Dispute resolution clauses and commercial contracts

Why include a dispute resolution clause in your commercial contracts?

Business disputes are an inevitable risk of commercial life. Whether that be a dispute over an unpaid invoice, an allegation that goods or services have not been provided in accordance with the agreed specification, or an argument over the meaning and effect of a commercial agreement.

When a dispute does arise, it is often an unwanted distraction for business owners. If it is not dealt with efficiently it not only results in resources being diverted away from operational decisions, but risks negatively impacting on commercial relationships and may result in financial loss and reputational damage.

One of the most effective tools to manage this risk is by including a dispute resolution clause in your commercial contracts. Such clauses allow parties to specify in advance how disputes are to be managed and what mechanisms are to be utilised to help them to resolve their dispute.

This has the clear advantage of ensuring that the mechanism to be deployed is one that has been agreed between the parties, rather than being one that has been imposed on them and it has been tailored so as to meet the specific commercial objectives of the parties to the contract.

What is a dispute resolution clause?

It is an express term of the contract that sets out the process for dealing with disputes arising out of that agreement.

This type of clause is intended to ensure that the parties have a pre-agreed mechanism for resolving disputes, which if properly implemented and adhered to, allows them to reach a commercial resolution without the need for time-consuming and expensive court proceedings.

Why include a dispute resolution clause in your contracts?

There are a number of commercial benefits to ensuring that a well-drafted dispute resolution clause forms part of your contract:

• Predictability and certainty: One of the primary benefits of including a dispute resolution clause is that it provides certainty. By specifying in advance how disputes will be resolved – whether through the use of court proceedings, arbitration, or alternative dispute resolution (ADR) mechanisms such as mediation – parties can avoid the uncertainty and procedural complexity that often arises when no such clause exists. This helps the parties to assess risk more effectively and plan their business strategies with greater confidence.
• Cost and time efficiency: Without a dispute resolution clause, parties may find themselves in prolonged legal battles over not just the substantive issue, but also the appropriate forum for resolution. By contrast, a well-drafted clause can streamline the process, reduce procedural wrangling and avoid jurisdictional challenges. For example, parties may agree to arbitration, which can be faster and less expensive than court proceedings, particularly in complex international contracts.
• Preservation of commercial relationships: In many business related disputes, seeking to preserve the business relationship between the parties is often as important as resolving the dispute itself. ADR mechanisms like mediation or expert determination, which are non-adversarial in nature, offer a more collaborative environment for resolving disagreements. Including such options in a dispute resolution clause can promote constructive dialogue and help maintain a working relationship between the parties.
• Jurisdiction and governing law: For international contracts, choosing the jurisdiction and governing law is crucial. English law is widely respected for its clarity, predictability and commerciality. By specifying that disputes will be resolved under English law and in English courts or by arbitration where the specified seat of the arbitration is England, parties benefit from a mature legal system with a strong track record in handling commercial disputes. This also helps prevent jurisdictional disputes, where each party argues that the matter should be heard in their own country’s courts — a costly and time-consuming distraction from the substantive issue at hand.
• Enforceability: Arbitration, when chosen as the dispute resolution mechanism, offers a further advantage: the enforceability of arbitral awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as the New York Convention). This means that arbitral awards issued in the UK can be enforced in 173 countries, giving parties greater confidence that the outcome of the dispute will have practical effect.
• Tailored dispute resolution processes: Dispute resolution clauses allow parties to tailor the process(es) to be employed, so that it best reflects their needs and desires. This includes choosing the number of arbitrators, the seat of arbitration, the language of proceedings and confidentiality provisions. This flexibility enables parties to design a process that aligns with the nature, value and complexity of their commercial relationship.

Boilerplate or a negotiated term of the contract

When negotiating a commercial contract, the focus of the parties is, for good reason, often on the terms that govern the day-to-day operation of the business partnership being created, such as price, specifications, delivery dates etc.

Less focus is often placed on clauses that are intended to govern what happens when things do not go to plan. This is completely understandable, but we would argue that it is equally important to consider these issues are the outset.

