How to Draft a Dispute Resolution Clause

When you enter into a commercial contract with another business, you must ensure they are well drafted and fit for purpose. Otherwise, you could get into a commercial dispute regarding a misinterpretation or breach of contract. Where this occurs, you need to know how to resolve it so that you can move forward with your business activities, such as through arbitration proceedings. To understand how to resolve your contractual dispute, you should read the dispute resolution clause in your contract. It is, therefore, important to have a well-drafted dispute resolution clause. This article will explain how to draft a dispute resolution clause and will discuss legal best practices. 

What Are Contractual Disputes?

Contractual disputes are where parties disagree on an issue in the contract. They usually occur because the party has not done what the contract requires. However, there are many reasons a contractual dispute can arise, such as where:

• details relating to the contract are not all contained in one document;
• it is not clear if particular terms apply; and 
• there is confusion over the meaning of contractual terms.

What is a Dispute Resolution Clause? 

A dispute resolution clause details what you and the other party are willing to do if you fall into a contractual dispute. They are in place to ensure you can resolve the dispute rather than engage in litigation or terminate the contract. This could include alternative dispute resolution (ADR) such as:

• arbitration;
• mediation; or
• negotiation.

Why Should I Have a Dispute Resolution Clause? 

Ideally, your commercial contracts should contain a dispute resolution clause to help prevent the risk of you and the other party falling into a dispute. For example, it can:

• instruct you and the other party on how to prepare for a dispute;
• preserve business relations;
• show you both how to resolve any dispute; and 
• help to avoid court litigation. 

What Are Best Practices When Drafting a Dispute Resolution Clause?

Ideally, as with any contract, your business should get a commercial solicitor to draft your contracts and ensure that they are legally effective. Dispute relations clauses, like other clauses, must be drafted correctly, as they are legally binding, and a court can enforce them. However, as a business owner, it is always essential that you are aware of best practices and what to ask for in a contract. 

Before Drafting the Clause

Before drafting your dispute resolution clause, you should negotiate with the other party for their preferred dispute resolution method. It is important to do this early in your business relationship and ensure that your wishes are included in the dispute resolution clause. Thinking about the clause includes:

• looking at different types of dispute resolution for your contract;
• thinking about both parties’ circumstances;
• considering the nature of disputes that could arise; and 
• deciding if you will use different dispute resolution methods for different parts of the contract. 

Category of Dispute Resolution Clause

When drafting your dispute resolution clause, the category under which you want it to fall is an important consideration. This could include, for example:

• using formal arbitration when a contractual dispute arises;
• passing powers to an independent ‘expert’ to resolve the dispute; and 
• using an ‘escalation clause’, which means that senior members of your business will have powers to resolve the dispute. 

Guide to Resolving UK Business Disputes

This guide outlines how to resolve commercial disputes.

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What Should My Dispute Resolution Clause Include?

When drafting a dispute resolution clause, there are certain things it should include, such as:

• who can make a claim;
• when can it be used;
• explaining the procedure and exactly when it applies;
• detailing how a third party will be appointed; 
• explaining who will pay for the procedures used;
• parties’ obligation when carrying out the dispute resolution process;
• whether parties have to carry out the dispute resolution process before commencing litigation;
• confidentiality issues;
• any time limits; and 
• what happens if a party fails to abide by the dispute resolution clause. 

Key Takeaways

You should look at your contract’s dispute resolution clause if you fall into a contractual dispute. This will detail what you should do to resolve your commercial dispute. Having a dispute relation clause in your commercial contracts is important for many reasons, such as avoiding court litigation and preserving your business relationship. Firstly, you should consider how you want to resolve a dispute and each party’s circumstances. You also need to decide the category of dispute resolution clause, for example, using arbitration. 

If you need help drafting dispute resolution clauses, our experienced disputes and litigation 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. So call us today on 0808 196 8584 or visit our membership page.

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