If you trade using standard terms and conditions or if you enter into written contracts in the course of business, the chances are that the terms will include a dispute resolution clause. A dispute resolution clause is a clause setting out what will happen in the event of a dispute between the parties, and how they must go about trying to resolve it.

Often these kinds of clauses will be 'tiered', which means that they will provide first for one method of dispute resolution, for example mediation, and in the event of that failing, for one or more subsequent types, usually culminating in either litigation or arbitration as a last resort.

To illustrate, a tiered dispute resolution clause could state that in the event of a dispute arising, the parties have 30 days to resolve the dispute amicably through informal negotiation. In the event of no agreement being reached at the end of that time, the clause may require the parties to refer the matter to mediation. If the mediation fails, the clause could then stipulate that the matter be referred to litigation or arbitration.

The courts have considered the legal enforceability of such clauses on a number of occasions, and recently the High Court gave up to date guidance in the case of Wah & Another v Grant Thornton International Limited & Others [2012] EWHC 3198 (Ch). In that case, the claimants applied for an order that the decision reached by an arbitral tribunal had no effect because the tribunal had no jurisdiction to hear the claim, for the reason that the earlier procedures set out in a multi-tiered dispute resolution clause had not been followed.

The clause in question, which was in the agreement governing the relationship between the parties, set out a three tiered mechanism for the resolution of disputes between the parties. The first step was that disputes would be referred to the chief executive of the first defendant to try and settle the dispute amicably by informal conciliation. If the dispute was not solved within a month, it would then be referred to a panel of three board members who would have a further month to attempt to resolve it. Thereafter, if the matter was still not resolved or if at least one month had passed since the request for conciliation, the matter could be referred to arbitration.

Upon the dispute being referred to the chief executive, he indicated that he did not feel that he could act as an objective and impartial conciliator due to his previous involvement in the issues surrounding the dispute. Consequently, the first step of the dispute resolution clause could not be fulfilled. Attempts were then made to put together a three person panel, but no suitable persons put themselves forward, meaning that step two was also frustrated. The defendants therefore referred the dispute to arbitration in accordance with step three.

The claimants raised an argument that steps one and two in the dispute resolution clause were conditions precedent to any arbitral process (ie they legally had to be fulfilled before step three providing for referral of the dispute to arbitration could come into force), and that therefore the arbitral tribunal did not have jurisdiction over and hence had no power to determine the dispute. The tribunal rejected the claimants' argument and so the claimants applied for an application to that effect to the High Court.

The court dismissed the claimants' application and found that the tribunal was right in concluding that it had jurisdiction. The court held that the essential question to be determined was whether the dispute resolution clause's content was sufficiently precise and certain to be enforced. A clause lacking sufficient detail cannot be enforced. Hildyard J held that the clause in question was 'too equivocal in terms of the process required and too nebulous in terms of the content of the parties' respective obligations to be given legal effect as an enforceable condition precedent to arbitration.' He also found that the first and second steps could not be conditions precedent because that would mean that if the chief executive did not adjudicate or a panel could not be convened, no arbitration could be commenced, which was unworkable.

The case shows that the wording of tiered dispute resolution clauses must be very carefully considered so that the clause in question balances the parties' wishes with ensuring that the clause has legal effect and so can be enforced if necessary. Agreements to simply negotiate 'amicably' or 'in good faith' will be unenforceable because they are too vague for the court to be able to determine what should have taken place.

To have legal effect, dispute resolution clauses must state as precisely and clearly as possible exactly what the obligations are upon the parties at each stage, and what form each clearly defined process should take, including timeframes. They must not leave any room for ambiguity or require the court to 'fill in the gaps' in order to be able to properly construe it. Otherwise, the clause may well be held to be legally unenforceable and a party may be left with no option but to submit to litigation or arbitration proceedings from the outset, when this is precisely what the clause had been intended to avoid.