By doing so, the parties have the opportunity to provide certainly and devise a dispute resolution process that is tailored to the particular circumstances of the contract and their commercial interests. It is much better to agree a process in advance, rather than have one imposed on you later.

Factors to consider when drafting a dispute resolution clause

When drafting a dispute resolution clause, it is important that thought is given to the following issues:

• Scope: What types of dispute are intended to be covered by the clause? If the parties only intend the clause to cover a limited type of dispute arising under the contract, or want a different mechanism to apply depending on the nature of the dispute, then it is important that the clause expressly provides for this. It is important that clear and unambiguous language is used. Having gone to the effort of including a dispute resolution clause, the parties do not want to spend time and resources arguing about the meaning and effect of that same clause. Equally, if the intention is that the clause should apply to all disputes arising under the contract, then it is important that the wording adopted is wide enough to avoid the scope of the clause being unintentionally restricted. A dispute resolution clause that only refers to claims for breach of contract may omit valuable claims for negligence, breach of statutory duties and claims arising for pre-contractual statements.
• Trigger mechanism: How and when will the dispute resolution clause be triggered? Is it dependent on one party serving written notice on the other party and if so, how must that notice be given? Will email suffice or does written notice need to be sent in the post to a specific address, marked for the attention of a named individual and sent by a particular method of delivery? These are all issues that should be considered.
• Procedure to be followed: One of the primary reasons for including a dispute resolution clause is that it allows the parties to create a tailored route map for the resolution of a dispute. It is common for clauses to have a multi-tiered approach with a view to providing multiple opportunities for resolving disputes before the matter is escalated to a stage that requires a third party to resolve the dispute, whether that be through arbitration or court proceedings. For example, the clause may first provide for without prejudice discussions between named individuals in each business, followed by mediation. Only if those stages fail to result in a resolution, usually within a set time frame, are the parties then at liberty to issue court proceedings or commence arbitration proceedings.
• Compliance: It is important that the clause imposes an obligation on the contracting parties to follow the dispute escalation procedure provided for in the contract. This ensures that everyone understands what process needs to be followed, how and when. It is often beneficial to be as prescriptive as possible, to minimise the possibility for further areas of dispute. For example, if the parties agreed to mediate, then it may be important to provide for how a mediator is to be selected and what happens in the event that agreement cannot be reached. When a dispute arises, the parties want to focus on resolution, especially if the issue in dispute is time critical and therefore the more that has been agreed in advance the better.
• Governing law: It is important, especially when contracting with a business operating in another country, to decide what law is intended to apply to the contract. This is not something that should be left to chance. Parties ultimately benefit from having certainty.
• Jurisdiction: Thought should also be given to what court will have jurisdiction to resolve a dispute in the event that court proceedings become necessary. Often the decision is based on where the primary obligations under the contract are to be performed.
• Dispute resolution mechanism to be followed by the parties: When drafting a dispute resolution clause thought should be given to the method(s) of dispute resolution to be adopted and whether these should be binding or non-binding, or, as is usually the case, a mixture of the two. Forms of alternative dispute resolution that are non-binding (i.e. do not result in a final, binding outcome) including negotiation, mediation and adjudication. Binding forms of dispute resolution include expert determination, arbitration and traditional court proceedings. The different types of dispute resolution process, the differences between them and the advantages and disadvantages of each, will be the subject of a future article. As stated above, it is common for a dispute resolution clause to be multi-tiered by combining a chosen method of binding determination with one or more forms of non-binding process that enables the parties to resolve their dispute without the need for litigation or arbitration.

Enforceability

Dispute resolution clauses will be upheld by the court. If a party commences court proceedings in breach of a dispute escalation clause, the court will often stay (or pause) the proceedings pending the dispute resolution process set out in the clause being completed.

Conclusion

Including a dispute resolution clause in a commercial contract governed by English law should not be treated as a procedural nicety – it is a strategic tool that can save parties considerable time, money, and effort if a dispute arises.

It offers certainty, efficiency and flexibility, while also supporting the maintenance of commercial relationships. For these reasons, it should be considered best practice in the majority, if not all, commercial contracts.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Dispute Resolution team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.