Daniel Wood
Partner
Article
13
Parties embarking on a new commercial venture together are often positive about their relationship and focused on making it work to their mutual benefit. Understandably, they can be reluctant to spend much time planning for what should happen if matters later turn sour. However, it is vital to give some thought in advance to the dispute resolution clauses in your contract to ensure that there is an appropriate procedure in place to deal with disagreements in a structured and proportionate way which gives the parties the best chance of resolving them as quickly and cost efficiently as possible. In this article we look at some of the key considerations when drafting an effective dispute resolution clause.
A dispute resolution clause sets out the process by which the parties intend to resolve any disputes which may arise out of their contract. It may cover both contractual disputes (e.g. a difference of opinion as to the meaning and effect of a particular contract clause) and non-contractual disputes (e.g. where party A alleges party B was negligent in its performance of the contract). There are various different methods of dispute resolution, one or more of which may be set out in a dispute resolution clause.
It is important to ensure that the dispute resolution clause is clear, concise, and workable. Courts and tribunals are generally keen to uphold terms the parties have agreed, including agreements as to the method of dispute resolution. Therefore, if the dispute resolution clause is unclear, ambiguous or overly convoluted, there is a risk of uncertainty about how it operates, and the possibility of time-consuming and costly satellite disputes as to its meaning and effect.
The precise contents of a dispute resolution clause will depend to some extent on the form of dispute resolution the parties choose (as to which, see further below), but key considerations which should be addressed in dispute resolution provisions include:
There are many different methods of dispute resolution, but they broadly fall into one of two camps: non-binding or binding.
Non-binding forms of dispute resolution focus on the parties reaching a consensual resolution. Examples include:
In binding forms of dispute resolution, the parties submit their dispute to a third party decision maker (e.g. a judge or arbitrator) to make a decision which will be binding upon them (subject to any agreed appeal process). The most common alternatives are:
In the UK, ADR usually refers to non-binding forms of dispute resolution, geared towards resolving a dispute without recourse to binding determination by litigation or arbitration. In other jurisdictions though, including North America, ADR refers to any method of dispute resolution other than litigation - so arbitration is considered to be a form of ADR (even though it produces a binding award which the parties cannot generally appeal in the national courts).
Non-binding ADR can be a shortcut to resolution, and produce time and cost savings compared to the parties going straight to a more intensive form of binding dispute resolution. This is particularly the case where the input of a neutral third party with an objective view provides the parties with a fresh perspective on a dispute, and can help to break a stalemate between parties whose positions may have become entrenched.
Parties do, however, need to be aware that for ADR to stand a good chance of success, they need to approach it with an open mind and prepare adequately, rather than treating it as a 'tick-box' exercise. In turn this means that there are incremental costs to engaging in ADR (including both the parties' legal costs and the fees of the neutral third party), so if unsuccessful in determining the dispute or narrowing the issues, ADR will add to the overall costs of resolving the dispute rather than save them.
Escalation clauses are multi-tiered dispute resolution clauses, which provide for a dispute to be escalated usually from relatively informal discussions between the parties through gradually more formal processes until the dispute is finally resolved one way or another.
A tiered dispute resolution clause may, for example, provide for the parties to negotiate for a specified period (e.g. 30 days from notification by one party to the other of the dispute). If the negotiations are unsuccessful, then the parties might progress the matter to a non-binding form of ADR (e.g. mediation), and in the absence of a resolution, ultimately escalate the dispute to a binding dispute resolution process for a decision.
Tiered dispute resolution clauses may include all or only some of these stages. It is perfectly possible, for example, to go straight from negotiations between the parties, to litigation (although see the warning below), or to use more than one form of ADR. No one size fits all, and there are many factors which will determine the appropriate escalation process, including the value of the contract, the type of disputes likely to arise, the cost of the dispute resolution process and how quickly the parties need to resolve matters.
This depends very much on the wording of the clause; the parties may express that a particular step in the process is optional. However, it is important to note that the courts of England & Wales expect parties to attempt to resolve their dispute through ADR, and there may be costs sanctions for a party who fails to engage in ADR, even if that party ultimately succeeds at trial - see our article "do I have to consider mediation?" Therefore, even if parties are not contractually bound to follow every step of the dispute resolution clause, they would do well to engage in ADR in case their dispute ultimately appears before the courts of England & Wales.
Yes. Whilst it is not always possible for the parties to know in advance what sort of disputes may arise, in some cases they will be able to anticipate certain discrete issues, such as disputes over valuation or technical points. The parties could for example agree for such disputes to be referred to expert determination so that they can be resolved quickly and cost-effectively, while agreeing to refer more substantial disputes to litigation or arbitration.
Something else to consider, particularly in international contracts, is appointing a service agent in the jurisdiction where court proceedings would be commenced. This means that the parties agree in their contract that court legal proceedings may be served on their nominated representative, the service agent. This can avoid potential disputes about whether proceedings have been effectively served on a party resident in another country. For discussion on the use of service agents, see our article "All about service".
Although it can feel pessimistic to consider the "what ifs" when drafting dispute resolution clauses at the start of a business relationship, consideration of these points should not be thought of as admitting the possibility of failure, rather as giving your contract the best chance of success. The appropriate dispute resolution clause will put you in the best position to work through disputes in a constructive and cost-efficient way if they do arise, and also give you the best chance of maintaining an amicable relationship if desired.
For more information and guidance on contract clauses, please contact Daniel Wood
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