Dispute Resolution Clauses In Agreement – Drafting Principles And Concepts – By OSAMA OBASOYO

INTRODUCTION

It is a fundamental principle that parties are bound by the terms of their agreement. The Courts are keen on upholding terms agreed by the parties including the terms of dispute resolution. Therefore in creating a watertight agreement, drafters and parties alike are required to draft clear, complete and consistent dispute resolution clauses that are preemptive of all possible scenarios. It is important to construct the clauses with simple and clear language and to avoid the use of unnecessary legal jargons. The need for clarity is to prevent the parties from being subject or bound to a term they had not intended.¹

The use of dispute resolution clauses in a contract is distinct from governing law clause or jurisdiction clause. The jurisdiction clause operates where the parties intend to submit their dispute to a competent court through litigation. The governing law clause primarily refers to the substantive law regulating the performance of the contractual terms. The governing law clause could also cover the law that would apply to the dispute settlement but only where a distinct dispute resolution clause is not available.²

However, in a properly drafted contract the dispute resolution clause should be made distinct from these clauses for clarity and enforceability. It should be well drafted to state the rules and laws that would apply should a dispute arise.

A poorly drafted dispute resolution clause may affect the validity, effectiveness and progress of any mechanism chosen by the contracting parties. This article is aimed at exploring the principles drafters should observe when drafting dispute resolution clauses.

CONCEPT OF DISPUTE RESOLUTION

A dispute resolution clause is an agreement, separate or within a contract, which sets out the mechanism for the resolution of disputes between parties to a contract. The scope of that agreement is determined in the drafting of the clause. A dispute resolution clause refers to an agreement within a contract that sets out the mechanism for the resolution of dispute between the parties to the contract.³ A dispute resolution clause in an agreement is a decisive means set in place by contracting parties to resolve any probable conflicts.

There are several forms of dispute resolution mechanisms. They are litigation, arbitration, mediation, negotiation and conciliation to mention a few. There is also the concept of Alternative Dispute Resolution which in some jurisdiction refers to every other means of dispute resolution that does not include Litigation while in others it refers to non-binding forms of dispute resolution.⁴

1. Litigation – it involves settling disputes in a court of law. It is the most common form of resolving disputes. The parties refer their disputes to the jurisdiction of the court to deliver a binding decision, usually by an experienced judge having authority from the State. It is adversarial in nature and makes use of strict rules of court procedure. It is characterized with being more expensive and time consuming than other forms of dispute resolution. Litigation is hardly ever the desired means of dispute resolution for parties involved in commercial transactions but becomes the necessary means when no other form of dispute resolution was agreed or the dispute resolution clause was not drafted with precision and clarity. Other forms of dispute resolution are considered ADR depending on jurisdiction.
2. Arbitration – in arbitration the parties agree to submit their dispute to an arbitrator or an arbitral tribunal to deliver a binding decision. It is similar to litigation in the sense that it involves a trial process however the parties are in control of the process. It is characterized by its confidentiality and flexibility and is more desired for commercial transactions. It is compared to litigation less time consuming and is not subject to stringent procedure of court or evidence. In a properly drafted arbitration clause the parties are able to decide the arbitrator, the location or seat of the arbitration, the applicable rules and all that could possibly affect the process.
3. Mediation – in this form of dispute resolution mechanism, the parties voluntarily and with the help of a trained neutral third party known as the mediator, resolve their dispute. The goal of the mediator is to help the parties reach a mutually beneficial agreement resolution. The decision is however not binding. It is confidential and completely under the control of the parties.
4. Negotiation – this form of dispute resolution is done by the parties without a third party. The parties are able to reach a compromise that is not binding. It is usually one of the first steps parties take in resolving disputes.

Multi-tier clause or Escalation clause

This refers to dispute resolution clauses which provide for a dispute to be escalated usually from one form of dispute resolution to another. The parties relatively begin with an informal means, probably negotiation and gradually progress to more formal means arbitration/ litigation until the dispute is finally resolved.

A tiered dispute resolution clause may, for example, provide for the parties to negotiate for a specified period (e.g. 30 days from notification by one party to the other of the dispute). If the negotiations are unsuccessful, then the parties may progress the matter to a non-binding form of ADR (e.g. mediation), and in the absence of a resolution, ultimately escalate the dispute to a binding dispute resolution process for a decision.⁵

Tiered dispute resolution clauses may include all or only some dispute resolution mechanisms at various stages. It is perfectly possible, for example, to go straight from negotiations between the parties, to litigation or to use more than one form of ADR. No one size fits all, and there are many factors which will determine the appropriate escalation process, including the value of the contract, the type of disputes likely to arise, the cost of the dispute resolution process and how quickly the parties need to resolve matters.

