue class action when there’s an enforceable class action waiver.
The fix: Make sure every procedural threat in your demand letter is actually available under your contract. If you’re bound to arbitration, threaten arbitration. If you have exceptions for injunctive relief, reference them specifically. Never threaten procedural options you don’t actually have.
Mistake three: Failing to invoke required prerequisite procedures. If your contract requires mediation before arbitration, and you threaten to initiate arbitration without proposing mediation first, you’ve given the other party grounds to challenge any filing as premature.
The fix: Structure your demand letter to invoke procedures in the correct sequence. If mediation is required first, propose mediation. If executive negotiation is required first, address your letter to the designated executive. Create a paper trail showing you’re following the contractual procedures.
Mistake four: Not understanding the fee implications of ADR procedures. Some demand letters threaten arbitration without realizing that arbitration filing fees might exceed the amount in dispute. This makes you look either uninformed about costs or unwilling to actually follow through.
The fix: Research the applicable arbitration organization’s fee schedule before sending your demand letter. For smaller disputes, you might need to acknowledge that arbitration isn’t economically viable and propose small claims court (if available) or direct negotiation instead.
Mistake five: Treating all ADR clauses as the same. An arbitration clause is different from a mediation clause, which is different from a multi-step procedure, which is different from a forum selection clause. Generic demand letter language doesn’t work across these variations.
The fix: Customize your demand letter to the specific ADR provisions in your contract. Quote the relevant language, address the specific procedure required, and demonstrate you understand the particular framework that applies.
Mistake six: Not preserving evidence of procedural compliance. When disputes escalate to formal proceedings, arbitrators and judges evaluate whether parties complied with contractual procedures in good faith. A demand letter that’s vague about which procedure you’re invoking creates problems later.
The fix: Be explicit about procedural compliance. State which section of the contract you’re invoking, which step of a multi-step procedure you’re initiating, and what timeline applies. Send the letter via methods that create delivery confirmation. Keep detailed records of all communications related to ADR procedures.
Responding to Demand Letters When You’re the Recipient and ADR Clauses Apply
So far I’ve focused on drafting demand letters, but responding to them when ADR clauses exist requires equally sophisticated strategy. Your response can either neutralize a demand or inadvertently strengthen it.
When you receive a demand letter that correctly invokes contractual ADR procedures, your response should address both the substantive claims and the procedural posture. Ignoring either element weakens your position.
A strong response structure might be: “We received your letter dated [date] invoking the dispute resolution procedure under Section 12. We dispute your claims for the following reasons: [substantive defenses]. However, in the spirit of the contractual requirement for good-faith resolution attempts, we’re willing to participate in mediation as proposed. We’re available on [dates] and suggest [mediator or service].”
This response accomplishes several things. It preserves your substantive defenses without appearing obstinate about procedure. It demonstrates good-faith compliance with ADR requirements. And it doesn’t concede anything while remaining open to discussion.
If the demand letter incorrectly handles ADR provisions—threatening unavailable remedies or skipping required steps—your response should point this out professionally. “Your letter threatens litigation in superior court. However, Section 15 of our Agreement requires binding arbitration of all disputes. While we dispute your underlying claims, any dispute resolution must occur through arbitration as contractually required. We’re willing to engage in the executive negotiation process required by Section 15(a) if you wish to proceed.”
This response corrects the procedural error while appearing reasonable. It also subtly undermines the sender’s credibility—they demonstrated they haven’t carefully read the contract, which may make their substantive arguments less persuasive too.
When the demand letter skips required prerequisite procedures, your response can use this to delay or deflect. “Our Agreement requires good-faith executive negotiation followed by mediation before any party may initiate arbitration. Your letter threatens immediate arbitration without invoking these required preliminary procedures. We’re willing to participate in the contractual dispute resolution process in the proper sequence if you wish to pursue this matter.”
