A dispute resolution clause can serve an important role in specifying alternative dispute resolution methods for the resolution of issues arising from a contract. Alternative dispute resolution can reduce the costs associated with disputes and provide the parties with greater certainty as to their rights and the steps to be taken to enforce those rights.
Typically, such clauses restrict the commencement of litigation until after the parties have exhausted the process specified by the clause. Such clauses also allow the parties to specify who they want as a mediator, expert, or arbitrator of disputes, opening up the possibility of using individuals who are familiar with the subject area of the relationship.
A further potential benefit of a dispute resolution clause is that a dispute can be resolved in private without public litigation and reported cases. This is particularly attractive where the parties wish to keep their relationship secret.
There are also disadvantages to dispute resolution clauses. These include the potential inability to appeal the decision of an expert- whereas a court’s decision can often be appealed on a number of legal grounds. Further, if a dispute involves complicated questions of law and fact, it may be more suitably dealt with by a court.
What if a dispute resolution clause is missing
If a dispute resolution clause is missing, the parties will need to look to negotiate or litigate the resolution of disputes arising from the contract. As noted above, in some circumstances this may be preferable.
Drafting considerations
When drafting a dispute resolution clause, the parties should carefully consider the processes to be followed, the potential costs of each steps, the timelines involved, and the scope of the operation of such a clause. For example, a dispute resolution clause may be restricted to apply to particular disputes i.e. the pricing of components or to cost recovery as opposed to applying to all disputes however arising from or in connection to the contract.
