Dispute Resolution Clauses for Contract
Is litigation the only solution to a contractual dispute? The short answer is no.
This is because, in reality, parties often have alternate ways to settle their dispute. Today, we will talk about one such method that could potentially prevent parties from having to fight tooth and nail in court. However, this particular method only works if there is a clause known as a “dispute resolution clause” inserted into the contract
What is a dispute resolution clause?
These clauses are usually clauses which state how the parties to a contract wish to resolve their dispute. In this regard, such clauses:
- Dictates how a dispute should be resolved, such as via arbitration, mediation, adjudication, and even litigating the matter in a different country; and
- Could also be multi-tiered (or commonly known in the legal industry as an “escalation clause”). This means the contracting parties will have to first go through a series of dispute resolutions in a specific order before they could bring their dispute to court. For example: In the event there is a dispute, A and B would have to:
- First, resolve their matter via an expert;
- Thereafter, if the matter cannot be resolved, to refer their dispute to an arbitrator/ mediator; and
- Only then could the matter be referred to the court, subject to the provisions of law.
Is there a need for such a clause?
- Such a clause could potentially save parties a lot of time as the parties can determine in advance the governing laws concerning the contract and the jurisdiction governing the dispute should one arise- effectively saving cost and time to determine the issues later on. This is especially true in cases where a contract involves multinational companies spanning several jurisdictions.
- Such a clause allows the parties involved to deal with a dispute discretely without the need to attract the attention of outsiders.
- Matters that are discussed (especially in mediation proceedings), saved under certain exceptions, cannot be used in court as evidence later on.
- It allows parties to resolve a dispute in a mutually advantageous manner- both parties win when they can set their sight on a commercial objective which they both can agree upon in an event a dispute arises.
The Malaysian Climate
If there is such a clause in the contract, such clauses must be complied with before parties are allowed to commence legal proceedings in court.
For example, in Juara Serata Sdn Bhd v Alpharich Sdn Bhd, the Federal Court held that parties who decided to be bound by dispute resolution/ escalation clauses in a contract must follow through with the agreement and cannot resile from their agreement as by doing so would mean that the parties are allowed to take advantage of their wrong/ misfortune.
It is therefore prudent for parties to not only have a dispute resolution clause(s), but a properly drafted dispute resolution clause(s) in a contractual agreement, as such clauses could potentially prevent a lot of heartache for both contracting parties in the long run.