Disputes, if not handled swiftly and effectively, can cause significant financial losses, harm your reputation, and damage your professional relationships. Incorporating a clear, comprehensive dispute resolution clause into your contracts can make resolving contractual disputes quicker and easier, minimising their impact and allowing you to get back to business.
In this article, our business dispute solicitors will discuss what a dispute resolution clause is, how to incorporate a dispute resolution clause into a contract and how to enforce a dispute resolution clause.
Contents:
- What is a dispute resolution clause?
- Why are dispute resolution clauses included in contracts?
- Is it common for parties to negotiate dispute resolution clauses?
- What happens if there is no dispute resolution clause in a contract?
- What factors should be considered when drafting a dispute resolution clause?
- Can a dispute resolution clause be modified or amended after a contract is signed?
- Are dispute resolution clauses legally enforceable?
- How do you enforce a dispute resolution clause?
- Can a dispute resolution clause be enforced internationally?
- Summary
What is a dispute resolution clause?
Dispute resolution clauses are provisions in contracts that state how the parties must deal with any disagreements arising under it.
One of the main purposes of dispute resolution clauses is to avoid time-consuming, costly litigation. Some dispute resolution clauses will prohibit either party from issuing court proceedings until the processes detailed in the clause have been exhausted, increasing the chances of the parties negotiating a settlement.
Why are dispute resolution clauses included in contracts?
Including a business dispute resolution clause in your commercial contracts has several benefits, including the following:
- You can tailor the dispute resolution clause to the needs and priorities of your business. For example, if you are concerned about confidentiality, you can choose a dispute resolution method that guarantees privacy.
- Dispute resolution clauses often encourage open and honest frank discussions between the parties, maintaining relationships and avoiding the dispute escalating.
- By specifying that the parties must attempt alternative dispute resolution, such as mediation before embarking on litigation, you can encourage out-of-court settlements and avoid expensive court proceedings.
- You will minimise the scope for the other party to employ underhand tactics. This is useful if you are a smaller enterprise doing business with a larger one with deeper pockets who may otherwise use their resources to put pressure on you by threatening litigation.
- You can state that the English courts have jurisdiction, which is important if you do business internationally. It will prevent the other party from bringing proceedings abroad or a satellite dispute arising over where the case should be heard.
Is it common for parties to negotiate dispute resolution clauses?
At the start of a new business relationship, nobody wants to anticipate a future dispute. Since dispute resolution clauses do not contain deal-critical terms, businesses often view them as ‘boilerplate clauses’ – standard provisions included in most contracts - and give them little airtime during negotiations. Sometimes, the parties adopt standard wording with no regard for how the provisions will operate in the context of their business relationship. Given the prevalence of commercial disputes, dismissing dispute resolution clauses in this way can be disastrous. For example, if your contract contains a cross-border element, failing to negotiate that the English Courts have jurisdiction may mean you have to bring or defend a claim in a foreign country whose laws and procedures are starkly different to those of the UK.
What happens if there is no dispute resolution clause in a contract?
If there is no dispute resolution clause in a contract, there is no certainty as to how any dispute will be handled. For example, you may be keen to use arbitration rather than litigation, but if the other party does not agree, you will have no choice but to litigate. If the contract contains an international element, time-consuming disputes can ensue over the appropriate forum for the dispute.
Some dispute resolution clauses oblige the parties to follow a series of steps aimed at settling a dispute before escalating the issue to formal proceedings. For example, the parties may agree that they will try to resolve their problems through non-binding dispute resolution methods like mediation before embarking on a binding method such as litigation.
Non-binding dispute resolution methods offer a range of benefits, including being quicker, cheaper and less stressful than a court case. In the absence of such a clause, a disgruntled party is at liberty to forge ahead with court proceedings in the event of a disagreement (albeit the court rules on pre-action conduct oblige the parties to make some attempt at settlement first). Litigation is sometimes referred to as a ‘runaway train’, which, once you’re on, can be hard to get off. It is expensive and lengthy, and its outcome is inherently uncertain. Whilst Judges may penalise anyone who unreasonably refuses to engage with alternative dispute resolution methods before issuing court proceedings, dispute resolution clauses of this nature compel both sides to undertake the process detailed within it before seeking recourse from the court.
What factors should be considered when drafting a dispute resolution clause?
The key to drafting an effective and enforceable dispute resolution clause is to ensure it covers all it needs to and is drafted with sufficient clarity to be clear and unequivocal in its meaning and effects. Examples of the types of issues you will need to consider include the following:
Scope of the clause and when it is triggered
The parties must be clear about the types of disputes the clause is intended to apply to and when it will come into play. If you anticipate that the clause will cover all disputes, the wording must be sufficiently wide to cover not only breach of contract claims but also any claims arising under tort law, statute, or as a result of pre-contractual conduct. These claims might include disputes over intellectual property rights or the quality of the goods or services or involve negligence or breaches of confidentiality.
If the nature of your business relationship is such that the types of potential disputes are diverse, you may wish to carve out specific disputes from the general dispute resolution clause so they can be treated differently. For example, for straightforward disagreements relating to matters such as post-completion accounting, it may be more sensible to refer the issue immediately for expert determination to obtain a swift, cost-effective resolution. Carving out specific types of disputes can have unforeseen consequences and lead to further disputes, so the wording must be clear and precise.
Your clause must also specify the circumstances in which it will be triggered. Often, the parties agree that the dispute resolution process will commence when one party gives written notice of the dispute to the other.
Process the parties must follow
A key benefit of dispute resolution clauses is that they allow the parties flexibility to implement a dispute resolution process that aligns with their business practices. For example, you may agree that the business owners should meet and discuss the issues before taking any legal action, following which the parties should move to a non-binding form of dispute resolution, such as mediation, within a set time frame. If neither of those methods yields results, the clause should specify the binding dispute resolution the parties wish to employ.
