Contractual disputes – how do you solve yours?

The Dispute Resolution Clause

Nobody wants to sit down and prepare for the worst to happen. Especially not at the start of an exciting new venture when the sun is shining and the grass has never seemed greener. What could possibly go wrong?

Well, speak to any litigation solicitor and they will tell you – “a lot”. Although some disputes are unavoidable, it is well worth putting in the thought at an early stage to ensure that, if the worst happens, there is a clear, mutually acceptable process in place to enable the parties to deal with disagreements. Enter the “Dispute Resolution Clause”.

The purpose of a Dispute Resolution Clause is to set out, in advance, how and where the parties to a contract wish to resolve a dispute if one arises. A well-drafted Dispute Resolution Clause will specify:

1. which country’s laws will govern the contract and any dispute arising out of it,
2. which forum(s) will deal with any dispute and which of those shall be binding upon the parties, and
3. what steps the parties must take before referring a dispute to a binding authority.

There is a broad range of options that parties can provide for and there is no one size fits all approach. In some cases a contract will simply provide that any dispute will be resolved by arbitration or by the Courts of a particular country. In other cases, the parties may choose to set out a series of escalating stages through which they will attempt to resolve a dispute before litigation or arbitration is started.

For example, a contract could provide that:

i. in the first instance the respective C.E.O.s of the parties will attempt to resolve any dispute through direct negotiations,

ii. if a negotiation does not result in a resolution after a certain period the parties will attempt to resolve the dispute through mediation, and

iii. only if a mediation is unsuccessful will either party be entitled to issue court proceedings.

The most important points to specify are which country’s laws will be applied in any dispute and the forum in which a dispute will ultimately be resolved, usually either litigation or arbitration. The choice of forum can have a significant effect on the costs and timetable involved in resolving a dispute as well as the extent of the steps the parties will be required to take as part of the process (for example the obligation to search for and disclose relevant documents to the other party). Serious thought should therefore be given to the most appropriate type of Dispute Resolution Clause for the particular situation and parties involved.

The Dispute Resolution Clause and Brexit

In our ever-changing political environment, the question as to whether to litigate or arbitrate or to place more emphasis on forms of alternative dispute resolution becomes more important than ever. One of the key factors which should be taken into consideration when agreeing a Dispute Resolution Clause is the question of how easy it would be to enforce any court judgment or arbitral award. This is particularly so for contracts with an international element. There is no point in a party obtaining any kind of award which they cannot enforce without a great deal of difficulty.

During the transition period for Brexit, the UK benefits from a harmonised EU legal system that includes cross-border frameworks in the areas of civil justice and judicial co-operation. Importantly, Regulation (EU) 1215/2012, known as the Recast Brussels Regulation, ensures that judgments from an EU member state are automatically recognised and enforced in other EU member states. Once the transition period is over at the end of 2020, unless the UK has negotiated continued application of the Recast Brussels Regulation, it will cease to apply.

However, all is not lost. The 2005 Hague Convention on Choice of Court Agreements will continue to apply to its signatories (which include EU member states (except Denmark), Singapore, Mexico and Montenegro) but it is only applicable where the parties have entered into an exclusive jurisdiction clause – and only where they did so after the 2005 Hague Convention came into force in their chosen state. In such cases, the judgment will be recognised and enforced by the courts in the other signatory states. If we are to place greater reliance on the 2005 Hague Convention in the near future, it is therefore very important to give consideration to the inclusion of exclusive jurisdiction clauses within contracts.

It is far less straightforward to enforce a judgment of the English Court outside the EU (notwithstanding Brexit) and the Commonwealth. Should it be likely that enforcement of a judgment is needed in, for example, the United States, parties would be wise to consider whether arbitration is a more appropriate forum. This is because The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) provides for an extensive enforcement procedure for international arbitration awards. The New York Convention has been ratified by 161 nations.

Finally, contracting parties may also wish to give consideration to factors such as flexibility, speed, privacy, and cost when choosing their route to resolution. Each of the methods available have their distinguishing features and their unique advantages and disadvantages.

If you require further information about anything covered in this briefing, please contact Blue Elliott or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2020