When entering into a new contractual relationship, planning for its breakdown may not be at the forefront of the contracting parties' minds. However, the unfortunate reality is that it is extremely common for disagreements to arise at some stage. Most commercial contracts therefore will contain dispute resolution provisions which set out what is to happen in the event of a dispute.
By including a set Dispute Resolution Procedure (DRP) in the contract, the parties are able to map out, in advance, how they would like a dispute to be managed. If done effectively, a particular issue can potentially be resolved in a controlled manner which does not prevent the contract from operating as normal in the meantime and may ultimately preserve the relationship between the parties.
This will not be possible or realistic in every case, but the inclusion of a DRP in the contract will at least provide a degree of certainty and allow parties to approach the resolution of a dispute in an agreed manner.
Dispute resolution provisions will typically determine:
- The steps and procedure which parties will need to follow when a dispute arises;
- The forum which should determine the dispute; and
- The applicable law (particularly if parties are based in different jurisdictions).
A DRP will often require certain formalities to be observed, such as the service of a dispute notice or the provision of certain details when an issue becomes a 'dispute' for the purposes of the contract.
It is also common for these clauses, in an attempt to promote the early resolution of the matter, to provide that the dispute may not be referred to a third party decision maker until the contracting parties have attempted to resolve matters themselves, usually within a prescribed period. For example, certain individuals within the relevant organisations may be required to meet in the first instance and there will often be a tiered escalation process which needs to be followed thereafter, involving more senior representatives (or others who are more detached from the dispute) taking over the discussions. It may then be necessary for the matter to be referred to mediation before the dispute can be escalated further.
If an agreement cannot be reached, either in the discussions between the parties or through mediation, a DRP will usually set out the way in which the dispute ought to be determined, such as by arbitration, litigation or expert determination.
Is a contractual DRP worth considering?
One of the benefits of a contractual DRP is that it allows the parties to weigh up the advantages and disadvantages of each of these options and agree, prior to any dispute arising, which is most suited to their particular circumstances and requirements. It may, for example, be considered that, due to the flexibility of the procedure and the ability to nominate the decision maker (or the international nature of a dispute), an arbitration would be more suitable than proceeding to litigate in the courts, or that there are certain technical issues which may arise and ought to be determined by an independent expert.
One potential disadvantage of a contractual DRP is that parties may feel restricted and that they have lost the flexibility to manage disputes according to their particular circumstances. A DRP will usually be mandatory and a failure to follow the process correctly may amount to a breach of contract, or it may prevent further steps from being taken, such as suing for damages or terminating the contract, until the DRP has been followed.
However, as a DRP is contractual, parties can attempt to address such concerns by agreeing a procedure which is less rigid and strikes a balance between certainty and flexibility, for example where it is necessary to raise proceedings urgently to preserve assets or prevent something from happening which would be damaging to one of the parties' interests.
If the contracting parties take the time to ensure that an appropriate DRP is in place, it may put them in the best position possible to resolve any disputes which arise in an efficient and cost-effective manner – one which, ideally, avoids the need for a long and expensive court battle.