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Contract Drafting Tips Series: Dispute Resolution Clause

This article begins a series on drafting tips for various types of contract clauses.

Good contracts help avoid and resolve disputes. The person who drafts a contract should consider possibilities for dispute resolution and, if need, draft a clause.

Having a dispute resolution clause is useful in appropriate cases. According to a recent dispute resolution survey by the Institute of Arbitrators & Mediators Australia (IAMA), almost half of all technology contracts result in some kind of dispute over factors such as time, cost or performance.

You can draft a contract with no dispute resolution clause, and we often do. There are also instances when it is very useful to have one.

Purpose

In essence, in all its varieties, a dispute resolution clause sets out the agreement of the parties on at least their first method for resolution of any dispute or disagreement that may arise.

It is sometimes headed "Alternative Dispute Resolution". In that instance it typically states that resolution will initially be sought by arbitration, mediation or other identified alternatives to litigation in a court of law.

A dispute resolution clause can help resolve disputes before litigation. For certain situations, parties or contracts it can set a path that is better, cheaper and faster than litigation. It does not suit all situations, parties and contracts.

Cases

  • May and Butcher Ltd v R [1934] 2 KB 17 HL the words “to be agreed upon” referring to the price of sale of goods was deemed to be invalid where the arbitration clause in the agreement did not cover the dispute.
  • Whitlock v Brew (1968) 118 CLR 445: an arbitration clause was ruled to be invalid because it did not authorise an arbitrator to impose such terms as the arbitrator might think were reasonable.

Drafting Tips

  • Ensure that the clause is specific as to how it is triggered. In other words, exactly what breaches will invoke the selected dispute resolution?
  • Consider what mode or modes of dispute resolution would be most appropriate to your situation.
  • Once chosen, carefully specify exactly the mode of dispute resolution will be implemented, and how it will be chosen and organised. The courts will deem uncertain clauses void.
  • Are there additional parties (or additional contracts) that may be affected by a disput, and should they be considered and involved?
  • Model clauses and programs are available through various ADR organisations and the Law Society of NSW. Invoking such neutral bodies, clauses and programs can facilitate agreement.

Sample Clause

"1.1 Rent payable is of the amount as may be mutually agreed. Failing agreement then such rental as may be fixed by an arbitrator.

21.2 In the event an arbitrator cannot be agreed upon, the President of the Queensland Law Society Inc can nominate an arbitrator under cl 3.05(b)."

This clause was tested in Booker Industries v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600. The court ruled that both parties had an obligation to request the President to nominate an arbitrator. Had the President declined to nominate an arbitrator, according to the court the clause would have been “fruitless”.


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