Hey, do you think that Dispute Resolution Clauses are in agreements for fun? I bet you think that dispute resolution clauses are one of those clauses that lawyers include in agreements to make them voluminous and justify their exorbitant fees.
What are Dispute Resolution Clauses (DRCs)?
Dispute Resolution Clauses (DRCs) are inserted in agreements by lawyers and are meant to serve as a voice of reason when business relationships go sour. Whilst DRCs are the last to be negotiated by parties, yet they are the most important because DRCs serve as a guide to parties on the path they are to take when there is a dispute, that is the forum or medium through which parties want their disputes to be resolved. For example, DRCs determine if disputes are to be decided by a Judge, a mediator or a panel of arbitrators. It may cover simple misunderstandings, major breaches such as non-compliance either willful or due to force majeure[1] or enforcement of contractual rights and obligations, etc.
DRCs are contractual provisions through which parties specify how their disputes are to be resolved, this includes negotiation, mediation, conciliation, arbitration, litigation, etc. However, different ADR mechanisms can be combined in a DRC.
Drafting Efficient Dispute Resolution Clauses
There are different types of DRCs, for instance, DRCs could range from simply drafted clauses to complex multi-tiered clauses (escalation clauses) designed to explore 2 or more available dispute resolution mechanisms.
In order to avoid difficulties and/ or delays in dispute resolution processes, DRCs should be clearly drafted, workable, reflect the intention of the parties and free from ambiguities. For instance, clauses that require parties to explore Alternative Dispute Resolution, with litigation as a last resort should set out the time frame within which parties are required to explore each dispute mechanism before the next mechanism is explored in the absence of settlement. Instances parties decide to explore arbitration, the arbitration clause should clearly spell out the seat and venue of arbitration, governing rules, choice of language, preferred number of arbitrators, etc. It is pertinent to state that poorly constructed DRCs could result in uncertainty and parties might end up applying to the courts to interpret the meaning of the DRC and its effect, which might result in parties resolving disputes through unintended means.
Some examples of DRCs are:
Simple Clauses
Upon written notice of any Dispute, the parties shall attempt to resolve it promptly by negotiation between executives who have authority to settle the Dispute and this process should be completed within 30 days.[2]
Or
The Parties will attempt in good faith to resolve any dispute or claim arising out of or in relation to this Agreement through negotiations between a director of each of the Parties with authority to settle the relevant dispute. If the dispute cannot be settled amicably within fourteen (14) days from the date on which either Party has served written notice on the other of the dispute then the remaining provisions of this Clause [ ] shall apply.[3]
Two-tier Clause
If a dispute arises out of, or in connection with this Contract, and the parties do not resolve some or all of the dispute through negotiation, then the parties agree to attempt to resolve the dispute through mediation, in accordance with the Terms of Mediation set out in Appendix to this Contract.[4]
Three-tier Clause
- If a dispute arises out of, or in connection with this Contract, and the parties do not resolve some or all of the dispute through negotiation, then the parties agree to refer the issue(s) in dispute to mediation, in accordance with the Terms of Mediation set out in Appendix to this Contract.
- If the parties do not resolve all of the issues in dispute through mediation, then within days from the date of the mediator’s report, the parties shall submit those issues to binding arbitration pursuant to the Commercial Arbitration Act and Commercial Arbitration Code annexed thereto (R.S.C. 1985, ch. 17 (2nd) as am.); and
- The parties agree to the specific Terms of Arbitration as set forth in Appendix to this Contract.[5]
An appropriate DRC should result in the speedy, effective and cost-efficient resolution of disputes and, if possible, preserve relations between the parties.
Peculiarity of Dispute Resolution Clauses
Although, Dispute Resolution Clauses form part of agreements, however, by their very nature, they are independent of the agreement. Such that if parties disagree as to the interpretation of the content of an agreement or enforceability of an agreement, parties are bound by the guidelines set out in the DRC. For example, if the DRC states that parties are to explore mediation at the Lagos Multi-Door Courthouse (LMDC) before a suit is initiated in Court. The above cited clause actually impedes any of the parties from seeking recourse in a Court of Law without first exploring mediation at the LMDC. If any of the parties files a suit in Court without exploring mediation first or one of the parties decides to file mediation proceedings at another mediation center apart from the LMDC, the opposing party can take legal action by filing a Notice of Preliminary Objection challenging the jurisdiction of the Court or by applying for a stay of proceedings pending when the agreed dispute resolution process is completed. Despite the above provisions, parties could agree to skip mediation and seek recourse in court. Also, the Lagos State High Court Civil Procedure Rules, 2019 require parties to attempt to resolve their dispute through ADR before a suit is filed in court[6] and failure to comply might attract sanctions.
Biodun is a Legal Practitioner, Chartered Secretary, a certified Mediation Advocate and a trained Mediator. She is an ADR Enthusiast and resolutely believes in the effective resolution of disputes and preservation of relationships. Email – abiodunogunnubi@gmail.com
Footnotes
[1] Also known as Act of God, it refers to unforeseen circumstances that could arise in the course of a contract to frustrate the performance of a contract. Examples are, natural disasters, riots, political unrests, war, pandemic, etc.
[2] Compilation of Sample Mediation Clause by the Alternative Dispute Resolution Committee of the New York Bar Association https://www2.nycbar.org/pdf/report/uploads/20073042-CompilationofSampleMediationClausesALTDIS442016.pdf accessed on 27th March, 2020,
[3] Example of an Alternative Dispute Resolution Clause https://ppp.worldbank.org/public-private-partnership/ppp-overview/practical-tools/checklists-and-risk-matrices/dispute-resolution-checklist-example Accessed on 27th March, 2020.
[4] DR Model Clauses and Agreements by Department of Justice, Canada https://www.justice.gc.ca/eng/rp-pr/csj-sjc/dprs-sprd/res/index.html Accessed on 27th March, 2020.
[5] DR Model Clauses and Agreements by Department of Justice, Canada https://www.justice.gc.ca/eng/rp-pr/csj-sjc/dprs-sprd/res/index.html Accessed on 27th March, 2020.
[6] Order 2, Rule 1 (v)