Dispute Resolution Clauses: an Overview
15 January 2021
15 January 2021
This guide highlights the key considerations that should be borne in mind when drafting dispute resolution clauses.
For detailed guidance on the drafting of the clauses themselves, see the following Quickguides:
Dispute resolution clauses are often relegated to the end of contractual negotiations; or are dismissed as "boilerplate" and given standard wording without any thought as to the context. But these clauses can have profound implications for how any dispute is resolved and the contractual rights and obligations enforced.
Is the dispute to be decided by a panel of arbitrators or by a judge? Will it be heard in England, in Europe, or in another part of the world? Will the dispute resolution method take months or years, and can it then be appealed? Will it result in a judgment that can be easily enforced or something that will need further litigation before it can be translated into monetary value? The answers to these questions can radically affect the outcome of a dispute and can make a difference in how a dispute is resolved that may be worth many thousands of pounds in costs.
These questions are answered by looking at the dispute resolution clause in a contract. Dispute lawyers turn to such clauses as the very first step in examining a dispute: these, together with the governing law clause, are the basic rules of engagement in any dispute. Any contract negotiator must view dispute resolution clauses in this light when sitting down to negotiations. Simply because they are at the end of a contract by custom does not mean that they should be relegated to the end of the list of important provisions.
This guide looks at the issues to consider when drafting dispute resolution clauses.
The dispute resolution clause should be clearly drafted and unambiguous. The English courts will endeavour to give effect to the parties' agreement on how they wish to resolve their disputes, but if such agreement is not clear because the clause has been poorly drafted, parties could find themselves in a different forum to the one they chose.
A distinction should be drawn between the governing law clause and the dispute resolution clause. The former deals with the substantive law governing the agreement. The latter sets out the forum in which the parties want any disputes arising under the agreement to be resolved. Although distinct, these principles are often confused and uncertainties arise when both governing law and choice of forum for disputes are dealt with in the same clause. As a matter of best practice they should be dealt with separately.
As a point of categorisation, the expression "dispute resolution clause" refers to the contractual provisions by which parties specify how their disputes are to be resolved: this includes arbitration, mediation and reference to litigation through the courts (commonly referred to as a "jurisdiction clause"). As such, a jurisdiction clause is simply another species of dispute resolution clause and should only be included where parties want a particular court (or courts) to decide a dispute. It should not be included where an alternative forum for dispute resolution is preferred.
When drafting the dispute resolution clause, the first decision to make is which forum to choose for the resolution of any dispute arising under the agreement. There are several options and parties can either elect one forum or a combination of different forums. The common starting point is deciding whether court litigation or arbitration is more appropriate. This requires an understanding of the advantages and disadvantages of the different forums as, in each case, the transaction will be better suited to one or the other. Below is a general guide to the differences, but does not take into account jurisdictional impact (dictated by choice of seat and court) which will also need to be considered.
Generally speaking, arbitration awards are easier to enforce than court judgments. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the "New York Convention") provides an extensive enforcement regime for international arbitration awards. Most industrialised nations are signatories (see the UNCITRAL website1 for a list). There is no real equivalent for enforcement of court judgments.2 As such, ease of enforcement will usually depend on the reciprocal arrangements in place between the jurisdiction of the court giving judgment, and the state in which you want to enforce that judgment.3
There is much greater scope for the parties to adapt procedures to the needs of a particular dispute in arbitration than in court. In arbitration, parties are generally free to agree a suitable procedure, hold hearings in a neutral country, and appoint arbitrators who are of a different nationality compared to the parties. Arbitrators can also be empowered to decide a dispute under different substantive and/or different procedural rules than the rules which a court is compelled to observe.
In many jurisdictions court trials are open to the public save in the most exceptional circumstances and, unless the court orders otherwise, court documents and judgments are publicly available. In comparison, arbitration hearings are held in private and the documents produced and awards issued are generally confidential. Commercial secrets and "dirty linen" need not be exposed in public – although in some disputes there may be an advantage to have the dispute heard in the public arena, eg to put pressure on the opposing party or to create precedent for later cases. Where parties are choosing arbitration for privacy reasons they should include an express confidentiality provision in the arbitration agreement or procedural order as attitudes to confidentiality vary in different jurisdictions.
Court procedure often permits the joinder of relevant parties to a dispute so all aspects can be resolved in one hearing. It also permits the consolidation of related actions, for example, where they all arise in respect of related contracts. Although arbitral institutions have revised their rules to permit joinder and consolidation, an arbitral tribunal will not have the power to order a third party which is not a party to the arbitration agreement to join an arbitration without the consent of that third party. This means that where there are multiple parties and multiple agreements there is a risk of parallel proceedings and inconsistent outcomes. Provision for joinder and consolidation in arbitration can be made but requires careful consideration and drafting beforehand.
