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Dispute resolution provisions in commercial contracts

Michael Evans

Parties to commercial contracts often try to minimise the risk of litigation by agreeing to alternative dispute resolution measures. It is important for the alternative solutions to fit in with each other if the regime is to be effective. A recent decision of the High Court has highlighted once again the importance of good drafting.

What are the main alternatives to litigation?

Escalation: any dispute between the individuals managing the contract on behalf of the parties may be referred upwards for resolution to senior managers of the parties. This is a common sense measure and has a number of benefits. The first benefit is that it concentrates the mind: managers may prefer to avoid their superiors being brought in to resolve what they themselves have not been able to resolve (and so persist until they find a solution themselves, rather than having to admit defeat and passing the problem up the line).  In some cases, senior managers may actually have greater discretion to compromise over a disputed matter. Senior managers may have less emotional involvement in the dispute and be more objective. Senior managers may have less time to invest in pursuing the dispute (and may be more aware of the possible consequences of failing to resolve the dispute quickly).

Even though escalation is a normal and common sense way for disputes to resolve themselves, it helps to have a formal process of escalation set out in the contract, giving either side a right to invoke this as a next stage, setting out how it is to be invoked and agreeing a clear timetable for the process.

Mediation: the mediation process involves an independent mediator seeking a resolution between the parties. As with escalation, it requires the agreement of both parties to resolve the dispute, and if successful, is usually concluded with a ‘mediated settlement agreement’ signed by and binding on both parties. The mediator’s skill as a trained neutral facilitator lies in helping each party identify areas of possible compromise and their ‘bottom line’; in theory mediators should not themselves express any views on the merits of each party’s case, but focus on helping bridge the differences between the parties by exploring their objectives in confidential discussions, testing the realism of their positions, and enabling them to marshal their negotiation tactics. Although the preparation and review of position papers beforehand can be a time-consuming process, the mediation itself rarely goes beyond one day.

Expert determination: while escalation and mediation require the parties to reach an agreement, expert determination leaves the final decision on a dispute to an independent expert, which is binding on all parties to the dispute. Similar in some ways to the arbitration process (see below) it is particularly useful in circumstances where an independent, expert and objective assessment is needed of something which is quantifiable. Typical examples are determination of a fair rent, or determination of fair value for shares in a company where is no free market for those shares.

Expert opinion is sometimes sought (and provided for in the contract) as to interpretation and assessment of whether a contractual obligation has been met by a party, especially where the field is a technical one. Typical examples include whether a software developer has produced work which meets the functional specification in the contract, or whether goods supplied meet appropriate quality standards.

Unlike arbitration or litigation, there is no statutory framework for expert determination. If the expert follows the procedures set out in the contract, and the provisions are well drafted, the decision will be binding on the parties and courts will not consider appeals unless there is a claim of fraud or bias against the expert.  There are some instances too where a decision has been challenged because it was felt not to be clear enough. There is no structure for decisions of experts to be enforced in other jurisdictions, unlike the decisions of courts or arbitrators.

Arbitration: a form of resolving disputes by one or three (or even more) independent arbitrators, taking into account all the relevant aspects of the dispute. The underlying basis of arbitrations is one of contract – of the parties agreeing to submit to arbitration and to be bound by the decision. The agreement will specify certain details (such as the number of arbitrators and the method of their selection) and may invoke a set of rules to govern the process of arbitration, such as the rules of the London Court of International Arbitration, for example. An arbitration usually has a ‘seat’ or home, which will determine the law which will govern the arbitration (which may be different from the governing law of the agreement which is in dispute). For example, arbitrations which have London as their seat will be governed by the Arbitration Act 1996 and related English legislation. However, the “seat” does not need to be where the arbitration actually takes place.

A framework of international treaties provides for enforcement of arbitral decisions across a wide range of jurisdictions without any further need to go to court. This is a particular advantage of arbitration over litigation, and should be considered with international agreements (although the court judgments of EU members may be enforced in any other member state within the EU).

Although arbitration is not necessarily cheaper than litigation (in both instances the costs will depend on the circumstances), it is almost always confidential, and is usually more flexible, with the possibility of procedures being adapted to suit the particular needs of the dispute and of the parties.

The High Court decision: When properly drafted, it is possible for an arbitration clause to keep the parties out of the courts if they wish. The parties doubtless thought they had achieved this by stating that arbitration would be “final, conclusive and binding”. But the High Court recently decided[1] that this was insufficient to rule out a right to appeal under section 69 of the Arbitration Act 1996.

The fact that a decision is to be final and binding does not mean it may not be appealed. Section 69 gives parties a right to appeal to the courts on a question of law arising out of an award made in the arbitration proceedings, if, in very broad terms, the point is important and the arbitrator appears to have got it badly wrong. If you wish to exclude any rights of appeal to the courts over an arbitral decision, this must be explicitly excluded, using wording such as “the parties waive irrevocably their right to any form of appeal, review or recourse to any state court or other judicial authority”.

Getting the drafting right: This decision underlines how important it is to get the drafting absolutely right. And the provisions must be compatible. It is not uncommon, for example, to see a mandatory binding arbitration clause coupled with a choice of jurisdiction clause such as “..the parties submit to the non-exclusive jurisdiction of the English courts” in the same agreement. Escalation and mediation can be complementary, and can be consistent with either an arbitration, an expert determination or a courts choice of forum clause; but the use of phrases such as “binding mediation” or coupling a binding arbitration or expert determination clause with a choice of courts clause is only likely to add to the issues available for the parties to disagree over.

[1] Shell Egypt West Manzala GmbH & another v Dana Gas Egypt Ltd [2009] EWHC 2097 (Comm)