This response doesn’t concede the merits but makes the other party go back and start the process correctly. It buys you time while appearing procedurally correct yourself.
One sophisticated defense strategy: if the ADR clause is ambiguous or potentially unenforceable, your response can raise these issues early. “We note that the arbitration provision in Section 13 may be unenforceable under [specific legal doctrine]. We reserve all rights regarding the enforceability of this provision. However, without waiving any rights, we’re willing to discuss resolution of the substantive issues you’ve raised.”
This preserves your ability to challenge the ADR provision later if needed while still appearing willing to engage. It also signals to the other party that proceeding through ADR might not be as clean as they assumed, which may incentivize settlement.
How to Negotiate Better ADR Clauses Before Disputes Arise
The best time to optimize your ADR strategy is when you’re negotiating the original contract, not when you’re drafting a demand letter years later. Understanding what makes ADR clauses favorable or unfavorable helps you negotiate better terms upfront.
If you want maximum flexibility, negotiate for optional rather than mandatory arbitration. Language like “disputes may be submitted to binding arbitration at either party’s election” preserves your right to sue in court while giving you an arbitration option if it becomes advantageous. This is far more flexible than mandatory arbitration language.
If mandatory arbitration is required by the other party (increasingly common in consumer and employment contexts), negotiate for these protective provisions:
The arbitration location should be convenient for both parties, not just the drafting party. If you’re a California business and the other party wants New York arbitration, push for California or at least a neutral location. Location has huge cost implications if disputes arise.
Fee allocation should be balanced. Some one-sided arbitration clauses require the smaller party to pay substantial administrative fees, which effectively prevents them from pursuing valid claims. Negotiate for fee structures where the initiating party pays filing fees but the arbitration organization’s administrative fees are split or borne by the larger party.
Discovery rights should be preserved to some degree. Pure arbitration can severely limit discovery compared to litigation. If your business model involves technical issues that require document discovery or expert testimony, negotiate for arbitration rules that allow reasonable discovery.
Appeal rights might be available. While arbitration awards are generally final, some arbitration organizations offer optional appellate procedures. If the amounts potentially at stake are large, negotiate for appellate arbitration options.
Carve-outs for injunctive relief should be mutual. If the contract allows one party to seek court injunctions despite the arbitration requirement, both parties should have this right. Don’t agree to one-sided carve-outs unless you’re getting other significant concessions.
For mediation prerequisites, keep timeframes reasonable. A clause requiring 90 days of mediation attempts before arbitration might sound good but can delay resolution excessively. A 30-45 day mediation window is usually sufficient to determine if settlement is possible.
The choice of arbitration organization matters. AAA, JAMS, and other organizations have different rules, fee schedules, and arbitrator pools. Research which organization’s procedures best fit your likely dispute scenarios before agreeing to a particular administrator.
Class action waivers are negotiable in commercial contracts (less so in consumer contracts where they’re often take-it-or-leave-it). If you’re negotiating a B2B deal, you might propose limiting the waiver to claims under a certain dollar threshold or allowing coordination of similar claims even if not formal class actions.
Industry-Specific ADR Considerations
Certain industries have developed specialized ADR frameworks that affect demand letter strategy in unique ways. Understanding these industry-specific contexts helps you craft more effective demand letters.
Construction contracts often use tiered dispute resolution starting with project-level negotiation, then mediation, then arbitration or litigation. They may also include expert determination for technical disputes. Your demand letter in a construction context should acknowledge these mechanisms and may need to trigger expert review of technical issues before pursuing monetary claims.
Technology and SaaS agreements increasingly include specialized procedures for IP disputes versus service level disputes versus billing disputes. A single contract might require arbitration for contract claims but preserve court jurisdiction for IP claims while requiring executive escalation for service issues. Your demand letter must identify which type of dispute you’re raising and invoke the corresponding procedure.
