Managing commercial disputes

13 January, 2014

Whilst practical steps can be taken in order to minimise the risk of a dispute arising in the first place (see Avoiding Commercial Disputes), some thought should be given to how a dispute will be handled and managed should it arise. This is usually addressed in the contract by the inclusion of a dispute resolution clause.

 

Dispute resolution clause

 

A dispute resolution procedure can be very simple, in that it just states the applicable governing law and jurisdiction (see below), or it can be more complex and set out an escalation procedure to be followed in the event of a dispute. It should be remembered that if a simple procedure is included this does not preclude the parties from attempting to resolve the dispute by informal means before resorting to formal court proceedings.

 

A multi-tiered dispute resolution clause requires or permits the parties to pursue some form of alternative dispute resolution (ADR) mechanism before embarking on the binding mechanism (arbitration or litigation) they have chosen. Most commonly, these clauses tend to have formal or informal negotiation as a first step, then formal mediation, then arbitration or litigation for final resolution.

 

Advantages:

  • Provides the opportunity for parties to resolve disputes in a less adversarial setting.
  • Preserves ongoing commercial relationships.
  • Saves significant amounts of time and money.

 

Disadvantages:

  • Risk of delay if one party fails to engage properly.
  • Costs of a mediation may be wasted if unsuccessful.

 

It is also possible to carve-out certain types of disputes from the dispute resolution clause and make provision for these to be resolved using a different dispute resolution mechanism.

 

Note: An ADR clause must always provide a mechanism for final, binding and enforceable resolution of the dispute (e.g. by arbitration or court action).

 

Sample clause

All disputes arising out of or in connection with this Agreement shall to the extent possible be settled amicably by negotiation between the parties within [30] days from the date of written notice by either party of the existence of such a dispute. If the parties do not reach settlement within a period of [30] days, they will attempt to settle it by mediation in accordance with the Centre for Effective Dispute Resolution (CEDR) Model Mediation Procedure. Unless otherwise agreed between the parties, the mediator will be nominated by CEDR. To initiate the mediation a party must give notice in writing (ADR Notice) to the other [party OR parties] to the dispute requesting a mediation. A copy of the ADR Notice should be sent to CEDR. The mediation will start no later than [x] days after the date of the ADR Notice.

 

Choice of law

 

It is important to ensure that the resolution of any dispute is retained within familiar national boundaries. Assuming that the contracting parties are English, this will entail a choice of English law and English courts:

 

Sample clause

This Agreement will be governed by and construed in accordance with English law. Each party irrevocably agrees that the High Court of England and Wales shall have exclusive jurisdiction in relation to any claim, dispute or difference concerning this agreement (including without limitation claims for set-off or counterclaim) and any matter arising therefrom.

 

Ideally, the choice of law should mirror the forum (or location of hearings) to avoid the necessity of expert witnesses and different languages. If the chosen law is not English, a lawyer qualified in the relevant law should be closely involved in the drafting process.

 

Whilst there are specific rules in place to determine a contract’s appropriate governing law and jurisdiction, this is an unsatisfactory position for contracting parties to be left in, as it introduces an additional layer of delay, complexity and uncertainty into an already protracted, stressful and complicated dispute resolution procedure. It is therefore important that contracting parties make explicit provision for governing law and jurisdiction within the contract.

 

Conclusion

 

Any contract should include a mechanism for the resolution of disputes that may arise between the parties. Assuming the parties are English, this should be in accordance with English law with a resolution process based in England. A detailed dispute escalation procedure can be set out for negotiation, mediation and ultimately arbitration or litigation with the aim of resolving the dispute at an early stage as cost-effectively as possible. A properly drafted dispute resolution clause will help ensure that any disputes are managed, progressed and resolved in a swift, effective and efficient manner.