Dispute resolution clauses are often found at the end of a contract and can easily be overlooked as "boilerplate" clauses. However, a failure to pay proper attention to these clauses can lead to unexpected legal consequences.
Introduction
Shareholders’ agreements are typically used to establish the rights and responsibilities of shareholders. Such an agreement aims to regulate the relationship between shareholders, the management of the company and the ownership of shares. A well-drafted shareholders’ agreement not only regulates the relationships between shareholders but also include effective provisions for dealing with disputes should they arise. Shareholder disputes may arise from a range of sources, including differences in opinion regarding the company’s strategy or alleged violations of the company’s articles.
When a shareholder seeks a contractual remedy under a shareholders' agreement, the dispute resolution clause sets out the process by which it must seek that remedy. For example, the agreement might provide for alternative dispute resolution (ADR) methods in the first instance before resorting to the courts. However, if the shareholder intends to rely on statutory remedies, such as unfair prejudice claims, it is crucial that the shareholder reviews the company's constitutional documents and any shareholder agreements to ensure that there are no contractual dispute resolution clauses that mandate arbitration. If such a clause exists and court proceedings are filed, the case could be stayed, leading to significant legal costs, potential adverse cost orders, and delays for the claimant.
Pitfalls like this can be avoided if the parties take into proper consideration at the drafting stage the types of disputes that may arise.
The Dispute Resolution clause
Disputes among shareholders can arise from various issues.
To mitigate the risk of disputes escalating into costly litigation, many shareholder agreements will include dispute resolution clauses which set out the procedure the parties must adopt where a dispute arises. For example, will the dispute be decided by the courts or in arbitration? What law will govern the dispute? What notices or other correspondence must be issued upon a dispute arising?
The inclusion of a dispute resolution clause tailored to the specific agreement can not only provide parties with clarity as to the appropriate steps to take in the event of a dispute but also improve the parties' chances of avoiding unnecessary and costly litigation.
General drafting tips
When preparing shareholder agreements, it is important to consider the potential shareholder disputes that may arise from the relationship between the parties and identify the most suitable methods for dispute resolution.
Tips:
- Be clear: Parties should avoid using standard, boilerplate clauses without careful consideration. Parties should ensure that the clause is carefully drafted to include all relevant types of disputes that might arise between the parties and a clear, defined process for dealing with them.
- Governing law: Parties must clearly state which law will govern the dispute resolution process, especially in international agreements.
- Think ahead: As the business grows and evolves, regularly review the shareholder agreement and dispute resolution clauses to ensure they remain relevant and effective.
Additional considerations when drafting arbitration clauses
Arbitration is often viewed as a flexible and confidential alternative to litigation. However, it is essential to recognise that certain remedies—particularly statutory remedies—may not be available in arbitration. This is a critical consideration when drafting dispute resolution clauses in shareholder agreements.
For example, a shareholder seeking relief under section 994 of the Companies Act 2006 (unfair prejudice) may wish to obtain a buy-out order or other court-based remedies. These remedies may fall outside the jurisdiction of an arbitral tribunal. If the dispute resolution clause mandates arbitration without allowing for exceptions, the shareholder may face additional challenges in pursuing the remedy through the courts, potentially resulting in delays, increased costs, and procedural complications.
This issue is more than a drafting nuance—it goes to the heart of whether the chosen dispute resolution mechanism can deliver the outcomes the parties may need. A rigid arbitration clause could inadvertently restrict access to effective remedies.
Ultimately, the dispute resolution clause should be tailored to preserve access to appropriate remedies and ensure that the chosen forum is capable of delivering them.
Conclusion
Through careful consideration at the drafting stage, parties can avoid unnecessary and unwanted litigation. A dispute resolution clause can have a profound effect on the outcome of a dispute and the ongoing relationship amongst shareholders.
If you would like advice on drafting dispute resolution clauses, or if you, as a shareholder or director of a company, find yourself in dispute with your fellow shareholders or directors, please get in touch and we can provide advice on potential routes to resolution.
If you would like more information on dispute resolution clauses, shareholder agreements, or anything else discussed in this blog, please get in touch with our corporate disputes lawyers, or your usual Brodies contact.
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