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Contractual relations are vitally important for any company, particularly as it grows in size. Whether you are talking terms with a new supplier or negotiating with a potential competitor, having your agreement down on paper in a contract is crucial. Sometimes, these relationships will go wrong. If that happens, you need to have clarity about how to resolve issues with the other party.

Every contract should have a dispute resolution clause that sets out the process for resolving any issues. This article will explain:

  • how a dispute resolution clause works;
  • whether you need one; and
  • what a good dispute resolution clause typically includes.

How Does a Dispute Resolution Clause Work?

A dispute resolution clause works by providing a process to follow in the event of a disagreement. A usual dispute resolution process involves:

  1. one party triggers a dispute resolution clause after being unhappy with the way the other party is working with them; 
  2. the clause provides for a third party to be brought in to assist with the process. This third party could be an independent mediator, arbitrator, or a neutral fact-finding body;
  3. the clause sets out a time frame for the third party to work with the two parties to resolve the dispute; 
  4. when the given time period is over, or if the parties include some other kind of conclusion to a dispute resolution process like a written agreement, the process comes to an end; and
  5. the clause will set out the option for a party who is not happy with the outcome of the process. For example, going to court.

Why Do I Need This Clause?

There are many reasons why you need a dispute resolution clause in any of your commercial contracts. The reality is that despite the good intentions from all parties involved, difficulties or differences of opinion often emerge in business relationships. Agreeing in advance on how to manage these kinds of issues makes it much easier to resolve them when they do arise.

Dispute resolution processes typically provide much lower cost and less time-intensive processes for solving problems and can save the parties from taking each other to court. Court is extremely expensive in comparison to dispute resolution processes, and also tends to destroy the relationship between the parties. Even when the circumstances are tense or unhappy, a dispute resolution process like the one described above has a higher chance of preserving a relationship compared to the court system.

Dispute resolution clauses are a common feature of commercial contracts and provides the other party confidence that they can work with you without needing to worry as much about problems emerging in the future.

What Does A Good Dispute Resolution Clause Look Like?

As there are many different types of contracts, a range of different dispute resolution clauses are best in different scenarios. However, a good dispute resolution clause typically:

  • defines the rights and obligations of the parties;
  • outlines the process the parties must follow in any kind of dispute or disagreement;
  • reflects the parties’ interests and their circumstances in a fair way; 
  • ensures the contract continues to be performed by both sides while they resolve their dispute;
  • addresses what happens if the dispute resolution processes are unsuccessful;
  • addresses whether the dispute resolution clauses would still apply if the contract is terminated; and
  • provides clarity about how the dispute resolution processes might be enforced, such as through the High Court. 

Types of Dispute Resolution

Within the broad category of dispute resolution, there are some different kinds of strategies or processes that you can consider using. Different experts in dispute resolution bring different strengths and skill sets to the table. Some of these include:

  • mediation;
  • conciliation;
  • arbitration; and 
  • expert determination.

Key Takeaways

A dispute resolution clause provides for the process for how to resolve issues with other parties, and what happens if they cannot be resolved. You need a dispute resolution clause to save yourself and your business from a much worse problem if there is a disagreement in the future. You want to avoid court and expensive lawsuits, and resolving the dispute amicably with the other party saves costs and helps preserve that relationship. If you want to know more about drafting a dispute resolution clause, contact LegalVision’s dispute and litigation lawyers on 0800 005 570, or complete the form on this page.

FAQs

Do dispute resolution clauses have to include anything in particular?

No, they can reflect almost any process you and the other party would like; but they have to be clear and reasonable. The key is providing certainty as to what happens in the event of a disagreement.

What are the most common types of dispute resolution?

Using mediators to mediate between the parties or an arbitrator to help produce a reasonable compromise in a dispute are the most common types of dispute resolution.

How does a dispute resolution clause save my business money?

Because it has a high chance of resolving any particular dispute, meaning that neither party would then take a lawsuit or go to court over a problem. That stage of disagreements is more serious and much more expensive than mediation or arbitration. 

Do my contracts legally have to have a dispute resolution clause?

No, they do not have to have one, but for the reasons covered above, these clauses are strongly recommended and extremely common in commercial contracts. 

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