Dispute Resolution Clauses – Ignore at your Peril!

Posted: 4th October 2019 | Written by: Sarah Allan

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Law, jurisdiction and dispute resolution provisions, including expert determination clauses are often overlooked in a heated contractual negotiation. Not unsurprisingly, at the start of a commercial relationship one is not focused on what might happen if things go wrong.  Fast forward a few years and this is the first clause that lawyers will look at to get any claim in contract off the ground in the event of a dispute.  

Most courts will recognise and enforce parties’ agreements to have a contract construed in accordance with a particular country’s law and to agree on jurisdiction whereby a particular court or tribunal in any place can determine any dispute. An exception to this is employment contracts and some consumer contracts, which are beyond the scope of this article. In the context of a commercial contract, a failure to agree on such terms, or unclear provisions, can allow an obstructive opponent to undermine the progress of an otherwise good claim.

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By way of example, I have seen a clause providing for “arbitration, failing which the parties shall refer disputes to the High Court in England”. Arbitration is a form of alternative dispute resolution, but in its most simple terms replaces the Court process. The drafter probably intended the parties to mediate first and, failing that, refer the dispute to the High Court.

Such terms are likely to involve satellite litigation in order to resolve the unclear term resulting in additional costs and delays. If a contract fails altogether to provide for law and/or jurisdiction then one looks to private international law and within Europe there are regulations which cover this. Therefore, the lack of such terms, or any inconsistencies, will necessitate legal advice from the get-go!

Alternative Dispute Resolution

Alternative dispute resolution (ADR) is a phrase often used referring to processes for handling disputes outside of the mainstream court process including arbitration, expert determination, and mediation. However, these are very different processes which should not be confused.

Arbitration

In arbitration, a Tribunal is appointed by the parties to determine a claim and the procedure will be governed by (a) the terms of the contract, (b) the terms of any agreed arbitration association such as London Maritime Arbitrator’s Association (LMAA), and (c) the applicable law in the agreed jurisdiction, which in England is the Arbitration Act 1996. 

Different associations require the payment of fees which may vary and are an important consideration. Choosing a dispute resolution forum which is not prohibitively costly to get a claim off the ground can be sensible. For example, the standard LMAA procedure only requires the payment of the arbitration fee to commence proceedings, whereas the International Chamber of Commerce (ICC) has a much higher filing fee and requires an advance payment of fees at quite an early stage. It might also be appropriate to agree that claims under a certain amount are dealt with pursuant to the LMAA Small Claims Procedure, which is a simplified arbitration process with capped fees and costs.

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Court vs Arbitration – Pros and Cons

There are commercial considerations which one should consider before agreeing to a particular court or arbitration procedure.  For instance:

(a)   Proceedings brought before courts are usually on the public record, whereas arbitration is private, except in the case of an appeal to the courts.

(b)   There are different procedures for enforcing court judgments and arbitration awards, and what is best may depend on the legal process in the place of enforcement.

(c)   In English court proceedings joining third parties to the proceedings is possible, whereas in arbitration this can, absent agreement, require a new claim to be brought having cost consequences.

(d)   Where parties are outside of the jurisdiction the relative ease of serving a claim is an important issue to consider.

(e)   If there is a chain of contracts or associated contracts you might want to ensure that they are all subject to the same law and jurisdiction can be advantageous. 

(f)    Court proceedings can sometimes have higher up-front costs in terms of the Court fee, and requirement to progress the case promptly, whereas dependent on the arbitration association appointed, the most significant fees in arbitration usually follow the award. 

Expert Determination Clauses

Many build contracts incorporate a provision providing for a technical expert to give a binding decision on a dispute. If the clause is drafted properly and used in the right circumstances it can provide a quicker, cheaper and effective means of settling a dispute. However, they are better suited to disputes regarding valuations or matters which require expert, scientific or professional opinion, as opposed to disputes where legal interpretation or facts are in issue. 

For instance, a technical expert might usefully determine whether an item was defective in its construction, as opposed to determining the legal effect of a warranty provision. Equally, if a provision provides that all technical disputes shall be referred to an expert for determination, consider if you would want that in the case of a total loss caused by fire arising from a defective battery installed by the yard. 

Some key points to consider are:

(a)   Who is to be appointed and a default provision if no longer available?

(b)   What is the scope of the appointment and terms of engagement?

(c)   The appointment process, procedure and costs.

(d)   The inclusion of limitations, and exceptions – for instance in the event of manifest error.

(e)   If the contract has a limitation period when claims are time barred, would commencement of this process protect time.

Unlike arbitration, there is no English legislation which governs this procedure, and which would serve as a fall-back position if the provision for expert determination are unclear.  Therefore, a badly drafted clause can result in separate litigation which can be costly.  Equally, if you wish to enforce a decision absent cooperation of the other party it would require the commencement of legal proceedings subject to the applicable law and jurisdiction in the contract. 

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Mediation

Parties to disputes may try to settle a dispute simply by discussions between themselves and/or lawyers and settlement offers may be made which, if accepted, result in resolution.  However, sometimes a more formal process is adopted to try to resolve a dispute.  Mediation is a voluntary process aimed at settling a dispute outside of court and most usually parties agree on a without prejudice basis to appoint an independent mediator.

In most mediations each party will submit its case to the mediator before splitting into separate rooms whereby the independent mediator will act as a go between seeking to narrow down the differences to try to facilitate a settlement. The significance of it being conducted on a “without prejudice basis” is that the parties may not refer any matters raised in the mediation in any court or arbitration proceedings where the dispute is not resolved.

Mediation can be a very good method of resolving complex disputes without incurring significant costs. Indeed, Courts sometimes require parties to engage in mediation before a hearing with adverse costs consequences following if they do not. However, it is usually most successful when both parties have a desire to reach a resolution but require assistance to try to reach a settlement. This may involve the parties receiving less than they expected but, importantly, if conducted at an early stage, significant legal costs can be saved.

Early Intervention

A new method of dispute resolution called Early Intervention has been pioneered by SeaMediation Chambers, a group of specialist mediators with maritime expertise across a broad range of disciplines.  Essentially, this uses many of the skills of mediators and many of the procedures or features of mediation to resolve disputes, sometimes intractable disputes with multiple parties.

Rhys Clift, a partner at Penningtons Manches Cooper LLP, explains that early intervention has some features which ordinary mediation lacks.  For example, one party can appoint an independent neutral/mediator to try to commence a process to resolve a dispute where the other party or parties may have been unwilling even to talk about dispute resolution.

Secondly, it does not require that all of the parties convene at the same time with a view to resolving all disputes simultaneously.  Early Intervention permits multiple different approaches to settlement.  This can be useful where there are a large number of parties and where the sums of money at stake are small and might be felt not to justify the cost of travel and attendance at a formal mediation day.  

Summary

One may not be able to persuade a contractor to vary their standard terms and conditions.  However, if you are drafting a bespoke contract it is worth taking legal advice on the law and jurisdiction provisions tailoring them to your specific commercial circumstances.  Provisions can also allow for different types of disputes to be dealt with in different ways, but such clauses must be carefully drafted as it is in no one’s interest to become embroiled in disputes about where and how a matter is to be litigated. Equally parties to a dispute can consider mediation or other forms of negotiation to try to a resolve a dispute at an early stage thereby reducing legal costs and sometimes better preserving a commercial relationship.'

Images: Pixabay, Pexels, Unsplash

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