It is best to keep the dispute resolution process as straightforward as possible. This will ensure all parties are clear about what they need to do and avoid delaying everyone’s ultimate goal, being the resolution of the issue.
Obligations of the parties
The dispute resolution clause must create a clear and enforceable obligation on the parties to follow it. The parties’ obligations during the dispute resolution process must be not only clear, but they must also have a degree of certainty that renders them capable of being enforced by the courts. For example, you should make reference to objective criteria, such as how the mediator will be appointed. If you agree on a period of time to discuss the issues amicably before proceeding to formal dispute resolution methods, you must use wording that enables a court to determine the nature of the obligations.
Choice of law and jurisdiction
Your dispute resolution clause must state which country’s laws will apply to any disputes and which courts will have jurisdiction. These are known as the ‘choice’ of law’ and ‘jurisdiction clauses’ respectively. When you enter into a contract with another English business, both parties will likely want English law to apply and the English courts to have jurisdiction. When the transaction has an international element, the issue can become more complicated.
It is usually preferable for your national laws and courts to apply to your business arrangements to avoid having to conduct proceedings abroad, potentially in a foreign language. Having said that, if you are more likely to be suing than being sued, you may need to consider where the majority of the other side’s assets are located and how easy it will be to enforce a judgment obtained elsewhere. The crucial point is that, once you have expressly agreed to a governing law and submitted it to the courts of a particular jurisdiction, you will be hard-pressed to subsequently argue that another forum would be more appropriate.
Whilst the governing law and jurisdiction clauses do not need to match, it makes little sense for them to differ. If they do, any dispute will likely be significantly complicated and more expensive.
Dispute resolution methods
Dispute resolution clauses allow the parties to choose a dispute resolution method upfront. Dispute resolution methods generally fall into two types: non-binding and binding. Non-binding dispute resolution methods are those that do not result in a decision that the parties are bound to comply with. Examples of non-binding dispute resolution methods include negotiation and mediation. Binding dispute resolution methods are those that result in a judgment or decision that binds the parties. Examples of binding dispute resolution methods include expert determination, arbitration and litigation.
Each dispute resolution method has its pros and cons. For example, arbitration is more flexible than litigation and, unlike court proceedings, is a private process. On the other hand, arbitration requires the parties to pay for the mediator’s time, and you can only appeal an arbitrator’s decision in very limited circumstances. The appropriate method for your contract will depend on various matters, including the nature of the parties’ relationship, their commercial operations, and the types of disputes most likely to arise.
Single or multi-tiered dispute resolution process
Some dispute resolution clauses simply specify a choice of law and jurisdiction and state the dispute resolution method the parties must submit to, such as arbitration. Others introduce a series of steps the parties must follow before moving to a final forum. These clauses are known as ‘multi-tiered’ or ‘escalation’ clauses.
Multi-tiered dispute resolution processes typically require the parties to go through several stages, each of which is intended to resolve the dispute if the previous stage failed. For example, a clause may state that the parties must begin by having informal discussions for a specified time, following which they may proceed to a non-binding dispute resolution method such as mediation. If the non-binding method does not result in a settlement, the parties may then advance to the binding method selected.
Multi-tiered dispute resolution clauses are prevalent in commercial agreements since they aim to minimise the time and costs spent on disputes and can preserve the parties’ business relationship. They do have downsides. In cases involving particularly thorny disputes, a prolonged dispute resolution process can serve to simply delay the inevitable, and incur additional costs for both sides. A poorly drafted multi-tiered clause can lead to further disputes as to its meaning and interpretation.
Can a dispute resolution clause be modified or amended after a contract is signed?
Yes, a dispute resolution clause can be modified or amended after a contract is signed, provided both parties agree to the amendments. The wording must be clear and unequivocal, or the court may hold that the original clause still stands.
Are dispute resolution clauses legally enforceable?
Yes, dispute resolution clauses are legally enforceable provided they are properly drafted and clear, and enable the court to determine the process and the parties’ obligations.
How do you enforce a dispute resolution clause?
If the other party issues a claim without first going through the dispute resolution process detailed in your contract, you can apply to the court for a stay of proceedings while the process is undertaken. As long as the clause is sufficiently certain, the process stated to be a mandatory precondition to litigation, and you have complied with it so far, the court will likely grant your request.
If you need advice on enforcing your dispute resolution clause, speak to us. Our dispute resolution solicitors have experience in advising business owners facing a claim brought by a party who has disregarded the dispute resolution clause and ploughed ahead with an alternative course of action.
Can a dispute resolution clause be enforced internationally?
Whether you can enforce a dispute resolution clause internationally depends on the country in question. In an EU context, if your clause specifies that English law should apply, the European Courts should respect the parties’ choice. Exclusive jurisdiction clauses continue to be recognised under the Hague Convention, although there is some uncertainty regarding clauses in contracts that predate 2021, being when the UK joined the Convention in its own right following Brexit.
Further afield, the enforceability of your dispute resolution clause will depend on the attitude of the court in the relevant country. Our dispute resolution solicitors have helped clients enforce dispute resolution clauses internationally. They will advise on the likely outcome of your case and guide you through the relevant process.
Summary
Dispute resolution clauses can have a profound impact on the outcome and effects of a commercial disagreement, so they must be carefully thought through and properly drafted. If a dispute arises, you should seek legal advice before taking any action, to avoid inadvertently breaching the provisions of the clause. Our dispute resolution solicitors will check for a dispute resolution clause in your contract and advise on the process you must follow. If the clause is clearly drafted and unambiguous, it can significantly assist in the swift resolution of the dispute and facilitate your ongoing commercial relationship with the other party.
