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If you are a business operator, you will likely engage in several contractual relationships daily. These contracts and agreements should contain a dispute resolution clause. Business disputes can be difficult to resolve at the best of times. Ensuring your contracts are in order and contain the appropriate dispute resolution clause is one of the best ways to manage and resolve a dispute. In preparation of your contracts, you will need to make sure you consider what happens if something goes wrong. This can be at any time in the life of your business – whether you have just launched and are setting up your service agreement or whether your business is going through a period of growth and you are updating your existing agreements. This article will explain why having a dispute resolution clause in your contracts with major partners and suppliers is key to protecting your business.
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What is a Dispute Resolution Clause?
A dispute resolution clause is a critical clause of any contract. It will outline how parties should respond in a dispute and the preferred dispute resolution process and will avoid premature and unnecessary court proceedings. It is reflective of the understanding between you and the other party of what should happen in the case of a disagreement.
Dispute resolution clauses are often ‘standard’ or ‘boilerplate’ clauses in a contract. However, having a bespoke clause in your contracts will set the tone of the business relationship moving forward. In addition, it should outline your preferred method of resolving any dispute.
The key elements of a dispute resolution clause are:
- notice periods and timelines for addressing the issue;
- a request to negotiate first;
- an alternative dispute resolution mechanism; and
- timing and location for legal proceedings.
Without a dispute resolution clause, you may need to jump directly to legal proceedings to resolve the dispute. Unfortunately, going to court is expensive, uncertain and time-consuming. To reduce your risk of this outcome, a dispute resolution clause is often effective. Including a dispute resolution clause could even prevent you and your business partners from resorting to suing each other.
Notice and Timelines
A good dispute resolution clause may require you or the other person or business to inform the other of an issue in a certain way, usually by written notice.
Formal communication, also known as ‘notice’, can be beneficial to start open discussions to resolve the problems raised. Clear written communication can also be very helpful later if the issue escalates. If you end up in court, you may need to demonstrate any steps you took to try to resolve the dispute before commencing legal proceedings.
Negotiation
To save on legal costs, parties to the contract should negotiate and try to agree to any escalation. A dispute resolution clause may require you or the other party to organise a meeting where you can both openly raise any concerns and negotiate a solution to the problem. This approach can promote collaborative problem-solving, as you can usually make offers or statements with no risk of them being used against you in court. These negotiations might be between you and the other party in the dispute. In some cases, it may be helpful to involve a lawyer early to assist with negotiation.
Alternative dispute resolution (ADR) mechanisms
Some dispute resolution clauses go beyond open discussions and require parties to undertake ADR processes. We detail some types of ADR detailed below:
| Conciliation | A third-party conciliator will narrow the issues in dispute and bring parties closer together to a position where they can compromise. The parties involved may meet together or separately. The purpose of conciliation is to resolve the dispute. It is commonly used for employment disputes in the Fair Work Commission. |
| Mediation | Mediation also involves a third-party mediator. The mediator is impartial and helps parties to identify the disputed issues and develop strategies and options to resolve the disputes and reach a negotiated settlement. In some court jurisdictions, mediation is mandatory before litigating. Settlements reached in mediation may be enforceable. |
| Arbitration | Arbitration involves a third-party arbitrator. The process for choosing the arbitrator will usually be set out in the dispute resolution clause. If a dispute goes to arbitration, the arbitrator’s decision will generally be binding. The arbitrator’s decision is typically based on legal principles. Arbitration is similar to going to court, however, the decision will remain private. |
These types of ADR all require an independent third party to:
- facilitate a discussion between you; or
- organise a panel to make a joint decision.
Before incorporating ADR into your dispute resolution clause or starting these processes, you and the other party to the contract should agree on the following:
- who will be involved and how will they be chosen;
- how quickly the discussion or process must be commenced;
- how the discussion or dispute resolution process should run;
- whether it will be binding or parties will be able to take court action if the outcome is not satisfactory; and
- how you and the other party will share the costs.
The different types of ADR will have associated costs, however, these are typically still more cost-effective than going to court.
Timing and Location of Legal Proceedings
A dispute resolution clause will often try to delay or limit the ability of each party to issue legal proceedings until a specific time.
A good dispute resolution clause should require parties to attempt to resolve the dispute first using any of the above methods before resorting to litigation. In some cases, litigation will be unavoidable. Dispute resolution clauses should reflect this and set out where parties can engage in legal proceedings. It will do so by stating that the laws of one state or country apply to the legal contract. If your business operates in a different location to your partner or suppliers, you should make sure that it is clear where legal proceedings will take place if a dispute arises.
Will It Damage Our Relationship?
With any legal contract, facing the reality of doing business is important. Only some things go to plan. Unfortunately, even the closest of business partners can sometimes fall out. Preparing for all eventualities is sensible if the business relationship truly matters to both parties.
Ultimately, agreeing upon an amicable way to resolve a dispute demonstrates a close working relationship. In addition, having a dispute resolution clause shows that you are both willing to take steps to get back on track.
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Key Takeaways
A dispute resolution clause is an integral part of planning for your business’s future. A strong clause can help you to resolve disputes quickly and cheaply without going to court. Your dispute resolution clause should set out how to raise and deal with issues. It should also clearly state the location of any legal proceedings. If you need help drafting a dispute resolution clause, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
The key elements of a dispute resolution clause are notice periods and timelines for addressing the issue, a request to negotiate first, an alternative dispute resolution mechanism and timing and location for legal proceedings.
Arbitration involves a third-party arbitrator. The process for choosing the arbitrator will usually be set out in the dispute resolution clause. If a dispute goes to arbitration, the arbitrator’s decision will generally be binding. The arbitrator’s decision is typically based on legal principles. This process is similar to going to court. However, the decision will remain private.
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