What is a Dispute Resolution Clause and How Can It Protect My Business?

Despite the parties’ best intentions during a contract term, problems may occur at some stage during the contractual relationship. Having a robust dispute resolution clause in your contract can help protect your business when problems arise. This article will explore what a dispute resolution clause is and some of the key ways a dispute resolution clause can protect your business.

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What is a Dispute Resolution Clause?

A dispute resolution clause is an important clause in a contract, stipulating what the parties should do if a dispute occurs. Drafting a dispute resolution clause clearly is critical to give the parties certainty and guidance on what to do when a dispute arises.

Importantly, you should draft this clause to address the parties’ commercial objectives. For example, the parties should consider the steps they should take to resolve the dispute and the country’s laws governing the dispute. 

There is no one-size-fits-all approach for dispute resolution clauses. Depending on how the parties wish to approach dispute resolution, they can take different forms with different terms.

How Can a Dispute Resolution Clause Protect Me?

Specifying an Approved Procedure Before Going to Court

Taking a claim to court should always be the very last resort. Court claims are time-consuming, expensive and often stressful for all parties involved. However, your dispute resolution clause can specify that the parties need to follow the specific dispute resolution procedure it sets out before being able to take the dispute to court.

Alternative dispute resolution is always advisable as a first step. Indeed, most judges expect that parties try to resolve their dispute outside of court before initiating litigation. If the parties can successfully resolve the dispute without going to court, you will likely save significant time and money. 

Setting the Terms of Dispute Resolution

If your contract includes a dispute resolution clause, you can tailor it to suit how you would like to address disputes. Seek legal advice if you require guidance on what your dispute resolution clause should cover.

For example, you can stipulate that any disputes under the contract must be dealt with through negotiations or mediation first. Businesses often include escalation clauses in their dispute resolution procedures, whereby parties enter into informal discussions as a starting point.

If parties still cannot resolve their dispute, your dispute resolution clause can outline that only UK courts, for example, can hear the matter. Likewise, the dispute must be governed by English law. Outlining these details in your contract is especially critical when contracting with an overseas business. Otherwise, you risk an additional dispute over which court has the authority to hear the dispute and which law applies. 

Outlining That Parties Must Act Amicably and in Good Faith

When problems arise, emotions can be heightened, and parties can be quick to rush into making court claims. However, court litigation should be the last resort to resolving a dispute.

A well-drafted dispute resolution clause may help to stop disputes from escalating too quickly and save commercial relationships that court proceedings could otherwise destroy. A dispute resolution clause can encourage open dialogue between the parties. It can allow you to be constructive and work together to address problems rather than exacerbate them.

Without a dispute resolution clause in your contract, parties can take a litigious approach and go straight into court proceedings. Commercially, your business priority should be to save relationships and resolve disputes quickly so you can focus on trading rather than being embroiled in acrimonious disputes.

A dispute resolution clause can give your customers confidence that you have good practices and a process to resolve problems when they arise, so they know there is a way to address issues from the outset. It can also show that you, as a supplier, are offering cost-effective and easy ways to resolve problems.

Key Takeaways

A well-drafted dispute resolution clause in your commercial contract can benefit your business in many ways. A key benefit is that the clause can reduce the chance of problems escalating into court claims, saving your business time and money. Effective dispute resolution clauses also offer an opportunity for constructive discussions between the parties and the chance to rescue commercial relationships.

If you need help drafting a dispute resolution clause or find yourself in a dispute, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.