Contract Clauses for Resolving Disputes - Business Lawyer – Commercial Lawyer - Dukesons Business Law

July 2019

This Blog isn't legal advice – if you need legal advice on any business law or commercial law issue, please contact me. I'm a business lawyer (commercial lawyer) who provides advice on a wide range of business law or commercial law issues.

I’m not a litigation lawyer and don’t profess to be an expert on arbitration. However, it may be useful for me to share some thoughts.

It’s common to include a dispute resolution clause in many types of commercial contracts. There are a variety of types of clause. Different lawyers have different preferences for the different types of resolution process that might be adopted. At the end of the day, it’s a question of what process the parties consider will best meet the needs, balancing practicality, certainty, and cost.

A typical clause will require the parties to negotiate in good faith, then mediate, and then possibly refer the dispute to arbitration or an independent expert.

In the context of a special contract like a Shareholders Agreement, a dispute at board level might be referred to shareholders (if that would be practical) or it might be referred to mediation and/or arbitration or to an independent expert, or various types of options might be preferred e.g. call option, put option, etc, or if the dispute can’t be resolved by negotiation or mediation, liquidation or sale of the business might be provided for.

Most lawyers consider that mediation is a worthwhile process. Traditionally, mediation has a reasonably significant success rate. There are some lawyers who disagree. For example, they would say that if a party isn’t prepared to negotiate in good faith, the party wouldn’t be prepared to attend mediation in good faith.

A more difficult point to decide on is whether, if mediation fails, should a dispute be referred to arbitration or to an independent expert. Again, some lawyers favour one or other of these options. Part of the reason for that is because it’s commonly said that arbitration or reference to an independent expert is likely to result in a more expert decision than would occur if the matter went to court and the matter might be less costly and be dealt with more quickly.

Against that, some lawyers take the view that it would be better to let the parties decide what course they may want to take if mediation fails. It would be open to the parties to agree on arbitration or reference to an independent expert, if either of those alternatives were to be appropriate in the particular circumstances. Alternatively, if appropriate, a party could issue court proceedings. (Of course, if the parties can’t agree on what should be done, the dispute may remain unresolved and a party may or may not have rights or remedies open to them.)

One reason why some lawyers take the view that arbitration or reference to an independent expert shouldn’t automatically be provided for is because if careful consideration isn’t given to the rules that should apply and as to the timing and cost, an arbitrator or independent expert might be tempted to be lazy in the determination of the issue, and might not even issue a written determination (all the more so if no right to appeal the determination has been reserved). A lot can depend upon who is chosen to be the arbitrator or independent expert and therefore, on their integrity.

An excellent barrister who subscribes to that view says that it’s generally very hard to appeal successfully from a decision of an arbitrator or independent expert even if a right of appeal is reserved.

It can also be difficult in advance to determine whether a dispute should be referred to an arbitrator or to an independent, because it isn’t known just what the dispute might relate to, and in any event, there may be matters that really aren’t appropriate for any third party to decide for the parties (whereby the third party is really making a decision for the parties that they should make themselves). A third party may not be in any better position to make a determination than the parties themselves. Disputes should only be referred to arbitration or to an independent expert where that would be appropriate e.g. the dispute requires the input of a person who has particular expertise in relation to matters of that kind and doesn’t simply involve a third party making a determination that should be made by the parties themselves.

So, in the end, what’s a client to do? First, they need to have some understanding of the alternatives that are available and of the main pros and cons of the alternatives. How else can a client determine what would be appropriate for them? If that sounds like work, that's tough - a client is entitled to good legal advice but then, based on that advice, they have to determine what they want. We all have to take some responsibility for our actions.

Secondly, there’s some sense in including a provision requiring the parties to negotiate in good faith to try to resolve the dispute and then to try and resolve it through a non-binding mediation. This warm fuzzy approach tends to appeal to many commercial parties and as noted previously, mediation traditionally has a reasonably significant success rate.

After that, it seems to me that it’s very much a matter of opinion both in terms of how different lawyers might view things and in terms of what a client would prefer. There’s some sense in not automatically providing for arbitration or reference to an independent expert for the reasons given above.

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