Employment agreements in California face special scrutiny regarding arbitration clauses. The California courts have developed complex case law about when employment arbitration provisions are enforceable. Your demand letter strategy must account for potential unenforceability arguments if you’re dealing with an employment dispute.
Franchise agreements typically favor franchisors with one-sided ADR provisions—often requiring arbitration in the franchisor’s home jurisdiction and sometimes limiting discovery or remedies. Franchisees facing these provisions need demand letters that acknowledge the procedural reality while emphasizing the strength of substantive claims.
International commercial contracts may specify arbitration under UNCITRAL rules or through the International Chamber of Commerce (ICC). These procedures differ significantly from domestic arbitration in timing, costs, and procedures. Demand letters in international contexts should reference the applicable international arbitration framework and may need to account for multi-jurisdictional enforcement issues.
FAQ: Alternative Dispute Resolution Clauses and Demand Letters
If my contract requires arbitration, can I still threaten to sue in my demand letter?
No, and doing so undermines your credibility significantly. When you’re contractually bound to arbitration, you have no right to file a lawsuit in court. Making that threat shows you either haven’t read the contract carefully or don’t understand it, which weakens your overall negotiating position. Instead, threaten to initiate arbitration proceedings and reference the specific arbitration provisions in your contract. If your contract has exceptions that allow court proceedings in certain situations—like preliminary injunctions for irreparable harm or small claims court for disputes under a certain amount—you can reference those specific carve-outs. But the baseline threat should match the procedure your contract actually requires.
The one nuanced exception involves situations where you have good-faith grounds to believe the arbitration clause is unenforceable. California courts, for example, have held certain arbitration provisions unconscionable in consumer and employment contexts. If you’ve done the legal analysis and believe your arbitration clause may not hold up, your demand letter can reference your position that the clause is unenforceable while stating that “without waiving our position on enforceability, we’re open to resolving this matter through arbitration or direct negotiation.” This preserves your arguments about unenforceability while not appearing obstinate about procedure. However, this is an aggressive position that requires solid legal ground to stand on, and you should consult with an attorney before taking it.
What happens if I send a demand letter without following the contract’s required mediation procedure first?
You’ve potentially given the other party a procedural defense that can delay or derail your claim. If your contract says “the parties must attempt mediation in good faith before pursuing arbitration or litigation” and you skip straight to threatening arbitration, the other party can refuse to engage with your demand. If you then file a formal claim, they can move to dismiss or stay the proceedings because you failed to comply with the mandatory mediation prerequisite. I’ve seen cases where parties lost months of time because they had to go back, properly initiate mediation, go through that process, and only then could they proceed to formal proceedings.
The correct approach is to make mediation the centerpiece of your demand letter. Explicitly invoke the contractual mediation requirement, propose specific mediators or mediation services, suggest dates, and make clear you’re attempting to fulfill this contractual obligation. This serves multiple purposes: it demonstrates procedural compliance, positions you as reasonable and cooperative, and creates a paper trail showing you tried to resolve things amicably. Even if mediation fails, you’ve protected your ability to proceed to the next step.
There’s one exception worth knowing: if the other party has already indicated they’ll refuse to participate in good-faith dispute resolution, or if there’s genuinely no possibility of settlement (like if they’ve gone out of business or explicitly stated they won’t pay), you might be able to argue the mediation requirement is futile and should be excused. But this is a risky position to take without consulting an attorney, because if you’re wrong, you’ve just delayed your own case by months.
How do I calculate whether arbitration is worth pursuing for a smaller dispute?
This is one of the most important strategic questions and many businesses get it wrong. Start by researching the fee schedule for the applicable arbitration organization—usually specified in your contract. AAA and JAMS publish their fees online. For a typical commercial dispute, you’re looking at initial filing fees that might range from $2,000-$5,000 depending on claim size, plus arbitrator compensation that typically runs $400-$600 per hour, plus administrative fees. A straightforward arbitration might require 20-40 hours of arbitrator time for hearing preparation, the actual hearing, and decision-writing. That puts total costs at $15,000-$35,000 even for a relatively simple matter, not counting your attorney fees.
