A contract dispute resolution clause (DRC) is a written agreement detailing how contractual disputes should be resolved. The DRC will become part of the contract and set out the steps to be taken to resolve disputes. A DRC does not have to be confined to contractual disputes, it can cover issues such as negligence.
Often a DRC is viewed as a ‘boilerplate’ or is created without much thought. However, should a contractual dispute arise (and they often do) a clear DRC can save you thousands of pounds in legal fees and mitigate the destructive stress associated with trying to resolve a disagreement using an ad-hoc approach.
What Should a Contract Dispute Resolution Clause Contain?
The following should be considered when drafting and negotiating a robust DRC:
Jurisdiction
In contracts which encompass two or more countries, it is vital to set out in which legal jurisdiction a dispute resolution process will be instigated. For example, say your organisation has a joint venture agreement to develop a new app with a German company. You decide that any dispute should first be sent to mediation. If it remains unresolved, the parties can move to arbitration. To avoid a dispute over where the mediation/arbitration should take place, make sure that the jurisdiction where the dispute is to be decided is identified in the DRC.
The Method Disputes Will Be Resolved
There are several alternative dispute resolution (ADR) methods that can be used before going to court. Negotiation, mediation, adjudication, arbitration – all these are usually cheaper, quicker, and more private than litigation. Your contract’s DRC should set out which methods will be used and in what order before a court application is made.
Enforceability
In multi-jurisdiction contracts, it is important to consider how a decision from the mediator/court/adjudicator will be enforced. One of the reasons arbitration is commonly used for multi-jurisdictional disputes is that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) provides an extensive enforcement regime for international arbitration awards.
In Bridgehouse (Bradford No. 2) Ltd v BAE Systems Plc [2020] EWCA Civ 759, the Court of Appeal considered whether company disputes can be arbitrated.
Bridgehouse (Bradford No. 2) Ltd (BB2) entered into a contract with BAE Systems Plc (BAE) to purchase two commercial sites for £93 million. The purchase was due to be completed no earlier than January 2021. BB2 was incorporated for the sole purpose of entering into the contract.
Clause 19 of the contract which applied to disputes “arising out of the provisions of this agreement” stated that any such disputes between the parties were to be referred to an “independent person” who would act as an Arbitrator per the Arbitration Act 1996.
A jurisdiction clause in the contract declared that “the courts of England shall have exclusive jurisdiction to hear and decide any suit action or proceedings and/or settle any disputes which may arise out of or in any way related to this agreement or its formation (including any non-contractual disputes or claims)”.
BAE was able to terminate the contract if certain “events of default” occurred. Such events included BB2 “being struck off the Register of Companies or being dissolved or ceasing for any reason to retain its corporate existence”.
On 31 May 2016, BB2 was struck off the Register of Companies due to an administrative error. BAE served written notice that it was terminating the contract on 2 June 2016. BAE was restored to the register on 28 July 2016.
The case went to arbitration and in an award dated 14 June 2018, the arbitrator determined that BAE had validly terminated the contract on 2 June 2016.
After the failure of its appeal against the arbitration award, the appellant issued a claim in the Chancery Division seeking relief under section 1028(3) of the Companies Act 2006, namely restoring the company and others to the position they would have been in but for the strike-off. Section 1028(3), when read in conjunction with section 1028(1), provides that if a company is restored to the Register, it is deemed to have continued in existence as if it had never been struck off and the Court can make an order to place the “company and all other persons in the same position (or as near as possible) as if the company had not been dissolved or struck off the register.”
On 9 September 2018, BAE applied for BB2’s claim to be stayed under section 9 of the AA 1996. This was granted and BB2 appealed.
The Court of Appeal dismissed the appeal to overturn the stay. It stated that there was nothing in the Companies Act 1996 stating that matters arising on a section 1028(3) application could not be dealt with by arbitration and no public policy reasons prohibited arbitration from applying. The issues arising under such an application were within an arbitrator’s capacity to resolve.
This decision provides confidence that English courts will support arbitration awards where the dispute is ‘essentially internal’ and will not affect the status of the company, or third parties. It also illustrates the complexity of contractual disputes and why dispute resolution clauses need to be carefully drafted.
Industry Knowledge of the Decision-Maker
One of the advantages of ADR is that, if the DRC allows it, parties can generally choose the decision-maker and agree in advance on the qualifications and industry experience they should ideally possess.
If the dispute ends up in Court, one reason many DRC states that litigation must be heard in London is that the quality of English High Court judges is incredibly high, and the decisions made can be trusted to be correct and sensible.
Key Takeaways
This article contains only a small number of DRC considerations for commercial contracts. It is always best to have an experienced Commercial Solicitor draft and negotiate agreements. This will give you the peace of mind that carefully thought-out DRC will be included, ensuring that disputes have the best chance of being resolved quickly, effectively, and cheaply.
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