Is the dispute resolution clause enforceable?

Disputes are often far from the minds of the parties at the time of entering into an agreement.

Everyone is excited about the new opportunities brought by the new agreement and the new relationship and are quick to dismiss the possibility of any disputes arising.  A few months or years down the track and the story may be very different.

In the unfortunate event that a dispute arises, how is it to be resolved?  What have the parties agreed in the dispute resolution clause and is the clause effective and enforceable?

Recent cases in Australia and England have highlighted potential issues that may arise from poorly drafted dispute resolution clauses.  This alert briefly considers the potential risks and drafting questions to consider as well as tips for drafting effective dispute resolution clauses.

Dispute Resolution: Potential Risks 

The avoidance of disputes is often the parties' primary consideration.  Resolving issues through negotiation or mediation may prevent issues from escalating unnecessarily. 

For this reason, dispute resolution clauses often flow through a series of options starting with negotiation then mediation before a dispute is referred to arbitration or litigation.  Expert determination may also be included where the contract involves technical or construction issues or valuation issues that are more appropriately resolved by an expert.

Potential risks that may arise are:

  • What happens if one party refuses to play the game or does not comply with the mechanisms in the dispute resolution clause?
  • Is the clause enforceable? 
  • Can that party be forced to go to mediation? 
  • What if that party commences court proceedings in breach of an arbitration clause or in breach of an exclusive jurisdiction clause? 
  • How can the parties prevent forum shopping, parallel proceedings and the risk of inconsistent and conflicting decisions?

Much depends on the drafting - are the terms sufficiently clear and certain to be given legal effect?  Many issues can be resolved if the agreement contains a carefully drafted dispute resolution clause that accurately reflects and clearly delineates the parties' intentions.

Otherwise, the parties may find themselves embroiled in costly and time-consuming litigation about the dispute resolution clause itself, delaying the resolution of the dispute and exposing a dispute that otherwise may have been kept confidential between the parties.

Drafting Questions to Consider

The drafting of a dispute resolution clauses is often done at the "11th hour", hence it is commonly referred to as the "midnight clause".  A boilerplate clause may be pulled off the shelf, or quickly drafted without any discussion with a specialist dispute resolution or litigation lawyer.

Drafting an effective dispute resolution clause requires some consideration: 

  • What options would be suitable for the particular agreement?
  • How do I choose between the options available for the resolution of disputes?
  • Should the parties agree to retain the right to choose one of those options at the time a dispute arises?
  • What remedies can be obtained?
  • Will the remedy be enforceable, if necessary?

For example, a remedy obtained from the Australian courts pursuant to a jurisdiction clause in an agreement between an Australian and a foreign party may not be enforceable against the assets of the foreign party because the courts of the foreign party will not enforce an Australian judgment.

More importantly, however, there may be an issue as to whether the clause provides a dispute resolution process that is sufficiently certain or whether it is simply an agreement to agree that is unenforceable.  A clause that provides a process that is sufficiently certain and demonstrates an unambiguous commitment to commence a process, the steps of which can be clearly determined and sufficiently defined, is usually enforceable.  The clause must specify the minimum required by the parties to participate in the process and how the process may be exhausted or terminated.

A clause that requires further agreement of the parties, such as whether to go to expert determination or arbitration, may be found to be an agreement to agree and thus, not enforceable.

Tips for Drafting Effective Dispute Resolution Clauses

The key tips for drafting an effective dispute resolution clause are:

  • keep it simple yet ensure there is sufficient detail for it to be enforceable; and
  • ensure there are no internal inconsistencies or conflicts between the options included in the clause.

Specific considerations for the dispute resolution options commonly used by parties are considered below.

Negotiations

An agreement to negotiate in good faith is in general not enforceable but may be enforceable in the context of a dispute resolution clause.

The parties may agree one or more rounds of negotiations: between the managers, authorised representatives an/or at the executive level.

Most importantly, the clause must include time limits for the negotiations to avoid protracted or unproductive negotiations.  The time limits enable the parties to move to the next stage if an amicable settlement cannot be reached.  The parties can always agree to extend the time limits if a settlement is imminent.

Mediation

A mediation clause that is sufficiently certain and does not require further agreement by the parties for the mediation to proceed is enforceable.  At a minimum, it should specify:

  • the process for appointing a mediator, either by agreement and/or an appointing authority;
  • the process for termination of the mediation, including time limits if, for example, a settlement is not reached within say 30 days of referring the dispute to mediation.

Parties may adopt mediation rules, such as the ACICA Mediation Rules.

A vague mediation clause that simply provides that the parties will mediate or will seek to resolve the dispute by mediation may be uncertain and unenforceable. 

Expert determination

The parties may agree to refer certain issues to expert determination.  The clause should stipulate:

  • the specific issues to be determined by the expert;
  • the process for the appointment of the expert, either by agreement and/or an appointing authority;
  • the process for the expert determination, such as how submissions and information are to be provided to the expert;
  • how the expert is to issue a decision - time limits? reasons?
  • whether the decision is binding or non-binding; and
  • how the costs are to be divided between the parties.

An expert determination clause that leaves the process open or requires the parties to agree on further matters before they can proceed may be found to be uncertain and unenforceable. 

Arbitration

The key advantage of arbitration is enforcement.  An arbitral award can be enforced in one of nearly 150 States that are party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, provided that it has been made in one of those States.

An arbitration clause or agreement may also be enforceable.  The clause should be kept simple stating:

  • the arbitral rules to be applied - e.g. ACICA, ICC, SIAC, HKIAC, LCIA, UNCITRAL Arbitration Rules
  • the number of arbitrators to be appointed - one or three
  • the seat of the arbitration - e.g. Sydney, Singapore, London
  • the language of the arbitration - e.g. English

The parties may, for example, consider providing for confidentiality, interim measures, and/or the joinder of parties and consolidation if there are more than two parties to the agreement or more than one agreement in the transaction.  Such clauses are optional and often already provided for in the applicable arbitral rules or arbitration law.

Arbitration precludes the parties from referring the dispute to the courts.  A jurisdiction clause in the agreement providing that the parties have submitted to the jurisdiction of the courts, may render the arbitration clause uncertain and ineffective and thus, unenforceable.

Parties may include an "option clause" if they want to reserve the right to refer the dispute to the courts.  The clause needs to be carefully drafted and must include a time limit in which the option may be exercised - that time limit must be early in the proceedings, such as before a response to the notice for arbitration is filed. 

Option clauses are not enforceable in all jurisdictions so careful consideration must be given if this is the path the parties want to take.

Litigation

If the parties choose to refer disputes to the courts, then they need to consider:

  • Which court is the most convenient forum?
  • Should the court have exclusive or non-exclusive jurisdiction?
  • Should the parties waive any rights to raise forum non conveniens arguments?

If a dispute resolution clause is ineffective and unenforceable then the parties are likely to end up in the courts.  That court is often chosen by the party commencing the claim.  If the other party commences proceedings in a different court then there is a risk of parallel proceedings and conflicting judgments unless an anti-suit injunction can be obtained to stay one of the proceedings.

Conclusion

In short, give careful consideration to drafting dispute resolution clauses to facilitate a speedy resolution of the dispute, maintain some control over the dispute resolution process and prevent a dispute arising about the scope and meaning of the clause itself.