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In most contracts, it is wise to make sure you include a dispute resolution clause. While certain contractual terms are more obvious as to why they require more stringent drafting, most people are quick to include dispute resolution clauses as another ‘standard form’ or ‘boilerplate’ term. 

The reality is that these clauses are essential to: 

  • protect a party’s rights in the event of a breach of contract or a breakdown of party’s rights; and
  • ensure parties follow steps to attempt to resolve the dispute before they can issue court proceedings.

It may not be the most exciting clause to include, but it is not a clause to be simply overlooked. This article will explain why. 

Why Do You Need Well-Drafted Dispute Resolution Clauses?

A well-drafted dispute resolution will be clear and concise about the purpose and the methods of resolving the dispute. Often parties will include sample clauses for dispute resolution. However, these sample clauses will not properly consider:

  • your business and overall industry;
  • the particular disputes that might arise in your specific contract;
  • what the best methods of resolving the dispute are; and
  • any administrative concerns associated with the contract, such as timing.

Additionally, if the clause is drafted too loosely, or it has not properly covered the methods for resolving a dispute, the clause might be held to be unenforceable. 

For example, if a dispute resolution clause merely states that parties have to ‘attempt to resolve the dispute’, the clause will not be enforceable due to uncertainty. There needs to be a clearly defined method of resolving disputes, not just a suggestion that parties need to try.

Therefore, it is best practice to have a well-drafted dispute resolution clause. If not, you risk spending extra time and money to dispute the interpretation of a poorly worded clause.

What Should You Include in a Dispute Resolution Clause?

The main function of a dispute resolution clause is to explain the procedure for resolving disputes arising out of the contract. Generally, a good dispute resolution clause will include:

  1. a requirement that an aggrieved party give the other party written notice about the breach/issue;
  2. options and processes for negotiating between the parties;
  3. further escalation to facilitated negotiation with the assistance of a third party (mediation or arbitration); and
  4. restrictions on commencing proceedings until previous steps have been taken.

You can find out more about what you need to include in a dispute resolution clause here.

Alternative Dispute Resolution

Typically, the dispute resolution clause will include methods of alternative dispute resolution (ADR). These methods are used to avoid having to take your contract dispute to court, incurring unnecessary time and costs. ADR is also beneficial for resolving your dispute without affecting the commercial relationship between the parties. Methods of ADR include:

  • conciliation;
  • negotiation;
  • mediation; and
  • arbitration.

The dispute resolution clause should be quite clear on the ADR methods used to resolve the dispute. Not every method of dispute resolution is the same, and you should be unambiguous about which method is best suited for the situation between the parties.

Each method of ADR will also have details that you will need to address in your clause. For example, if you wish to include mediation as a method of dispute resolution, you should be clear on all aspects of the mediation, including but not limited to:

  • whether it will be conducted in the presence of a third party or mediator;
  • the method for choosing the mediator;
  • which jurisdiction the mediation will be considered in; and
  • when will a decision be made, and what are the steps to enforce a decision.

What Should You Avoid in a Dispute Resolution Clause?

In line with best practice, well-drafted dispute resolution clauses should avoid uncertainty and ambiguity. The following table provides examples of clauses that should be either avoided or amended.

Terms, phrases or concepts to avoid

Reasons to avoid them and how to re-word the clauses

‘Agreement to agree’
OR
Parties must ‘make an attempt’ to resolve

Clauses such as an ‘agreement to agree’ or requirements to ‘make an attempt’ to negotiate will lack certainty and enforceability. You will need to follow up those types of clauses with clear steps of dispute resolution and any potential ADR methods. 

Assumptions regarding dispute resolution

Clauses should not be assumptive of parties’ intentions or expectations. Whilst the requirement to negotiate ‘in good faith’ can be an enforceable clause, you should follow it up with a series of standards and requirements that each party must abide by.

Inconsistent wording

If a particular standard or requirement has been agreed upon, you should try to be consistent with the wording and avoid using similar or inconsistent terms. For any terms or wording that may be potentially ambiguous, it may be good to include a definition of the term in the definitions section of your contract.

Clauses that limit dispute resolution options

A good dispute resolution clause should not limit your options to resolve the situation out of court. The clause should also not prevent you from taking action against a party if there is urgency arising out of the situation. For example, if an employee is threatening to disclose confidential information.

Key Takeaways

A well-drafted dispute resolution clause is an important way to protect your business and your commercial relationships. However, they often parties do not consider them properly as they account for situations that people hope never occur. It is always good practice to hope for the best and prepare for the worst. In the event that you need to rely on the dispute resolution clause, you want to make sure you can resolve your disputes as quickly and efficiently as possible. If you need help with drafting a dispute resolution clause, or any aspect of drafting or reviewing your contracts, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is it important to have a well-drafted dispute resolution clause?

A well-drafted clause will be clear and concise about the purpose and the methods of resolving the dispute. This is important because if the clause is drafted too loosely or has not properly covered the methods for resolving a dispute it might be unenforceable. 

What is the benefit of alternative dispute resolution?

Alternative dispute resolution (ADR) methods are used to avoid having to take your contract dispute to court, wasting time and money. Additionally, ADR is beneficial for resolving your dispute without affecting the commercial relationship between the parties.

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