In many jurisdictions the quality of the judiciary is top-class and so the judgment given is sensible, correct and justifiable. The quality of an arbitral tribunal may be more variable given the freedom of the parties to choose arbitrators (though there are many top-class arbitrators throughout the world as well). Arbitral tribunals also lack the "safety-check" afforded by an appeal system.
If a dispute is likely to raise technical or scientific issues of fact, arbitration permits the parties to choose a tribunal with the relevant technical expertise. Depending on the nature of the (likely) dispute this can have great benefits compared to a court where you may have a trial before a judge who has no such knowledge and has to have explained at length (and cost) what would otherwise be a "given".
It used to be said that arbitration was quicker than litigation. However, this has become less accurate with the increasing involvement of lawyers in arbitration, together with the difficulties in convening a three-person tribunal. The process has now slowed down to a similar pace as that of the courts. However, if there is an appeal of a court judgment, arbitration will be significantly faster than litigation given the fact that there is little possibility of appealing an arbitration award (see below on finality of decision).
Arbitration has no equivalent of the summary judgment procedure often available in litigation - where a claimant or defendant can apply for a quick determination without a full hearing. Having said that, arbitral institutions are increasingly providing for summary disposal/early determination in their rules. In contrast, the courts are usually happy to determine matters at an early stage – whether by way of preliminary issue or summary judgment. Therefore, if claims are likely to be straightforward and are indisputably due, court proceedings may be preferable.
The circumstances in which an arbitrator's award can be appealed is generally very limited. In contrast, a first instance court judgment can be appealed relatively easily in most jurisdictions, involving more delay, cost and uncertainty.
In international contracts there can be a perceived disadvantage in having a dispute referred to the "home" court of a counterparty, particularly if the counterparty is a state entity. Arbitration permits the parties to refer their disputes to a neutral forum. In addition, the consensual nature of arbitration means that the parties can ensure that the composition of the tribunal, as well as the seat of the arbitration and the location of any hearing, are neutral.
Arbitration is often perceived as being cheaper than litigation but this is now rarely the case. The fact that parties are not required to pay for the judge's time and the hire of the court, and the availability of procedures such as summary judgment, mean that court litigation can be cheaper. However, in arbitration flexible and more cost efficient procedures can be agreed, although this is dependent on the parties co-operating.
There is more scope for a party to delay matters in arbitration: arbitral tribunals' coercive powers are much more limited than that of a court and, generally speaking, judges tend to be less tolerant of such behaviour and more robust in imposing sanctions.
An arbitration award is for most purposes confidential to the parties. Furthermore, although persuasive, it does not give rise to any binding precedent or res judicata vis à vis other parties. Where, therefore, a final and generally binding ruling on the meaning of a standard form contract is required, court litigation will be preferable.
A jurisdiction clause should be included where the parties want all disputes arising under their agreement to be determined by a particular national court or courts. A party expressly submitting to the courts of a particular jurisdiction will find it difficult to argue that those courts are not the appropriate forum for the trial of disputes.
The issues to consider when drafting a jurisdiction clause include the following:
Jurisdiction clauses should always be expressly written into the contract; it is vital that a contract clearly records the parties' agreement to a particular jurisdiction. Do not leave it to invoices sent after the contract has been concluded, or fall into the trap of allowing the parties' standard terms to be swapped thereby practically guaranteeing a "battle of forms" argument over whose terms - and exclusive jurisdiction clause - apply.
See our Quickguide: Jurisdiction Clauses for more detail.
As with all contract clauses, to introduce a "standard" arbitration clause into all contracts can be unhelpful since there is no such thing as a "standard" contract or a "standard" dispute. Rather, the parties should consider whether there are any matters that the clause ought to address in the particular circumstances.
These basic elements should be included in an arbitration clause.
The following may also be relevant depending on the circumstances.
For more detailed guidance see our Quickguide: International Arbitration Clauses.
Traditionally the main choice for dispute resolution was arbitration or litigation. However, the last few years have seen contracting parties become more creative in their adaptation of these forums. Parties are now choosing more cost-effective, efficient and bespoke ways of dealing with their disputes and are catering for this in their contracts. Dispute resolution clauses are, as a result, becoming longer and more complex. If drafted clearly and with thought they can ensure that disputes are resolved in a way that best supports the commercial interests of the parties. If not, parties can find themselves in delayed and protracted proceedings in the forum they were particularly keen to avoid.
What follows is a brief overview of the principal mechanisms being used and drafting pointers.
The term "split" or "hybrid" clause covers a variety of hybrid dispute resolution clauses, the most common being a clause which provides for both court jurisdiction and arbitration coupled with a mechanism allowing one or both parties the right to determine the procedure once a dispute arises. Such clauses tend to be used when one party has a superior bargaining position, the stronger party utilising the clause to optimise its position in any given dispute. So, for example, the clause would provide that disputes are to be resolved in the English High Court but with Party A also being permitted to elect that the dispute in question be referred to arbitration.
