Do we need an alternative dispute resolution clause in this contract?

A contract is often compared to an insurance policy, you hope you never have to make a claim. Of course, if a dispute does arise, the contract terms will be pivotal in achieving a satisfactory resolution, and any clauses setting out how resolution should be conducted can have a profound influence on the outcome.

'Dispute resolution clauses are not a ‘one size fits all’ matter. Which clauses, if any, to include will very much depend on the relative bargaining position of the parties, the contract value, the likelihood of disagreement, whether the contract relates to confidential information or technical matters, and many other factors,’ according to James Conduit, Head of our Corporate and Commercial Team.

Choosing the right dispute resolution clauses for your commercial contract requires evaluation of the advantages and disadvantages of each option to the parties and the subject matter of the agreement. This is why it is important to seek legal advice to protect you in the contract and to ensure you have the right dispute resolution mechanisms built in. Our team of experts can help you navigate this often-overlooked element of commercial contracts.

James outlines the two main alternatives to litigation, and some of the key considerations when negotiating these clauses.

Arbitration or mediation – pros and cons

Arbitration and mediation are among the most common types of alternative dispute resolution clauses included in commercial contracts.

• Arbitration means that an independent person is appointed to make a legally binding decision to resolve the dispute without the need to bring a claim in court.
• Mediation offers the chance for the parties to negotiate a resolution in the presence of a mediator who facilitates the discussions.

Arbitration, while guaranteeing a resolution, will be more costly than mediation. It requires an independent arbitrator to be presented with the case and arguments from each party, so that they can evaluate and make a determination. It is akin to having a judgment from court, but without the same procedural rules and without the dispute being put in the public domain. The parties will need to pay for the appointment and have to accept whatever determination is made, without the right to appeal.

Mediation, on the other hand, can be less expensive as the parties are merely using a mediator to ensure discussions are as productive as possible. The mediator will not be evaluating the case like an arbitrator, as they will be focused on helping the parties to reach some agreement through compromise. Unlike arbitration, mediation does not guarantee a resolution. If the parties cannot reach an agreement, then ultimately a court may need to resolve the dispute.

It is possible to have a 'multi-tiered' approach, which might require that the parties first seek to resolve the dispute informally, then proceed to mediation, before then proceeding to arbitrate if no resolution can be agreed. 

Negotiating the clauses

The first consideration is whether there should be an alternative dispute resolution clause in the contract at all. While this may come down to the preferences of each party, advice should be sought on the advantages and disadvantages of having such clauses. There is a danger that the dispute resolution clause is seen as just another 'boiler plate' provision without really considering what the commercial effect of the clause is likely to be.  Mediation is often a low-cost and effective dispute resolution mechanism, but it isn't suitable for all situations and a requirement to mediate can just increase costs if a party is particularly recalcitrant and it can also lead to delays which favour one party over the other.

Once your intentions around dispute resolution are known, the clauses can be negotiated. Examples of some of the points raised during negotiations may include:

• What criteria or qualifications should the arbitrator or mediator have? What if you do not agree on the person? How long should be allowed for the appointment to take place? Who should be the appointing authority if the parties cannot agree?
• Where should the mediation or arbitration be conducted, in what language and applying which rules?

How we can help

Without clauses that encourage dispute resolution prior to going to court, the default position is litigation.  Some parties may believe that a judge should be the ultimate arbiter of any dispute, but often mediators and arbitrators will have specialist legal or technical knowledge that puts them in a stronger position to understand the issues and reach a fairer outcome.

Either way, seeking legal advice on your options while negotiating the contract is important.

For further information, please contact our Corporate and Commercial team on 0800 542 4245 or email info@sillslegal.co.uk

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.