Contract Clauses for Resolving Disputes

Resolving Disputes

It’s common to include a dispute resolution clause in many types of commercial contracts. There are a variety of types of clause. 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 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.

Mediation and Arbitration

Mediation is obviously a worthwhile process. Traditionally, mediation has a reasonably significant success rate. However, if a party isn’t prepared to negotiate in good faith, the party wouldn’t be prepared to attend mediation in good faith. 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.)

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. A third party may not be in any better position to make a determination than the parties themselves.

What parties should 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 just a practical reality – a client is entitled to good legal advice but then, based on that advice, they have to determine what they want. 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 approach tends to appeal to many commercial parties and as noted previously, mediation traditionally has a reasonably good success percentage.