A legitimate concern about this kind of clause is the potential for a party to unnecessarily delay the process. However, this problem can be addressed by providing time limits on each step. These limits are, at best, an educated guess regarding appropriate timing for negotiations or a mediation to be completed by the disputing parties.

PRINCIPLES IN DRAFTING DISPUTE RESOLUTION CLAUSES

The first main principle is that dispute resolution clauses should set out the detailed dispute resolution processes. It must include details such as the time and place for the dispute resolution, the procedure, the process of choosing an arbitrator, to mention a few.

The second is that the dispute resolution clauses should be drafted in a clear and mandatory language. This is a principle required in drafting all contractual clauses. Drafters should use simple and understandable language for clarity and to avoid words being misconstrued and a situation where the clause becomes unenforceable.

The third guiding principle is that the duties of good faith in a contract should not be implied, which means that the dispute resolution clause should contain an unequivocal commitment to enter into the dispute resolution process before litigation or other dispute resolution mechanisms commenced.⁶

CONTENT OF A DISPUTE RESOLUTION CLAUSE

Every dispute resolution clause must be tailored to suit the nature of the contract between the parties, bearing in mind, the nature of business and their existing business relationship. Depending on the mode of dispute resolution chosen by the parties, there are standards a properly drafted dispute resolution clause must possess.⁷

Where the parties have for instance agreed to arbitration, the clause must include,

• The mode of initiating the process.
• The appointment of the arbitrator or arbitral tribunal.
• Number of arbitrators.
• Qualification of arbitrator.
• The seat or location of the arbitration.
• The applicable rules/choice of rules – if they decide to make use of UNCITRAL rules for example (distinct from governing law clause).
• The language.
• Cost of arbitration.
• Others may include their waiver of the right to appeal or challenge an arbitral award.

CONCLUSION

The use of dispute resolution clauses is fast rising in various forms of contracts. The purpose of the clause is to ensure that the clear intentions of the parties are expressed. It should at all times reflect the intentions of the parties in resolving any possible dispute. The clause should not become itself a subject of dispute and the situation where the parties become bound by what was not desired or the clause becomes unenforceable must be avoided by drafters.

Footnotes

1. Charles Ho Wang Mak, “Drafting Dispute Resolution Clauses- Four Main Guiding Principles that Drafters Should Observe” Nov, 2018. https://www.researchgate.net/publication/335598966_Drafting_Dispute_Resolution_Clauses-_Four_Main_Guiding_Principles_that_Drafters_Should_Observe, Accessed on 21^st Jan 2021.

2. The ‘Lectric Law Library “Drafting Dispute Resolution Clauses: A Practical Guide” https://www.lectlaw.com/files/adr16.htm Accessed on 20th Jan, 2021.

3. Saudi Centre for Commercial Arbitration 2016. “Guide to Drafting ADR Clauses” https://sadr.org/assets/uploads/download_file/Guide_To_Drafting_ADR_Clauses_EN.pdf Accessed on 20th Jan 2021.

4. Gowling WLG “The Basics: What Should a Dispute Resolution Clause Say” April, 2018 https://gowlingwlg.com/en/insights-resources/articles/2018/what-should-a-dispute-resolution-clause-say/#:~:text=clause%20should%20cover%3F-,What%20is%20the%20purpose%20of%20a%20dispute%20resolution%20clause%3F,arise%20out%20of%20their%20contract. Accessed on 21^st Jan, 2021.

5. Saudi Centre for Commercial Arbitration 2016. “Guide to Drafting ADR Clauses” https://sadr.org/assets/uploads/download_file/Guide_To_Drafting_ADR_Clauses_EN.pdf Accessed on 20th Jan 2021.

6. Charles Ho Wang Mak, “Drafting Dispute Resolution Clauses- Four Main Guiding Principles that Drafters Should Observe” Nov, 2018. https://www.researchgate.net/publication/335598966_Drafting_Dispute_Resolution_Clauses-_Four_Main_Guiding_Principles_that_Drafters_Should_Observe, Accessed on 21^st Jan 2021.

7. Mondaq, Stephenson Harwood, Dec, 2020 https://www.mondaq.com/arbitration-dispute-resolution/1014118/dispute-resolution-clauses-drafting-principles-and-concepts, Accessed on 20^th Jan, 2021.