A dispute resolution clause sets out how parties to a contract will resolve disputes. It is common for parties to overlook these clauses in negotiations, dismissing them as ‘standard form’ or just another ‘boilerplate’ term. In reality, however, these clauses create valuable contractual rights and impose obligations on parties to resolve their disputes in a certain way – this can significantly influence the outcome of a conflict, and ultimately, the commercial relationship.
What Should a Dispute Resolution Clause Say?
A dispute resolution clause should clearly outline the method to resolve disputes.
For example, it is sensible to consider the following questions:
- Will it have to be mediated in the presence of a mediator?
- How will the mediator be chosen?
- Will this occur in the jurisdiction of party A or party B?
- When will a decision become enforceable?
It is typical for dispute resolution clauses to provide for alternative dispute resolution (ADR) methods to avoid the expensive, time-consuming court processes that too often end up damaging the commercial relationship. ADR methods include negotiation, mediation, conciliation and arbitration. Mediation and arbitration, in particular, have become popular inclusions in dispute resolution clauses.
Why Do You Need Well-Drafted Dispute Resolution Clauses?
It is critical to draft a dispute resolution clause correctly to ensure the purpose and effect are made clear. Otherwise, the parties are at risk of the clause being deemed too uncertain and therefore unenforceable.
The Victorian case of WTE Co-Generation v RCR Energy Pty Ltd  VSC 314, considered the uncertainty of a dispute resolution clause. In this case, the clause stated, “in the event the parties have not resolved the dispute then within a further seven days, senior executives representing each of the parties must meet to attempt to resolve the dispute or to agree on methods of doing so.”
The Court concluded that this clause failed to define a method for resolving disputes, and it provided no particulars for how to go about resolving a dispute. Therefore, it was void for uncertainty because it provided no more that an ‘agreement to agree’ on a method.
What Will a Well-Drafted Dispute Resolution Clause Include?
A good dispute resolution clause will include:
- The chosen method of resolving the dispute, such as mediation or arbitration;
- How the method should be carried out, for example, if a third party will be involved, how the third party/mediator will be selected, and where it will take place;
- The key dates and timeframes for resolving the dispute to ensure it is evident when each stage ends, and when the parties can seek to resolve the matter outside of the contract.
A dispute resolution clause should avoid:
Anything that may constitute as an ‘agreement to agree’
Such clauses are likely to be ineffective and too uncertain to be enforceable (see above in WTE Co-Generation v RCR Energy Pty Ltd).
Using the phrase ‘in good faith’ without actually outlining any requirements that parties must meet
While it may seem illogical to state seemingly obvious matters in a clause, you should never assume that a matter is self-evident. The High Court alluded to this issue in Electricity Generation Corporation v Woodside Energy Ltd & Ors  HCA 7 when interpreting the phrases ‘best endeavours’ and ‘reasonable endeavours’. This case also highlights the importance of consistently using the same standard to avoid ambiguity.
Being too restrictive
The parties should be allowed to circumvent lengthy dispute resolution methods in some cases, for example where a party requires interlocutory relief (to compel or prevent a party from doing certain acts so as to maintain the status quo, pending a decision).
In the process of drafting and negotiating a contract, parties should always turn their mind to the dispute resolution clause, and consider whether it provides an adequate and clear method for resolving issues. It is worthwhile discussing these clauses with your lawyer and determining what the parties involved wish to achieve.
If you need assistance with drafting or negotiating a contract, or have any questions about a dispute resolution clause, get in touch with our experienced contract lawyers on 1300 544 755.