Compare this to the amount in dispute. If you’re trying to recover $10,000 and arbitration will cost $20,000, it’s not economically viable unless you have a fee-shifting provision that puts costs on the losing party. Look at your contract carefully—many include provisions saying the prevailing party recovers arbitration costs and attorneys’ fees. If yours does, and your claim is strong, the economics change significantly because you can recover costs from the other party.
For smaller disputes, look for alternative procedures your contract might allow. Some arbitration clauses have carve-outs for small claims court if the amount is under the jurisdictional limit (in California, $10,000 for individuals, $5,000 for businesses on most claims). Small claims court is fast, inexpensive, and doesn’t require an attorney. If your contract allows this option, it’s usually the best path for smaller matters. Your demand letter should reference this option and note that small claims provides a quick, low-cost resolution path if the other party won’t pay voluntarily.
Another consideration: some arbitration organizations offer expedited procedures for smaller disputes with reduced fees and streamlined processes. AAA’s Expedited Procedures apply to claims under $75,000, for example. These reduce costs significantly compared to standard arbitration. Check whether your arbitration clause allows or requires expedited procedures for disputes under certain amounts.
Can I ignore an ADR clause if the other party breached it first?
Maybe, but it’s risky and the analysis is complicated. The general rule is that one party’s breach doesn’t automatically excuse the other party’s obligation to comply with procedural requirements like arbitration clauses. These are considered separate from the substantive contract terms. However, there are situations where the other party’s conduct might excuse your compliance with ADR procedures.
If the other party explicitly refuses to participate in the required ADR procedure—they’ve stated they won’t attend mediation or won’t engage in good-faith negotiation—you may be able to argue that compliance is futile and you should be allowed to proceed directly to the next step. Document their refusal clearly before taking this position. Your demand letter might say: “We proposed mediation as required by our Agreement on [date]. You refused to participate [reference their communication]. Because you’ve made clear you won’t comply with the contractual dispute resolution procedure, we’re proceeding directly to arbitration.”
If the other party’s breach is so severe that it goes to the heart of the contract—for example, they’ve repudiated the entire agreement—some courts have held that arbitration clauses don’t survive such fundamental breaches. This is a complex area of law that varies by jurisdiction, and you should get legal advice before relying on this exception.
There’s also a doctrine called “anticipatory repudiation” where if one party has made it clear they won’t perform their obligations and won’t engage in dispute resolution, the other party may be excused from jumping through procedural hoops. But this is a high bar to meet and requires more than just the other party being difficult to work with.
The safer approach in most situations is to comply with ADR procedures even when the other party is acting in bad faith, while documenting their non-compliance. Send your demand letter invoking the required procedures. If they refuse to participate, document that refusal. Then, when you proceed to formal proceedings, you have a clear record showing you tried to comply while they didn’t. This puts you in a much stronger position procedurally and often influences the decision-maker’s view of both parties’ good faith.
What if the contract’s ADR clause is unclear or contradictory?
This happens more often than it should, particularly in contracts that were cobbled together from multiple templates or heavily negotiated with insertions and deletions. When ADR provisions are ambiguous, your demand letter strategy depends on which interpretation favors your position.
If the ambiguity works in your favor—for example, the clause could be read to make arbitration optional rather than mandatory, or to excuse certain procedural prerequisites—your demand letter should assert that interpretation while offering to proceed through ADR if the other party insists. You might write: “Section 12’s dispute resolution language is ambiguous regarding whether arbitration is mandatory or optional. We interpret this provision as allowing either party to elect arbitration or pursue litigation. However, we’re willing to proceed through arbitration if you prefer, or we can resolve this through direct negotiation.”
