How to build a dispute resolution clause

In this article, we have a look at some of the important aspects that must be kept in mind when drafting dispute resolution clauses.

Most disputed terms WCC ranking: 

20

Most important terms WCC ranking: 

Not ranked

Most negotiated terms WCC ranking: 

30

What is a dispute resolution clause?

Dispute resolution clauses provide how a disputes under the Agreement must be resolved.

These clauses come in different shapes and sizes and it is up to the Parties to decide which processes to follow when it comes to disputes.

As a first step, the Parties need to decide if a court process will be followed or an alternative process (for example mediation followed by binding arbitration).

Why consider an alternative dispute resolution process

One of the reasons the Parties may want to consider an alternative process is with the aim to keep the Parties out of court. More specific reasons include:

  • When a Court process is followed, confidentiality surrounding the dispute may be of concern. Parties, therefore, opt for arbitration proceedings with stricter rules surrounding confidentiality.
  • Generally, arbitral awards are considered more enforceable and a large number of Countries have, for example, adopted the New York Arbitration Convention.
  • The Parties may agree on specific rules for appointing experts/arbitrators. If disputes may be of a technical nature, having an expert with relevant experience in the industry may be beneficial. 
  • Arbitration/expert determination may provide for a speedier process.

Building blocks of a dispute resolution clause

The building blocks of a dispute resolution clause

Alternative dispute resolution

Point of departure

The above diagram illustrates an extensive dispute resolution process. There is, however, no need to make use of all the different dispute resolution mechanisms. Even if the Agreement does not stipulate anything about alternative dispute resolution, it is still fine, and disputes will be resolved according to the usual court process.

Good faith negotiations

The purpose of good faith negotiations are to get the Parties taking to each other to see if they can settle a dispute without further processes. There is no obligation to settle a dispute during good faith negotiations; however, the Parties need to at least give an honest try as a good faith negotiation clause usually provides the parties must attempt to negotiate in good faith.

Escalations

For larger contracts for which contract managers are assigned, the Parties often want to make provision for various levels of escalations before a dispute goes to the next step of the dispute resolution process.

For example:

Level 1: Escalation to the Steering Committee

Level 2: Escalation to the Dispute Board

Level 3: Escalation to Senior Execs

Mediation

Mediation is generally a non-binding process, and there is no obligation to follow a mediation process unless the agreement specifically provides so. The Mediator will hear both sides and make recommendations.

The mediation process differs from one mediation association to the other. And each association has their own rules concerning its process.

Parties may opt to include certain provisions within the mediation clause that relates to legal representation, fees and costs and the place of mediation.

Expert determination

An option being adopted more often these days are experts’ determination of certain disputes. 

Expert determination usually only relates to specific disputes within the expert’s expertise.

There is no obligation on a Party to use expert determination as a form of dispute resolution unless it is specifically stipulated in the Agreement. The terms of reference for the expert determination are usually contained within the dispute resolution clause and may include:

  • How the expert will be appointed
  • Role and powers of the expert
  • Fees and disbursements relating to the expert determination
  • Representation and attendance at the determination
  • Obligations of Parties
  • The status of the expert determination

Arbitration

Arbitration is often the only way disputes that may arise under the Agreement can be resolved. However, using arbitration to resolve disputes is again not a must unless the Agreement specifically provides the Parties need to use arbitration.

In most jurisdictions, there are arbitration associations to assist in resolving disputes.

These arbitration associations will generally have their own rules and processes that must be followed. Therefore, it is important to indicate which arbitration association will be used to resolve the dispute and which rules will apply.

The arbitration clause will usually refer to:

  • Number of arbitrators
  • Qualification of the arbitrators
  • How the arbitrators will be appointed
  • Where the arbitration will take place
  • Legal representation
  • How fees and disbursements of the arbitration will be dealt with
  • What is the status of the finding of the arbitrators
  • Whether or not there is a right of appeal

Governing law

There is a difference between where dispute resolution will take place and which laws will apply to the Agreement. The governing law clause provides which law will apply to the Agreement.

Unless the Customer and the Provider are located within different legal jurisdictions, the governing law is usually not a problem. However, if the Customer and the Provider are located in different legal jurisdictions, make sure that the Agreement is clear which law applies to the Agreement.

Interim relief

A Party may require immediate relief to avoid further serious consequences due to a breach of the Agreement by the other Party. For clarity, and in such an event, the dispute resolution clause will usually determine that a Party will not be prohibited from seeking interim relief despite the dispute process per the Agreement.