Such clauses are increasingly appearing in financing agreements, in particular international derivatives and loan transactions with counterparties in jurisdictions where English court judgments may not easily be enforced. They have the obvious advantage of allowing the stronger party to control where any proceedings are to be commenced, the usual choice being between arbitration or litigation.
Caution should be used whenever such a clause is considered. Although valid as a matter of English law other jurisdictions may take a different approach. In some jurisdictions split clauses may be deemed invalid on the basis that they do not provide a proper reference to arbitration (where only one party has the right to refer the matter to arbitration) or they are unfair and against public policy (given that they strongly favour one party). If your contract incorporates a split clause check the governing law of the contract to make sure that it recognises their use and validity and also check the law of any relevant jurisdiction, for example, any jurisdiction where enforcement of any judgment or award might be sought.
When drafting such clauses clarity is essential. Also consider carefully how the clause is to operate. It is important to set out clearly the precise circumstances in which the option may be exercised and the extent of control of the stronger party. For example, is the stronger party to have an effective right of veto so that if the other party commences proceedings in the specified forum, the stronger party can then step in, have those proceedings stayed and proceedings commenced in their choice of forum?
Expert determination is a form of alternative dispute resolution whereby the parties to a contract ask an independent expert to give a binding decision on a dispute. If the clause is drafted properly and used in the right circumstances expert determination can offer an efficient and cost-effective means of settling a dispute. It is typically used for disputes of a technical nature or where a valuation is required.
Generally, expert determination clauses operate wholly on a contractual basis. The parties can choose who they want to deal with the relevant issue and the exact confines of the expert's authority without interference of the courts. However, there may be no legislative back-up as there is for arbitration (for example, the Arbitration Act 1996 supports arbitrations in England and Wales but there is no equivalent for expert determination). As a result the process is often much quicker and much cheaper than litigation or arbitration. The downside is that there are very limited grounds on which an expert's decision can be appealed; if the expert gets it wrong the parties are stuck with the decision. An expert's decision is also not enforceable in the same way as an arbitration award or court judgment. Enforcement often has to be by way of fresh proceedings for breach of contract.
These issues can be dealt with by careful drafting. Of all the dispute resolution clauses an expert determination clause requires the most care and tailoring to the specific circumstances. See our Quickguides on Expert Determination (UK and Australia versions) for more detail.
Structured negotiation and/or mediation provide contracting parties with alternatives to arbitration and litigation offering faster, less expensive and more flexible methods of dispute resolution. Mediation, a process whereby a neutral third party (the mediator) tries to "broke" a settlement agreement between the parties, is particularly successful in assisting parties in dispute to avoid costly litigation or arbitration. It is becoming more common for these methods to be provided for by inclusion in a tiered dispute resolution clause (also referred to as a "stepped" or "escalation" clause). Such clauses allow a claim to be escalated in stages. For example, a typical stepped clause would provide for negotiation at different levels within each party's business, mediation and then litigation or arbitration. If drafted carefully they can provide parties with a commercial and cost-effective dispute resolution mechanism. Conversely, poor drafting can add an extra layer of bureaucracy and, at worst, leave parties without proper recourse to the courts or arbitral tribunal.
Further guidance on drafting these clauses can be found in our Quickguide: Tiered Dispute Resolution Clauses.
Transactions will often involve a suite of documents. Where that is the case, those drafting the contracts should consider the overall dispute resolution strategy. In particular, is there to be consistency throughout the documents as to where disputes should be resolved? While consistency is preferable, often it will not be possible. In those circumstances care needs to be taken as difficulties can arise when disputes fall under more than one contract. In particular:
Risks can be minimised by thinking about the dispute resolution strategy at the transaction stage. In particular, think carefully where you want any disputes which go to the heart of the transaction to be heard. That choice should then be inserted into the main contracts and this will assist in ensuring that disputes that could potentially fall under several of the contracts will be heard in that forum. Alternatively, and particularly if arbitration is used, consider drafting an umbrella agreement which clearly sets out the position as to where any disputes which go to the heart of the transaction should be heard.
Whatever forum for dispute resolution is chosen, parties should also give thought as to whether they need to provide for an address for service or whether the contract requires a sovereign immunity waiver clause.
An address for service clause is basically a clause which provides that when a dispute arises, proceedings are to be served on a particular address. Such clauses are advisable if disputes are to be resolved in a particular court and one or more of the parties resides outside the court's jurisdiction. If not, time can be lost in ensuring that valid service is effected outside the jurisdiction once a dispute arises. Where arbitration is the chosen forum an address for service is not essential but is still highly recommended for practical purposes so that both parties know where they are to serve proceedings in the event a dispute arises. It can also assist should recourse to the courts be necessary (if the address is within the court's jurisdiction).
If one of the parties is a state or state entity then a waiver of sovereign immunity clause is required in order to ensure that any judgment or arbitral award can be enforced. If the contract relates to an investment in the state, consider whether investment treaty protection is available. See our Quickguides on State Immunity and International Investment Protection for more detail.