Do you need an alternative dispute resolution clause in a contract?

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Your options while negotiating a contract is important

A contract is often compared to an insurance policy; you hope you never have to make a claim. Similarly, you hope you will never need to consult a commercial contract because things have not been going to plan.

Of course, if a dispute arises, the contract terms will be pivotal in achieving a resolution, and any clauses setting out how resolution should be conducted are also important. Choosing the right dispute resolution clauses for your commercial contract requires an evaluation of the benefits and advantages of each option with respect to the parties’ bargaining power and terms of the contract. This is why it is important to seek legal advice to protect you in the contract and to ensure you have the right dispute resolution mechanisms built in. Our team of experts can help you navigate this often-overlooked element of commercial contracts.

Arbitration or mediation – pros and cons

Arbitration and mediation are the most common types of alternative dispute resolution clauses included in commercial contracts. The aim of each is to avoid the expense and time of taking the dispute to court:

  • Arbitration means that an independent person is appointed to make a legally binding decision to resolve the dispute without the need to bring a claim in court.
  • Mediation offers the chance for the two parties to negotiate a resolution in the presence of a mediator who facilitates the discussions.

Arbitration, while guaranteeing a resolution, will be more costly than mediation. It requires an independent arbitrator to be presented with the case and arguments from each party, so that they can evaluate and make a determination. It is akin to having a judgment from court without the protracted process of litigation. The parties will need to pay for the appointment and have to accept whatever determination is made, without the right to appeal.

Mediation, on the other hand, can be less expensive as the parties are merely using a mediator to ensure discussions are as productive as possible. The mediator will not be evaluating the case like an arbitrator, as they will be more focused on helping the parties to reach some agreement through compromise. Unlike arbitration, mediation does not guarantee a resolution. If the parties cannot reach an agreement, the default position of litigation in court will then be available.

Negotiating the clauses

The first consideration is whether there should be any alternative dispute resolution clauses in the contracts and if so, which ones. While this may come down to the preferences of each party, advice should be sought on the merits of having such clauses. For example, if the contract value is not that high and the contract is relatively simple, there is a strong argument to include either arbitration or mediation as an option in order to avoid the disproportionate costs that could accompany any litigation.

Alternatively, you may wish to include one but the other party may not be so keen. This is where mediation may offer a good first step. It ensures a relatively low-cost attempt at finding a resolution, but there is still the option to escalate the case to litigation if mediation is not successful.

Once your intentions around dispute resolution are known, the clauses can be negotiated. Examples of some of the points raised during negotiations may include:

  • Appointment of an arbitrator or mediator. What criteria or qualifications should the arbitrator or mediator have? Should you appoint one at the time of dispute or at the time of entering into the contract? What if you do not agree on the person? How long should be allowed for the appointment to take place?
  • Cost apportionment. Both mediators and arbitrators will charge fees. Should both parties split the costs? Or, in the case of the arbitrator, will the party whose favour the determination is made be exempt?

How we can help

Without clauses that encourage dispute resolution prior to going to court, the default position would be that the only option would be litigation.

Some parties may consider it is more reliable to have a judge consider the facts and for the law to be properly evaluated and determined in court, rather than rely on an industry expert who may or may not be familiar with the nuances of the law or contract.

Either way, seeking legal advice on your options while negotiating the contract is important.

For further information, please contact Olivia Chalmers in the corporate and commercial team on 01733 882800 or email [email protected].

Olivia Chalmers LLB, Partner

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