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Does your dispute resolution clause work?

It is now standard in commercial contracts to include a dispute resolution clause setting out the hoops the parties must jump through in the event that a dispute arises under the contract.

We look at some of the factors involved in choosing the right dispute resolution provision for your contract.

The aim of these clauses, very sensibly, is to encourage settlement and avoid costs at an early stage by forcing the parties to negotiate, and often mediate, the dispute before proceedings are commenced.

In many instances these clauses can be valuable. They bring the parties together to resolve a dispute before it gets out of hand and can avoid the break-down of the relationship that normally accompanies more formal proceedings.

However, these clauses are not a panacea for all disputes and will not always be appropriate for the contract in question.

Mediation

While dispute resolution clauses can avoid costs further down the line, they can also front load costs requiring the parties to go through an expensive mediation at an early stage, when neither party has fully fleshed out its arguments.
Enforced mediation can also be a futile venture. If the dispute is particularly acrimonious, or if one party has absolutely no intention of settling or negotiating, the costs of an early mediation forced by the contract’s dispute resolution procedures can simply be an unavoidable waste of costs for both parties.

For contracts where the sums in dispute are likely to be high, the relatively modest cost of a mediation at an early stage can be a valuable asset. Even if neither party wants to take part in a mediation, there can still be a benefit in having the parties around one table trying to reach a settlement. This can help to give clarity over the parties’ positions and, of course, can result in a settlement which avoids significant costs. If the value of the claim is high, the costs of a mediation are likely to be much less significant overall, and may be worth spending even if the likelihood of success is low.

However, for contracts where disputes are likely to be over more modest sums, the additional costs of a mediation when neither party wants to mediate, coupled with the anticipated costs of proceedings can simply add further risks and challenges to pursuing or defending a claim in circumstances where the costs are already a significant deterrent.

This can of course work in a party’s favour if they have deeper pockets than their counter-party; these costs may deter the counter-party from pursuing or defending a claim and attempts can be made to increase the costs of complying with the dispute resolution clause to further dissuade the counter-party. 

If your pockets are not so deep, then an inappropriate dispute resolution clause can be counter-productive and go against the purpose of the clause.

Alternatively, a clause which does not require mediation still allows a mediation to take place if the parties are so minded, but doesn’t force the parties into one in circumstances where it is very unlikely to be successful. Including a requirement to escalate a dispute internally can also assist by forcing negotiations, but limiting any increase in costs.

Jurisdiction – arbitration or litigation?

Dispute resolution clauses are often tied up with jurisdiction clauses, particularly when some form of alternative dispute resolution procedure, like arbitration, is envisaged. It is important to consider whether the choice of arbitration, litigation or some other form of ADR is appropriate. Expert determination for example can be particularly useful for disputes relating to discrete subject matters.  

In the case of arbitration particularly, careful consideration is needed as to whether the costs of the type of arbitration envisaged (for example, a tribunal consisting of three senior arbitrators) is appropriate given the sums that will likely be in dispute.

If disputes are likely to be for very high sums, then there are benefits to having a well constituted tribunal of senior arbitrators. However, if disputes are likely to be of lower value, the costs of three arbitrators could well be prohibitive, and consideration should be given to other options, including cost-controlled or expedited arbitrations.

Thought should also be given to whether an arbitration may assist with the enforcement of judgments in other jurisdictions and whether this is likely to relevant in the event of a dispute.  

What to do?

For the most part, the considerations involved are relatively straight-forward and largely revolve around costs, the value of disputes and the bargaining positions of the parties. Although, this can become more complicated when the parties are based in different jurisdictions.

It is all too easy to include a stock dispute resolution clause that is not appropriate to the particular circumstances involved. Time should be taken to ensure that the dispute resolution clause is tailored to fit the situation at hand.

It is worth bearing in mind that this is the only clause that you can guarantee will be relevant for every dispute that arises under the contract.

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