Before you charge in - part 6. Dispute resolution clauses – one size does not fit all

"Appropriate dispute resolution" is the mantra when drafting dispute resolution clauses. Such clauses should never be boilerplate. They should always be drafted to take into account the nature of the parties' relationship, the subject matter of the contract, the place of performance of the contract and any other considerations material to the parties' needs.

There is no "one size fits all" approach to dispute resolution. Before drafting or agreeing a clause, consider the following broad features of the main dispute resolution methods and the situations in which they may be appropriate. There are many forms of dispute resolution to consider, including civil litigation in the national courts, international arbitration, binding expert determination, adjudication, mediation, conciliation and other forms of non-binding dispute resolution.

It is critical that a dispute resolution mechanism results in a binding and enforceable decision without unnecessary delay or expense. There is no point in having a mechanism which results in a decision which one of the parties cannot enforce. Equally, a party does not want to have to spend years and significant legal costs to obtain a decision which could have been obtained quicker and cheaper through another mechanism.

However, the broad principles can be outweighed by particular needs or special circumstances of the parties. Is privacy and confidentiality important? If so, the public nature of High Court litigation may not be appropriate. Does the law impose a dispute resolution method (such as in the UK where the Housing Grants Construction and Regeneration Act 1996 imposes adjudication in construction contracts)?

Enforceability

The first question which should be borne in mind is: where might it be necessary to enforce any judgment or decision reached through the chosen dispute resolution mechanism and how easy will it be to enforce there? A dispute resolution mechanism which leads to an unenforceable result is worthless and may even enable one party simply to abandon its obligations under the contract without consequence.

Where there is an international aspect to a contract (such as where one of the parties is incorporated overseas or where the assets against which a decision might have to be enforced are outside the United Kingdom), serious consideration should be given to arbitration. The New York Convention (acceded to by 144 countries across the world) means an arbitration award made in a New York Convention state is easier to enforce internationally than an English High Court judgment.

Speed

Where urgent relief (such as injunctive relief) may be needed, the speed with which a chosen dispute resolution method can achieve a result is important.

Relief from the English High Court can be obtained very quickly (including out of office hours and even over the phone where particularly urgent). This is to be compared with the more time consuming commencement of arbitration proceedings, during which time the arbitrators have to be appointed (often by agreement between the parties or by a third party) and in some cases (such as arbitration under the ICC Rules) terms of reference need to be agreed. While a number of the well known arbitral institutions (such as the American Arbitration Association) offer an expedited arbitral process, this is still a comparatively pedestrian process.

In certain circumstances, a party to an arbitration agreement may be able to apply to the national courts for urgent relief. Alternatively, such a right can be expressly provided in the parties' agreement. However, in both instances, the proceedings can become complex, expensive and time consuming, involving one set of proceedings in the national courts and another in arbitration.

Another area where speed may be important is where a breach of contract is indefensible (such as a failure to pay interest or capital under a loan agreement). In such circumstances, summary judgment would be available in the High Court, but a similar process is not readily available in arbitration.

Accordingly, where the subject matter of the parties' agreement is such that urgent relief may be required (for example, where intellectual property rights are concerned), or where a breach of the agreement is likely to be appropriate for summary determination, High Court litigation may be the better option.

Technical expertise

A key to dispute resolution is getting the right answer as quickly as possible. Where the subject matter of the dispute is likely to be highly technical, the parties do not want to spend time 'educating' a judge so he can understand the technical aspects of a dispute prior to its determination. In such circumstances, the parties may wish to choose binding expert determination to resolve disputes of a technical nature. Expert determination is not without risk and the parties' agreement will need to be carefully drafted to set out, amongst other things, the context and parameters for the process, the method for appointing the expert, the timetable for the process and how costs are dealt with.

An alternative is to submit the dispute to arbitration and for the parties to prescribe the expertise that the arbitrator(s) must have. This gives the parties greater certainty that those determining the dispute have the requisite skills and experience to reach the right answer as quickly as practicable.

Procedural Flexibility

A bespoke dispute resolution mechanism, tailored to the needs of the parties' dispute is likely to be more efficient and effective than a generic system. In arbitration, the parties can tailor the process to fit their dispute. In litigation, the manner in which a dispute operates is fixed by the Civil Procedure Rules. If the parties' dispute would benefit from greater procedural flexibility, arbitration may be the better choice.

Confidentiality

If the parties' contract is of a particularly sensitive nature, the greater confidentiality and privacy offered by arbitration may make it a more appropriate forum for the parties' dispute. High Court litigation, by its nature, is public dispute resolution and third parties (including the media) can access documents contained on the court file. By contrast, arbitration is a private method of binding dispute resolution which is generally conducted in private and can easily be subject to stringent confidentiality requirements.

Mediation and other forms of alternative dispute resolution

Where appropriate, forms of non-binding dispute resolution can be included in a dispute resolution clause. A framework for a negotiated resolution, perhaps involving a process of escalation from commercial discussions between senior officers to a mediation prior to the commencement of formal proceedings, is often a commercially sensible option. Such provisions protect, as far as possible, the commercial relationship between the parties and avoid the polarisation of positions which tends to occur once formal litigation or arbitration proceedings have commenced. Where a dispute is litigated in the English courts, parties are likely to have to participate in a mediation at some point in any event. It can therefore be sensible to have an agreed process for mediation in the parties' contract.

However, care must be taken in the drafting of these provisions to ensure that the informal dispute resolution process does not adversely affect the parties' rights to pursue the formal process when necessary. An example of this would be a dispute resolution provision which requires parties to attend a mediation prior to the commencement of arbitration proceedings. This may deprive an arbitral tribunal of jurisdiction if such a mediation has not taken place.

General

Whatever the method of dispute resolution chosen, the dispute resolution clause should be clearly and precisely drafted to meet the parties' needs and should be explicit as to the options/mechanisms available to the parties. Argument between the parties as to the proper forum and jurisdiction for a dispute only serves to add cost and time to its resolution. Clear and careful drafting should avoid this.

This alert was written by Jamie Drinnan, associate, jamie_drinnan@wragge.com.

Wragge & Co's 60-lawyer Commercial Litigation team is part of one of the largest dispute resolution practices in the UK. The team completes a mix of domestic and international work for major private and public sector companies.

This alert is available in hard copy. To request a copy of this individual alert or to request a full bound copy of the entire series, please contact Jane Bates, jane_bates@wragge.com.