If the ambiguity works against you—for example, you want to arbitrate but the clause might be read to require litigation—your demand letter should acknowledge the ambiguity and propose a path forward: “Section 12’s language regarding dispute resolution is subject to multiple reasonable interpretations. Rather than engaging in procedural litigation about the meaning of this provision, we propose [specific ADR approach]. This will allow us to resolve the substantive dispute efficiently regardless of how a court might interpret Section 12.”
One important principle: ambiguous ADR clauses are generally construed against the party who drafted them. If you didn’t draft the contract, ambiguity may work in your favor. Your demand letter can note: “The ambiguous arbitration language in Section 12 was drafted by your company. Under established contract interpretation principles, ambiguities are construed against the drafter. We interpret this provision as [interpretation favorable to you]. If you disagree, we can seek judicial clarification of the provision’s meaning.”
The risk with ambiguous ADR clauses is that you might expend significant time and money litigating what procedure applies before you even get to the merits of your dispute. This is usually worse for both parties than agreeing on a procedure and moving forward. Your demand letter should try to establish a practical path forward while preserving your rights if the other party takes unreasonable positions on procedure.
Should my demand letter be different if I’m dealing with an international party and foreign arbitration?
Absolutely. International arbitration operates under different rules, has distinct strategic considerations, and requires different demand letter language than domestic disputes. The key differences affect how aggressive or conciliatory your demand letter should be, what procedural options you have, and what enforcement realities you’re facing.
First, identify what arbitration framework your contract specifies. International commercial agreements often call for arbitration under UNCITRAL rules, through the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), or other international bodies. Each has different procedures, costs, and timelines. Your demand letter should reference the specific framework and demonstrate you understand it. Don’t just say “we will pursue arbitration”—say “we will initiate arbitration proceedings under the ICC Rules as specified in Section 15 of our Agreement.”
Second, consider language and translation issues. If the other party is in a non-English-speaking country, even if your contract is in English, you may want to consider having your demand letter translated or at least offering to communicate in their language during settlement discussions. This isn’t legally required but can be strategically smart. At minimum, keep your language clear and avoid idioms or culturally specific references that might not translate well.
Third, recognize that international arbitration is significantly more expensive than domestic arbitration. ICC arbitration, for example, can cost $50,000-$100,000 or more in administrative and arbitrator fees alone, before counting attorney costs. Your demand letter should acknowledge these costs and use them strategically: “Pursuing this matter through ICC arbitration will cost both parties substantial sums—likely exceeding $150,000 in combined fees and costs. Settlement at the figures proposed below would save both parties significant expense while providing certainty.”
Fourth, enforcement considerations change the leverage calculation. If you win an international arbitration award, you’ll need to enforce it in the country where the other party has assets. The New York Convention facilitates enforcement of arbitration awards internationally, but it’s not automatic. Your demand letter might reference enforcement realities: “As you’re aware, arbitration awards under the ICC Rules are enforceable in [country] under the New York Convention. While we prefer to resolve this amicably, we’re prepared to pursue enforcement through all available mechanisms if necessary.”
Fifth, cultural differences affect negotiation style and demand letter tone. In some cultures, aggressive demand letters are standard and expected. In others, they’re considered offensive and counterproductive. If you’re dealing with Asian counterparties, for example, allowing them to “save face” while settling may be more effective than aggressive threats. Consider having someone with cultural expertise review your demand letter before sending it.
Finally, time zones and communication logistics matter. Your demand letter should propose meeting or mediation times that accommodate both parties’ time zones, or offer flexibility about communication methods. These practical accommodations can make settlement more likely and demonstrate good faith that arbitrators will notice if the dispute proceeds formally.
About the Author: Sergei Tokmakov is a California attorney (Bar #279869) with over 13 years of experience in commercial contract disputes, technology law, and international business transactions. He has handled over 1,750 client matters involving contract drafting, negotiation, and dispute resolution. For a consultation about your specific demand letter or arbitration situation, visit terms.law/call/.