Confidentiality

An advantage of alternative dispute resolution is that the Parties can agree to keep the proceedings confidential. Confidentiality provisions within your dispute resolution clause can help limit reputational damage that a Party can sustain due to the proceedings.

Court process

Exclusive jurisdiction

By selecting a specific governing law does not mean that disputes will be resolved by Courts within which the selected governing law applies.

The Parties may opt for the exclusive jurisdiction of Courts within a specific Country. The Courts within this selected Country will then need to apply the selected governing law.

Waiver of jury trials

Certain jurisdictions still have jury trials, even for business disputes.

Generally, Parties prefer to waive their rights to a jury trial when resolving business disputes.
There are arguments for and against opting out of jury trials, and each transaction must be evaluated independently.

Waiver of class actions

Class action waivers are not binding in all legal jurisdictions. So firstly, make sure what the position is within the relevant jurisdiction.

If a waiver is possible, note that there are pros and cons relating to class action waivers. Accordingly, each transaction needs to be evaluated on its own merits, considering the effects of class action proceedings on the Parties’ rights when it comes to disputes.

Example clause

1.           DISPUTE RESOLUTION

1.1        Dispute resolution:  A dispute under this Agreement must be resolved as follow:

(a)          Notice of Dispute:  Should at any time a Party assert that a exists between the Parties that Party may submit a written notice (“Notice of Dispute”) to the other Party specifying:

(i)           the nature of the dispute that has arisen;

(ii)          the areas of expertise it considers are required to resolve the dispute;

(iii)         the major issues for determination, and

(iv)        the relief or outcome being sought.

(b)          Notice of Response:  Within 10 days of receipt of the Notice of Dispute, the other Party shall provide a written response (‘Notice of Response’) stating their position in relation to the dispute, including:

(i)           a statement of the areas of expertise it considers are required to resolve the dispute;

(ii)          any additional issues that should be referred for determination; and

(iii)         any comment on the relief or outcome referred to in the Notice of Dispute.

1.2        Good faith negotiations: After receipt of the Notice of Response or after 10 days of receipt of the Notice of Dispute (whichever is the earliest), the Parties must attempt to negotiate in good faith the dispute for at least 7 days.

1.3        Escalation:  If the dispute is not resolved within the period provided for good faith negotiations, either Party may escalate such dispute by providing written notice (the “Escalation Notice”):

(a)          Steering Committee:  The dispute will be referred to the Steering Committee for resolution, which will in good faith attempt to resolve the dispute within 7 days from the date that the dispute was referred to them.

(b)          Designations of executives:  If the dispute is not resolved by the Steering Committee, each Party must designate an executive (with authority to make commitments that would resolve the dispute) which will in good faith attempt to resolve the dispute within 7 days from the date that the dispute was referred to them.

(c)          No further action:  Except to the extent necessary to prevent irreparable harm or to preserve rights or remedies, neither Party shall institute any further action until the period for escalation has come to an end.

1.4        Mediation:  If the dispute is not resolved within the period stipulated above the Parties must attempt mediation administered by ABC in accordance with the abc rules:

(a)          Notice of mediation:  Either Party may call for mediation by written notice to the other.

(b)          Appointment of mediator: 

(i)           The Parties may agree to appoint a particular person as the mediator.

(ii)          Failing agreement between the Parties, the mediator must be appointed in accordance with the abc rules.

(c)          Place of mediation:  The mediation will be held in Johannesburg, South Africa.

(d)          Legal representation:  The mediation shall be held without legal representation.

(e)          Fees and disbursements:  The Parties shall share equally in the fees and disbursements relating to the mediation.

(f)           Role and powers of the mediator: 

(i)           The mediator shall convene a hearing of the Parties.

(ii)          The mediator may hold separate discussions with any Party and shall assist the Parties in reaching a mutually acceptable settlement of their differences through means of reconciliation, interpretation, clarification, suggestion and advice.

(iii)         The mediator is authorised to end the mediation process whenever in their opinion further efforts at mediation would not contribute to a resolution of the dispute between the Parties.

(g)          No further action:  Except to the extent necessary to prevent irreparable harm or to preserve rights or remedies, neither Party shall institute any further action until the mediation process has come to an end.

1.5        Expert determination:  If the dispute is not resolved during the above process, and if the dispute relates to technical aspects concerning the Products,technical aspects concerning billing and accounting,technical aspects concerning the SaaS, or technical aspects concerning the Software such dispute shall be referred to expert determination:

(a)          Appointment of expert: 

(i)           The Parties may agree to appoint a particular person as the expert.

