However competent the commercial lawyer drafting the contract, we often see severe repercussions as a result of a poorly written dispute resolution clause. This arises because the commercial draftsman is not a dispute resolution lawyer and may not fully understand the subtle nuances involved in drafting a dispute resolution clause.
What is the purpose of the dispute resolution clause?
A dispute resolution clause is an agreement within a contract which sets out the mechanism for the resolution of disputes between the contractual parties. The scope of that agreement is determined in the drafting of the clause.
When agreeing such a clause, there is an increasing trend amongst commercial parties engaged in international business to provide for a mechanism, other than litigation. Often through bitter experience, many commercial parties consider national court litigation to be too public, expensive, lengthy and/or damaging to the long-term relationship of the parties.
An increasingly popular alternative for commercial contracts is arbitration. Amongst other benefits, arbitration provides the privacy that commercial parties seek when resolving disputes and, whereas difficulties may be encountered when attempting to enforce national court judgments in other jurisdictions, arbitral awards may be enforced in any of the 144 signatory states of the New York Convention. Other mechanisms commonly found in international commercial contracts include adjudication and expert determination. Each of these has its respective merits and may be relied upon in isolation or as part of a multi-tiered mechanism.
Why a poorly written dispute resolution clause can be costly.
Dispute resolution clauses are often considered to be one of a number of standard boilerplate clauses included in modern commercial contracts. Sometimes, those involved in the negotiations often pay less attention to these clauses than ought to be the case. A lack of attention to the drafting of a dispute resolution clause may lead to defective drafting and the clause becoming unworkable.
It is surprisingly common to encounter a contract with unworkable dispute resolution provisions. These often do not come to light until the relationship between the parties has broken down and one or both parties are looking to the provisions within the contract to assist in resolving their differences.
A typical example is where a contract provides as follows:
“This contract is subject to English law and the jurisdiction of the courts of England and Wales.”
…and then also provides…
“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration with English law to apply.”
It is questionable whether the two clauses are satisfactory individually, but the major problem is that they are contradictory.
The inclusion of both clauses, which is sadly commonplace, raises uncertainty. Are disputes subject to the jurisdiction of the courts of England and Wales or are they subject to arbitration?
Uncertainty in commercial contracts leads to protracted exchanges between lawyers and ultimately matters being brought before the courts for an interpretation. This means more expense and more wasted time.
The moral to this story…
Don’t overlook the importance of the dispute resolution clause.
When the commercial draftsman has finalised his draft, have a dispute resolution lawyer undertake a quick review and specifically look at the dispute resolution provisions.
A failure to do so will result in a problem being stored up for further down the line, as only at the point that commercial relations have broken down and the parties are in dispute, will the contract then be referred to the dispute resolution lawyer. By then, the uncertainty caused by the drafting will undoubtedly cost more to resolve than had a dispute resolution lawyer been instructed to review the relevant clauses at an earlier stage.
Want to know what other dispute resolution forums are available besides litigation? Our next featured article considers various, alternative dispute resolution forums available and their advantages and disadvantages.