Alternative dispute resolution (ADR) clauses now appear in almost every type of commercial agreement. Below, we explain the common traps in ADR clauses and how they can best be avoided.
A well-known challenge in drafting an ADR clause is that when it comes time for parties to utilise the clause, it is phrased in such a way that it is unenforceable. In the hurry to reach agreement on the substantive clauses of a contract, parties often do not properly turn their minds to future potential disputes. ADR clauses may be a last minute boilerplate inclusion.
Vague ADR clauses lacking clear processes and steps for the conduct of the dispute resolution mechanism are at risk of being considered mere agreements to agree. All the parties may have done is agree that they will agree in the future on how to commence an ADR process once a dispute materialises. Such clauses are meaningless and unenforceable (WTE Co-Generation & Anor v RCR Energy Pty Ltd & Anor  VSC 314).
So, how do you avoid making an agreement to agree?
Outline with precision
Specify clear steps for how the ADR process will unfold. For example, you should specify the minimum involvement for party participation in the process as well as a definite end point to the process. That is, when will the process be considered to be exhausted or complete, and when are the parties able to terminate and how?
Take care with tiered clauses
Parties often prefer the option of tiered ADR clauses as a means of outlining the dispute resolution process. These clauses (also known as 'stepped' or 'escalation' clauses) are usually a series of steps which parties are to undertake until the dispute is resolved. For example, a tiered ADR clause might provide that parties are to attempt to resolve the dispute by informal discussions, and in the event that these discussions fail, to proceed to formal mediation. Tiered clauses are particularly useful in disputes involving long term commercial relationships, as they provide further opportunities for parties to resolve the dispute without destroying the relationship.
However, in using tiered clauses, parties should bear in mind that these clauses may not function well in practice and may create uncertainty. Further, these clauses can be found to be conflicting or internally inconsistent. In the case that you decide to refer all disputes to arbitration, then including another clause which permits an application to be made to the Court for injunctive relief can be found to create internal inconsistency unless carefully drafted (Seeley International Pty Ltd v Electra Air Conditioning BV  FCA 29 (29 January 2008)).
Tiered clauses may lead to a lengthier dispute resolution process, as parties are required to undertake a number of processes or steps before a final resolution can be achieved. Further, tiered clauses can result in significant expense for both parties if the clause does not safeguard against delay. A tiered clause should provide a sufficiently clear time limit on the engagement by parties in each dispute resolution process as well as the time within which parties must progress to the next step. It is also important that the clause specifically outlines how the ADR process can be brought to an end.
Goal: Quick, cheap and efficient resolution
ADR clauses can provide quick, cheap and efficient avenues for resolving contractual disputes. However, these clauses are only effective when proper consideration is given to the mechanics of the dispute resolution process.
Next time, we'll explore the following issues:
- whether it is always desirable to include an ADR clause
- whether all types of disputes can be appropriately referred to ADR
- which types of disputes are best suited to mediation, arbitration and expert determination respectively.