JAMS International ADR Blog

Get the latest updates from our blog:

Dispute resolution clauses - FAQ

by Philip McMullan on 01 Aug 2016

dispute_resolution_clauseWhen drafting an agreement for a new business partnership, after all the time spent negotiating around deliverables and costs, the deal's legal advisers might well be tempted to use a boilerplate dispute resolution clause. Under pressure from commercial, operational and management teams to get the deal signed and get started on the project, it would be perfectly understandable. It would also be a mistake.    

It might not be front of mind in the heady days of a new business venture but the dispute resolution clause can have far-reaching effects in the longer term. Forum, location, tribunal composition, rights (and ease) of appeal and enforceability of award all flow from the dispute resolution clause.These factors can be crucial in international disputes where the importance of black letter law can take a back seat to the realpolitik of a home jurisdiction tribunal for one of the parties or a location which makes enforceability a serious headache.   

So what are the key issues to consider when drafting a dispute resolution clause?

The first decision to make is the choice of forum – will the parties litigate or arbitrate in the event of a dispute? There are detailed arguments in favour of each process; arbitration lends itself to privacy, neutrality, flexibility and expert decision-makers with deep understanding of the technical issues in dispute. While changes to the 2012 ICC rules have included emergency arbitrator provisions to help with interim relief and parties are able to agree on appellate mechanisms, the litigation route allows for summary judgment and generally greater scope for appeal. One of the important factors behind the success of international arbitration in recent years is enforceability of award. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the "New York Convention") provides an extensive enforcement regime and most developed countries are signatories. In contrast, international enforceability of judgments is a patchwork affair dependent on bi-lateral agreements between sovereign actors, The Hague convention notwithstanding.

Deciding which forum to pursue will also automatically throw up the issue of governing law, that is the substantive law under which the dispute will be resolved. Best practice advice is that the governing law clause is distinguished from the dispute resolution clause – sometimes the issue of governing law and appropriate forum can be confused, leading to procedural arguments before any hearing on the merits. Drafting separate governing law and dispute resolution clauses in clear and unambiguous language should avoid this outcome.

If the parties intend to litigate to settle disputes arising from the contract, a jurisdiction clause should be expressly included in the agreement. If parties leave this issue to invoices and other documentation, they are almost guaranteeing a battle of the forms argument over which party's terms, conditions and home jurisdiction applies.

If the decision is taken to settle potential disputes by arbitration, there will have to be a number of issues agreed between the parties and included in the clause. There should be a clear reference to arbitration and agreement around scope – will the arbitration be limited to contractual claims or will it include claims under tort? What will be the rules governing the arbitration? (JAMS, of course, is recommended.) Setting out the preferred language for submissions, seat of the arbitration and composition of the panel in express terms will avoid potential time and delay later on.

Depending on the nature of the contract, there may also be other important matters to consider. Are there any related contracts or parties to the main agreement? As arbitration is a consensual process there are limited mechanisms for joining a party to a dispute or consolidating arbitrations arising under different albeit related contracts. Careful drafting, as well as attention to timing, will be required here to ensure that joinder and consolidation can be effected if required by the particular circumstances of the case. Lawyers drafting the dispute resolution clause will also want to think carefully about provisions for interim relief and whether the arbitration award is subject to appeal.

Recent years have seen a rise in alternative methods of dispute resolution, including expert determination and mediation as cost-effective ways of settling disputes.

There has also been an increase in the use of tiered dispute resolution clauses. These generally require the parties to engage in a series of informal steps such as mediation or negotiation before moving on to arbitration if an agreement cannot be reached. While the benefits of a tiered dispute resolution clause are clear in terms of time and money they require very careful drafting as they have been struck down by the courts on several occasions for a lack of clarity, which were held to make the rights under the contract unenforceable. 

Dispute resolution clauses may look deceptively simple on the surface but there is a wealth of complexity which awaits the unwary. Much will depend on the nature of the agreement and the relationship between the parties. An understanding of the party’s commercial relationship and expectations, as well as clear drafting, are the key to getting it right.

Philip McMullan is a writer and researcher.

Download eBook - Litigation in Review CTA

Topics: ADR

Philip McMullan

Written by Philip McMullan