Pay Attention to your Dispute Resolution Clauses
If you are negotiating a contract or re-negotiating one, here are a few things to consider.
The importance of a clearly drafted dispute resolution clause should never be underestimated. It may have serious implications for how disputes arising under a contract are resolved and obligations enforced. Each contract is different and requires a custom-made dispute resolution clause. To that end, the use of generic dispute resolution clauses “pulled from the internet” is ill-advised.
A dispute resolution clause specifies how the parties wish their disputes arising under their contract to be resolved. It may specify one or more mechanisms for dispute resolution, including negotiation, mediation, arbitration or litigation.
Arbitration is sometimes perceived to be a cheaper alternative to litigation, but this may not be true in all instances. The cost of arbitration may far exceed litigation. Cost depends on several factors, including the number of arbitrators chosen, the likely length of the arbitration (given the complexity of the issues), and the location of the arbitration.
Selecting the mechanism
Some issues may be better suited to a particular type of dispute resolution mechanism. For example, disputes in relation to construction contracts or which require expertise in a particular area are often referred to arbitration as they afford an opportunity for the parties to choose an adjudicator who has expertise in the area.
For other contracts, the most appropriate type of dispute resolution mechanism may be negotiation. Negotiation can be a useful mechanism particularly where the parties intend to preserve their relationship rather than engage in a lengthy and costly adversarial dispute before an arbitrator or the court. A contract can provide for negotiation as a pre-requisite since, if successful, it avoids expense and minimizes inconvenience. The same is true of mediation.
Types of disputes covered by the clause
Not all disputes are suited for arbitration or litigation. A well-drafted clause takes account of the types of disputes that are likely to emerge and the processes best suited to their resolution. The type of dispute under the contract that is capable of being referred to arbitration should be clearly delineated. The scope of the arbitration clause will determine the extent of the arbitrator’s jurisdiction and may limit the type of disputed issues that can be arbitrated. Likewise, the scope of the issues the parties wish litigated can also be delineated in the dispute resolution clause. The clause may preclude litigation of certain issues arising under the contract that are better suited to being resolved by arbitration.
The type of contract may affect the type of mechanism
When assessing the draft of your proposed contract, you should also be asking yourself whether this is an agreement that requires a specific dispute resolution mechanism and, if it does, the type of dispute resolution mechanism best suited to your needs. For example, an arbitration clause may be ill-suited for a lease agreement as the expense of engaging in arbitration proceedings may far exceed the value of a disputed claim under the lease agreement. As the agreement to arbitrate is treated as a binding part of an agreement, you could find yourself having to engage in costly proceedings when that could have been avoided by a narrowly tailored dispute resolution provision. It may be important to you to have a right to appeal an adverse adjudication, in which event litigation is preferable to arbitration.
The location of an arbitration
The parties must also consider and specify the physical location of an arbitration. One would not want an arbitration agreement to stipulate that the location of the arbitration is New York when both parties reside in Jamaica, yet it happens sometimes, and at great expense to the parties. Of course, there may be legitimate reasons (including neutrality) where an external location is selected for conducting the arbitration. It must, however, be a deliberate decision by the parties to the agreement.
Selection of arbitrators
Selection of an appropriate arbitrator may turn out to be a lengthy process. The length of that process may be regulated by the dispute resolution clause. For example, the clause may provide that if there is no agreement regarding the arbitrator to be appointed, the selection may be made by an independent person.
Another consideration that should be stipulated in the contract and which is often overlooked is the number of arbitrators adjudicating a dispute. The number of arbitrators is usually between 1 and 3 and will depend on several factors including the accessibility of experts in an area, the perception of impartiality, etc. The costs of the arbitration will of course increase proportionately with the number of arbitrators appointed.
Law of the Arbitration
The UK Supreme Court recently handed down a decision clarifying the principles for determining the law governing the arbitration agreement. In that case, although the parties had specified the law governing the contract generally, they had failed to specify the law governing the arbitration agreement. The case is another illustration of the importance of a well drafted dispute resolution clause.
If your dispute resolution clause stipulates that arbitration is the appropriate dispute resolution mechanism, you want to ensure that the law governing the arbitration is clearly stated. The aim is to avoid an additional dispute about the validity of an award made pursuant to the clause.
These are just some general observations. You will require specific legal advice in relation to any dispute resolution clause you intend to include in your contract.
Litrow Hickson is an Associate at Myers, Fletcher & Gordon in its Litigation Department. He may be contacted at firstname.lastname@example.org or via our website at www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.