If your business is growing, you are likely to need new contracts. Perhaps you are embarking on a new venture with a business partner, finalising valuable negotiations with an important supplier or expanding your customer base with a new product or service. All of these business decisions require contractual relations between you and the other party. If you are drafting contracts, you will need to make sure you consider what happens if something goes wrong. This article will explain why having a dispute resolution clause in your contracts with major partners and suppliers is key to protecting your business. 

What Is a Dispute Resolution Clause?

A dispute resolution clause is a written understanding between you and the other party specifying what should happen in the case of a disagreement. The agreement will form part of your contract and set out steps to resolve issues before they escalate. Including a dispute resolution clause can prevent you and your business partners resorting to suing each other, which can be an expensive and lengthy process. Below, we set out the key clauses that a dispute resolution clause could include. 

Communication (Notice)

A good dispute resolution clause may require you or the other person or business to inform the other of an issue in a certain way. 

For example, the clause could require a formal email or letter to be sent before taking more serious action.

Formal communication, also known as ‘notice’, can be very useful to start open discussions to resolve the problems raised.

Providing clear written communication can also be very helpful later if the issue escalates. If you end up in court, you may need to demonstrate any steps you took to try to resolve the dispute before commencing legal proceedings.

Open Discussions (Negotiation)

A dispute resolution clause may require you or the other party to organise a meeting where you can both openly raise any concerns and negotiate a solution to the problem. This approach is meant to promote collaborative problem-solving, as you can usually make offers or statements with no risk of them being used against you in court. These negotiations might just be between you and the other party in the dispute, but they can also involve or be solely undertaken by legal representatives.

Facilitated Discussion (Mediation or Arbitration)

Some dispute resolution clauses go a step further than open discussions by requiring an independent third party to: 

  • facilitate a discussion between you (known as mediation); or 
  • organise a panel to make a joint decision (in arbitration).

Before the process begins, you should agree on:

  • who will be involved and how will they be chosen;
  • how quickly the discussion or process must be commenced;
  • how the discussion or dispute resolution process should run; 
  • whether it will be binding or parties will be able to take court action if the outcome is not satisfactory; and
  • how you and the other party will share the costs.

Timing and Location of Legal Proceedings (Litigation and Jurisdiction)

A dispute resolution clause will often try to delay or limit the ability of each party to sue until a certain time. 

For example, you might only be able to sue once a number of days had passed after either party took or attempted a certain step in the process.

More importantly, the dispute resolution clause may also dictate where you can sue each other. It will do so by stating that the laws of one state or country apply to the legal contract. If your business operates in a different location to your partner or suppliers, you should make sure that it is clear where legal proceedings will take place if a dispute arises. 

Why Does It Matter?

A well-drafted dispute resolution clause can save you a lot of time and money. Generally, resolving a dispute with fewer formal steps will be both quicker and cheaper. Additionally, taking a collaborative approach allows for flexible problem-solving.

Without a dispute resolution clause, a dispute might be more likely to go to court. Going to court draws out the dispute resolution process and increases costs for everyone. The time and money you might waste in court would be better spent on growing your business or planning to prevent future issues.

Will It Damage Our Relationship?

With any legal contract, it is important to face the reality of doing business. Not everything goes to plan. Unfortunately, even the closest of business partners can sometimes fall out. If the business relationship truly matters to both parties, preparing for all eventualities is sensible.

Ultimately, agreeing upon an amicable way to resolve a dispute demonstrates a close working relationship. Having a dispute resolution clause shows that you are both willing to take steps to get back on track.

Key Takeaways

A dispute resolution clause is an important part of planning for your business’ future. A strong clause can help you to resolve disputes quickly and cheaply without going to court. Your dispute resolution clause should set out how you should raise and deal with issues. It should also clearly state the location of any legal proceedings. If you need help with drafting a dispute resolution clause, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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