Every business has contracts of one sort of another and, for the most part, they do their job.

However, contractual disputes can arise quite easily and be damaging to the concerned parties’ relationships.

In this Q&A, Corporate & Commercial Trainee Hem Gujadhur answers your questions on dispute resolution clauses outlining what they are and how they can be used to mitigate disputes.

What causes contractual disputes?

Most commonly, contractual disputes arise where one party fails to carry out what they have promised to do under a contract, but they can occur for a wide variety of reasons.

Areas that might cause dispute include (but are not limited to):

• One party not completing the terms within the contract;
• The contract (or terms within it) not being in a single written document, and have instead been agreed orally or through emails;
• Where there is uncertainty within a contract regarding agreed terms;
• Where there is ambiguity as to whether certain terms and conditions apply;
• Implied terms in a contract; and
• Whether or not a contract has come into existence at all.

Even when a contract has been prepared to the best of both parties’ abilities, because of the uncertainties in language itself, disputes can still arise, and these will often be difficult to resolve and can be costly.

Related: What makes a strong business contract?

How to prevent contractual disputes

Although there is no way to completely prevent contractual disputes, both parties can do their best to decrease or mitigate the risk by properly and carefully drafting the contract terms and including a dispute resolution clause.

Including such a clause will allow both parties to be prepared for a dispute and set out steps to resolving the dispute. It also can prevent court involvement which can be costly and time consuming.

Whilst a dispute resolution clause may not be appropriate to all contract situations, it can be particularly helpful where there is a dispute about a technical, accounting or legal matter, where a third party can provide their expert input.

What is a dispute resolution clause?

A dispute resolution clause is one that sets out what should happen if the parties were to have a disagreement.

This constitutes of a mechanism to settle the issue before either party can go to court or terminate the contract. The dispute resolution process can fall into a number of categories, including:

• Referring the issue in dispute to a formal arbitration;
• Providing for the referral of the dispute to an independent “expert” who is given power to decide the issues
• An “escalation clause” so that the dispute, if not resolved, is referred to higher levels of management on the basis that the senior members of the teams will have powers to agree a resolution of the issue.

In any case, the clause should set out an agreed way for the dispute to be resolved, preventing the situation from worsening.

Do you need a dispute resolution clause?

No, having a dispute resolution clause in place is not required but we highly recommend it particularly for contracts involving technical issues, such as IT contracts and construction agreements.

It is also appropriate for confidential agreements, such as partnership agreements where the partners may want to keep details of their dispute private.

Like we’ve said, including this clause in the contract can diminish the risk of business relations breaking down completely between parties and disputes escalating too quickly since the dispute resolution clause will set out steps to resolve disagreements as they arise.

Related: The Importance of having a properly drafted partnership agreement

What makes a good dispute resolution clause?

A good and properly drafted dispute resolution clause will:

1. Specify clearly when it can be used, e.g. for a dispute involving the contract itself or circumstances in which the contract was agreed;
2. State the need to use the procedure and which one applies;
3. Deal with the appointment of any third party to be involved; and
4. Clarify how the costs of the procedure will be divided.

It is always the best policy to have a clear and unambiguous contract to avoid the need for disputes on the contract itself. For example, it should clearly show who can bring a claim in and in what capacity.

For this reason, the exact names of parties in contracts must be correct to ensure that in the event of litigation or a dispute, the court will not reject the claim on the basis of parties being unknown or unidentifiable.

It is also important that the most appropriate governing law and jurisdiction are included in the clause. If the client is based in the UK and operates primarily in the UK, the chosen court and governing law are likely to be one of the jurisdictions, such as England and Wales or Scotland, in the UK.

In the full article, Hem goes into much more detail on the legal nature of dispute resolution clauses, the risks of not having one and methods of Alternative Dispute Resolution (ADR). You can read it here.

Special business contract solicitors in Dorset

If you have any questions following this article, or would like some tailored advice on your business’ contracts and dispute resolution clauses, please don’t hesitate to get in touch with our bright team.

Our team have experience in drafting effective and legally sound contracts to include dispute resolution clauses that best reflect our clients’ interests.

You can call us on 01202 499255. We offer a free initial appointment for all new clients.

Alternatively, if you’re interested in our Careers, feel free to check out our Current Vacancies here. If there’s nothing for you, don’t be put off! We’d be happy to chat to you regardless. You can email our Operations Manager here.