Drafting enforceable dispute resolution clauses

Debate often surrounds the negotiation and enforceability of alternative dispute resolution (ADR) clauses that provide for mediation or conciliation prior to arbitration or the commencement of court proceedings.

The High Court’s recent decision in Wah v Grant Thornton International Limited emphasised the importance of precision in drafting to ensure alternative dispute resolution clauses can be enforced before proceeding to court should difficulties arise.

The court’s decision
Generally speaking, neither English or Scots law recognises an agreement to agree (such as an obligation to negotiate amicably) as being enforceable. On its own, such an obligation is too imprecise to impose a contractually binding obligation. This means that ADR or dispute escalation clauses have to be carefully drafted in order to be enforceable.

In Wah, Judge Hildyard explained that the Courts have to balance giving effect to what the parties agree and ensuring that what the parties have agreed is capable of being given legal effect. In order to be enforceable the clause must sufficiently detail the process to be invoked and the parties’ obligations.

The ADR clause in Wah detailed an ADR procedure for resolution of any disagreements, which comprised an escalation procedure and arbitration.

Although lengthy, the High Court held that the pre-arbitration escalation clause was not a valid pre-condition to starting arbitration proceedings because the process was not sufficiently defined and was vague in terms of the parties’ respective obligations. In particular, it did not detail the nature of any attempts to resolve any disagreements, or what the escalation representatives were required to do.

Where an ADR clause is silent or does not specifically prohibit a party commencing proceedings (whether in court or artbitration) prior to the conclusion of certain clearly specified events (such as the completion of a multi-tiered escalation process), then either party can commence those proceedings at any point. In Wah, the ADR clause was not considered a condition precedent and therefore the arbitral tribunal had jurisdiction to hear the claim notwithstanding that the escalation process had not been completed.

Drafting tips
This case highlights the importance of negotiating clear ADR clauses when drafting contracts.

  • Any ADR clause should clearly detail the process to be followed before court or arbitration proceedings can be instigated.
  • The parties should consider how the clause will apply in practice and consider if the process detailed in the agreement is workable.
  • If the ADR clause includes expert determination, then the parties should ensure the powers given to these appointed experts are sufficient to resolve any potential issues. A failure to provide the expert with the relevant powers could result in the clause being held as unenforceable and case progressing to the courts.

Resolving agreements to agree
It’s also important to remember that a dispute resolution procedure cannot always resolve a dispute if the underlying clause in the contract does not give sufficient guidance on what is required.

Agreements to agree are often inevitable in complex, long term commercial or outsourcing contracts. Sometimes during contract negotiations it is suggested that if during the term of the contract the parties are unable to reach agreement on an agreement to agree then the clause should state that the matter should be “resolved in accordance with the dispute resolution procedure”. Whilst this sounds great in principle, it may not work in practice. An escalation procedure may help focus and resolve areas of commercial disagreement. If, however, the process ultimately concludes with reference to an expert, arbiter or court, then it may not provide a satisfactory resolution unless the contract provides the expert, arbiter or court with a clear basis on which to make its decision.

For example, if the contract contains an agreement to agree (such as an obligation to negotiate and agree in good faith) in relation to the charges that a supplier may impose in the event that a contract is extended, then if the expectation of the customer is that the charges will not be any higher than those currently imposed, then the original clause should clearly state this and provide the expert, arbiter or court with a clear set of rules or principles upon which it is expected to make its decision.

If the contract doesn’t provide sufficient guidance on how the issue in dispute is to be resolved, then the outcome may not be the one that you are expecting – the expert, arbiter or court may consider that it is unable to resolve the dispute, leaving you in a deadlock, or (perhaps even worse) issue a decision that is not what you were expecting.

Martin Sloan

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