Dispute Resolution Clause

What is a Dispute Resolution Clause and Why Do I Need One?

A dispute resolution clause is an important feature of a contract as it outlines the procedure parties to resolve the conflict.

Why have a Dispute Resolution Clause? 

As mentioned earlier, a dispute resolution clause is useful to limit the pressure on parties as they resolve any disagreements. This is because while they try to come up with a resolution, they will have a path already mapped out that they have both agreed to in the contract. This will avoid hasty decision-making by a frustrated party to commence litigation, therefore, saving both time and money. Additionally, taking a diplomatic approach and following the procedure set out by the dispute resolution clause has a greater likelihood of maintaining the relationship between the parties. This is because the methods typically ordered by dispute resolution clauses involve a greater level of communication, understanding and compromise.

What should a Dispute Resolution Clause Include? 

Define Dispute

Dispute resolution clauses will need to first identify what a dispute means to provide greater clarity for parties when determining whether their issue warrants the operation of the dispute resolution clause. A dispute can be a disagreement of the payment or the quality of the services executed as per the contract. 

Notice 

Next, it will outline the method of notice provided by the party with the concern to the other party. Notice of an issue could be provided through a formal letter or an email or any other method prescribed by the contract. Not only is this step useful to ensure that both parties are aware of the issue, however, it may later be relied on in court to demonstrate that the parties made steps to address the problem. 

Good Faith 

It is also worth stating that any methods of dispute resolution must be entered into in good faith by both parties. This will encourage honesty and open mindedness leading to an equally beneficial outcome for the two.

Methods Prescribed by the Clause

Negotiation

A dispute resolution clause will commonly provide that parties should first attempt negotiating with one another before they move to other methods of dispute resolution. During negotiations, they will raise their concerns, discuss their interests, and make offers to resolve the situation. This has the benefit of being an unofficial procedure between the parties, lessening pressure. Any offers or statements made during the negotiation will remain unenforceable in court. However, as mentioned earlier, this will also be effective if the two parties participate in negotiations in good faith and genuinely seek to come up with an equally beneficial arrangement. 

Mediation/ Arbitration 

The next method dispute resolution clauses will prescribe is either mediation or arbitration where an impartial third party will preside over any negotiations occurring between the parties. The third party will assist discussions between the two parties and come up with a settlement agreement. This benefits the parties as it will avoid costly litigation and can protect commercially sensitive information from being released to the public. Dispute resolution clauses will often provide for a step by step approach so if a mediation session is unsuccessful, the clause may prescribe arbitration next or may prescribe for parties to go straight to litigation. Additionally, clauses prescribing mediation or arbitration should include details regarding the time frame allowed for the process and how the costs for the sessions are to be distributed between the parties. 

Litigation 

If these previous steps prove unsuccessful, then the next step would be to commence legal proceedings. Dispute resolution clauses can include requirements as to how legal proceedings are to be commenced such as by prescribing the jurisdiction where a business operates in multiple places. 

Benefits 

Dispute resolution clauses are an effective way of future proofing parties interests. They outline the steps to be taken if a conflict arises between parties, providing clarity and flexibility whilst coming up with a resolution. However, these clauses cannot be simplified. They will depend on the individual circumstances. Therefore, to ensure its effectiveness in protecting the interests of parties, a lawyer should assist drafting a dispute resolution clause.

If you need assistance with a dispute resolution clause, get in touch with us via the contact form or by calling 1300 337 997.

About Jennifer Andrade

Jennifer is a legal content writer with OpenLegal, with a particular interest in employment, contract and copyright law.