Why dispute resolution clauses are the unsung hero of your deal

When making deals the commercial focus is directed to the nature of the transaction and how it works mechanically. Frankly speaking, ‘peripheral’ terms such as dispute resolution clauses are an afterthought. More often than not a standard clause for dispute resolution is used without much consideration. Unfortunately, this can mean that if a dispute arises, you are forced to follow an inappropriate process or waste time (and money) trying to escape the clause.

Sophisticated contracts often prescribe a procedure that the parties must follow when a dispute arises. The reality is that these dispute resolution clauses can be expensive, difficult to follow and not really suited to the parties or the transaction. As disputes may take years to arise, the lawyers drafting the deal are unlikely to have to manage a dispute through the clause nor are they litigators.

Dispute resolution procedures that are not tailored (or, bluntly, appropriate) to the transaction are all too common. ‘Flavours of the month’ abound; contracts executed in the 1990s frequently require arbitration of all disputes, despite the high costs involved, whereas more recent contracts lean towards mediation. While these clauses are ostensibly included to ensure the quick resolution of disputes, it is not uncommon for parties to use the procedure to delay or frustrate negotiations or a resolution.

The reality is that if a dispute arises; it is in the interests of both the parties to resolve the matter as quickly and cheaply as possible. This often means that both parties prefer to avoid the application of a contractual dispute resolution procedure. This can be achieved by:

  • agreeing with the other party not to apply the procedure; or
  • convincing a Court to:
    • construe the clause’s terms narrowly (i.e., it doesn’t apply to the subject matter of your dispute); or
    • strike the clause down as void (for reasons including being vague, internally contradictory or ‘ousting the jurisdiction’ of the courts).

At the end of the day, this means added cost and expense whether you successfully argue your way out of a burdensome dispute resolution procedure or are forced to comply with its terms. While you may not like to think of potential disputes when closing your deal, agreeing a practical method of resolving a dispute is a valuable investment.

How to get a practical dispute resolution clause

First, ask yourself (and your lawyers): why should I have a dispute resolution clause? Is it really necessary? Depending on your transaction, it might make more sense for any disputes to be dealt with under existing law without a specific dispute resolution clause. It is important to remember that you cannot ultimately prevent litigation by way of a dispute resolution procedure.

If your situation does call for a dispute resolution clause, ask what you are trying to achieve: are you maximising the possibility of early resolution, discouraging minor claims, requiring claims be brought promptly, minimising the risk of litigation? Depending on what you have in mind, you may wish to impose time limits on bringing claims or require informal negotiations or a mediation before any proceedings can be commenced.

A good dispute resolution procedure is clear in application, does not involve many steps, is scalable, wholly found in a discrete part of the agreement (as opposed to being scattered throughout) and is appropriate to the subject matter and value of your deal.

It is too easy to ignore the importance of dispute resolution clauses when closing your deal, but giving it some thought can save a lot of pain and uncertainty later on.

To learn more about contract clauses please contact Gerry Cawson.