(ii)          Failing agreement between the Parties, either party may request the Bryan Habanna to appoint the expert.

(b)          Role and powers of the expert:  The expert will:

(i)           act as an expert and not as an arbitrator;

(ii)          act independently of, and act fairly and impartially as between the Parties, giving each party a reasonable opportunity of presenting their case and countering any arguments of any opposing party, and a reasonable opportunity to make submissions on the procedure or the expert determination;

(iii)         proceed in any manner they think fit;

(iv)        determine whether it is appropriate to co-opt legal or other technical expertise to assist their coordination of the dispute;

(v)         conduct any investigation which they consider necessary to resolve the dispute;

(vi)        examine such documents, and interview such persons, as they may require; and

(vii)       make such directions for the conduct of the expert determination as they consider.

(c)          Fees and disbursements: 

(i)           The expert shall provide the Parties with an estimate of the fees and disbursements in the expert determination.

(ii)          Unless otherwise agreed by the Parties, the Parties shall provide the expert with a security deposit in a form acceptable to the expert in the amount of the estimate.

(d)          Representation and attendance:  During any conference or any stage of the expert determination, the Parties may wish to be represented by a legal representative and other persons with information or knowledge relevant to the expert determination.

(e)          Obligations of Parties:  The Parties shall take all reasonable steps for the expeditious and cost-effective conduct of the expert determination.

(f)           Determination of expert:  The determination of the expert:

(i)           must be in writing, accompanied by reasons,

(ii)          in the absence of manifest error, be final and bind the Parties; and

(iii)         is not an arbitration within the meaning of any statute.

(g)          Payment of interest:  Unless otherwise agreed by the Parties the expert determination may include the payment of interest on any monetary component of the expert determination in such amount as the expert may determine.

1.6        Arbitration:  If a dispute cannot be resolved during the above process, and provided that the dispute must not be resolved under Section 1.5 (Expert determination),  the dispute must be submitted to mandatory, binding arbitration administered by XYZ in accordance with the xyz rules:

(a)          Notice of arbitration:  Either Party may call for arbitration by written notice to the other.

(b)          Number of arbitrators:  The arbitral panel shall consist of 3 arbitrators.

(c)          Qualification of arbitrators:  The arbitrators must:

(d)          Appointment of arbitrators: 

(i)           The Parties will jointly appoint the arbitrators.

(ii)          Failing agreement between the Parties, the arbitrator must be appointed in accordance with the xyz rules.

(e)          Seat of arbitration:  The place of arbitration will be Johannesburg, South Africa.

(f)           Legal representation:  The Parties may make use of legal representation.

(g)          Fees and disbursements:  The Parties shall share equally in the fees and disbursements relating to the arbitration.

(h)          Judgment:  Judgment on an arbitration award may be entered by any court with competent jurisdiction.

(i)           Right of appeal:  The arbitrator’s decision will be binding on the Parties to the arbitration at the date of the arbitrator’s ruling, and there will be no right of appeal.

1.7        Confidentiality:  The Parties will treat as confidential and not disclose to any third-party details of the dispute submitted to the above proceedings, the conduct of the proceedings or the outcome of the proceedings without the written consent of the other Party.

1.8        Continued performance:  Each Party must continue performing their obligations under this Agreement while a dispute is being resolved except when the issue in dispute precludes performance.

1.9        Governing law:  All disputes under Article 1 must be decided in accordance with the law of the Laws of South Africa.

1.10     Language:  Any dispute resolution proceedings under Article 1 must be conducted in English.

1.11     No suspension of contractual obligations:  The referral of a dispute to proceedings under Article 1 does not suspend the contractual obligations of the Parties under the Agreement.

1.12     Binding nature of dispute resolution provisions:  The provisions under Article 1 will be binding on the Parties despite any expiration, termination, or cancellation of this Agreement.

1.13     Interim relief:  The provisions under Article 1 does not limit either Party’s right to provisional or ancillary remedies from a court of competent jurisdiction before, during, or after any proceedings contemplated under Article 1.

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The Author

Martin Kotze is a commercial lawyer with over 10 years of experience. He specialises in transactional work within the Tech, Financial Services and Property industries. 

He is also one of the co-founders at DocNinja and regularly advises listed companies to small and medium enterprises on how to contract better with their customers. 

Martin Kotze

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