Dispute Resolution Clauses: The Kevin McCallister Clause of Commercial Agreements

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Table of Contents

• Meeting Between the Parties
• Mediation
• Litigation

In any commercial arrangement, it is important to think about what might happen when things go wrong. Of course, nobody likes to think in worst case scenarios – everybody hopes that their business, startup or project will be successful. But if parties don’t pay attention to the mechanics of how to resolve any dispute, you might find yourself not only out of pocket but litigating in a different state. Below we take a look at key points to consider when drafting your dispute resolution clause.

Meeting Between the Parties

It’s a simple fact of commercial life that not everything goes according to plan. However, rather than fire off that angry email or retain a lawyer to commence proceedings, your commercial agreement should contain a mechanism whereby authorised representatives of each organisation come together to seek to resolve the issue at hand. A properly worded clause may provide the following:

• Party A provides written notice of the issue to Party B;
• Party B responds to the written notice within a period;
• The parties meet on what’s known as a ‘without prejudice’ basis in an attempt to resolve the dispute, i.e., the parties can discuss the matter freely without fear that any concession may be held against them;
• If the matter can be resolved, the parties agree in writing the steps to be taken.

Of course, not all disputes can be resolved amicably. More often than not, a third party is required to act as a decision maker or facilitator to help the parties find a compromise. So, what are your options?

Mediation

In addition to the meeting between the parties, or indeed, as an alternative, a well-drafted dispute resolution clause may specify a form of mediation. Mediation is a relatively informal process by which the parties agree to use a third party – either an independent legal practitioner or industry representative – to assist the parties to identify the issues in dispute and, ideally, to reach a compromise.

Most Law Societies will offer a mediation process. If both parties are in, for example, Victoria, then it is natural to use a mediator based in Victoria and to have the mediation take place in Victoria. Where the parties are based in different states, the commercial agreement should specify where the mediation will be held. Factors to consider when deciding where a mediation should take place include:

• The location of the corporate parties;
• The location of the services provided under the commercial agreement if that location is different from the location of the corporate parties;
• The location of any relevant stakeholders or witnesses. For example, the commercial agreement may relate to a project in the Pilbara whereas the parties may be based in Queensland and New South Wales.

There is no need for the dispute resolution clause in your commercial agreement to specify the precise form of the mediation. However, mediation in accordance with a state Law Society will mean that you agree to be bound by the rules of that Society’s mediation process. While the particularities of the mediation process are outside the scope of this article, as a general rule, if the parties agree to resolve the dispute at mediation, the parties will enter into a binding agreement.

However, what happens if even after mediation, the parties cannot resolve their differences?

Litigation

Litigation is the dispute resolution mechanism of last resort. A well-drafted dispute resolution clause will make it expressly clear that any meeting between the parties or mediation process does not prejudice a party’s right to commence legal proceedings. Of course, there are a number of issues to be aware of when it comes to deciding where to litigate and the law of the contract. We will discuss both of these questions in a separate article.

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In short, your commercial agreement must consider the possibility that things will go wrong. By having a clause that outlines a dispute resolution process – whether by way of informal meeting between authorised representatives or mediation or both – you will have a degree of commercial certainty. Litigation should only ever be a last resort – and not without consulting your lawyer first! If you have any questions, get in touch with LegalVision’s dispute resolution team by calling us on 1300 544 755 or by filling in the form on this page.