Avoiding Disputes About Alternative Dispute Resolution Clauses
Alternative Dispute Resolution clauses (ADR) have the potential to facilitate early resolution of disputes between parties without the need to resort to time consuming and expensive litigation.
However, ADR clauses are often inserted in commercial contracts without proper attention and little consideration as to whether the clause itself is appropriate for the disputes which may arise under the contract. A poorly drafted ADR clause can cause further disagreement between the parties and increase costs for those involved.
In this article we consider what factors should be taken into account when drafting an ADR clause and problems to avoid.
ADR clauses have been increasingly included in commercial contracts. There are various forms of alternative dispute resolution available to parties including negotiation, mediation, expert determination and arbitration. The benefits of ADR over traditional litigation include the fact that the process is:
- informal, quicker and cheaper;
- confidential, which may be of benefit where commercial reputations are at stake; and
- co-operative, which allows commercial relationships to be more easily be preserved.
ADR clauses included in a contract are generally mandatory and provide that the parties must undertake an ADR process prior to recourse to litigation. Failure to comply with a dispute resolution clause is a breach of contract. In the event of a breach of the ADR clause, the Courts will look to support the parties’ intention by ordering specific performance of the dispute resolution clause or ordering that any proceedings be adjourned or stayed until such time as the ADR process has been completed.
Issues to consider
When considering whether to include an ADR clause in a contract or the scope of the clause, regard might be given to the subject matter which is to be covered by the dispute resolution process. Generally, an ADR clause will be broad and will include any dispute relating to the subject matter of the contract. Such a clause will likely mean that the parties will be required to undertake an ADR process in accordance with the contract before being entitled to commence litigation.
Consideration should also be given to the type of dispute which is likely to arise under the contract and the most appropriate dispute resolution mechanism for that type of dispute. For example, expert determination is a form of dispute resolution whereby the parties to a contract ask an independent expert to give a binding decision on a dispute. The process is typically used for disputes of a technical nature and adopted predominately for construction or engineering disagreements.
Drafting problems to avoid
If an ADR clause is not properly drafted, it can lead to disputes between the parties and to a Court finding the clause to be unenforceable. Listed below are some common problems which should be avoided when drafting an ADR clause:
- an ADR clause should operate to make completion of the ADR process a prerequisite prior to the commencement of Court proceedings;
- any clause which directs the parties to attempt to agree to an ADR process will be found unenforceable due to uncertainty. An ADR clause has to provide certainty as to the steps which the parties must take in order to attempt to resolve their dispute. For example, a mediation clause must provide for the appointment of a mediator, for the mediator’s remuneration and the process of the mediation; and
- an ADR clause will often provide that the parties are to hold discussions or negotiations in good faith or that they be genuine. There can be uncertainty as to what those requirements actually mean and questions as to whether the clause is enforceable.
There are clear commercial benefits to parties endeavouring to resolve their disputes through an ADR process rather than adjudication by a Court or Tribunal. An effective ADR clause can be fundamental to avoiding costly litigation. It may be difficult to agree an ADR process when a dispute has already arisen. As such, careful consideration should be given to an appropriate ADR clause when negotiating the terms of the underlying contract.
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