Dispute Resolution Clauses: What are they and what do I need to think about?

6th March 2023

Dispute resolution is the process of settling disagreements. When you enter into a contract with another party, the contract would often include a clause which sets out how the parties must deal with any disputes that arise between them.

Dispute resolution clauses can, if phrased clearly, provide certainty for both parties.

What to think about when considering a dispute resolution clause?

There are many methods to resolve a dispute, including arbitration, mediation and litigation. As a trader, what steps do you want you and your consumers to follow?

  • Starting with a face to face – Could a virtual Teams meeting between a senior manager and the person with a claim in the first instance be a chance to reach a resolution without either party having to incur the costs of an arbitrator or the court?
  • ArbitrationAn ‘out-of-court’ option – otherwise known as a form of alternative dispute resolution (ADR). Both parties will agree to use an arbitrator (an independent third party) and agree that the arbitrator’s decision is final. Dependent upon the nature of the claim, it generally costs less and is faster than litigation, but still results in a binding decision. There are a wide range of arbitration services that you could register with.
  • Mediation – Another ‘out-of-court’/ADR option. Unlike an arbitrator, a mediator will not determine the dispute or take sides. Instead, a mediator will work with both parties to achieve a resolution. Mediations generally have a good success rate in obtaining settlements.
  • Litigation – This involves one party issuing a claim, to seek the court’s determination of the dispute. The court’s decision (subject to appeals) provides finality, but this can be a costly and time-consuming process. The judgment would also be a matter of public record, so its important to also consider reputational impact.
  • Jurisdiction clause If the court may be involved, do you want a certain jurisdiction to apply? For example, would you only want the dispute dealt with in the courts of England and Wales? If so, consider including a jurisdiction clause in your contract.

If claims are likely to be simple and low value, you may not want an extensive dispute resolution clause. However, another thing to consider is whether you’re more likely to be the defendant of a claim, as you may then benefit from a multi-tiered dispute resolution clause which encourages settlement out of court.

Once I have a dispute resolution clause, do I need to update it?

It is important to keep your dispute resolution clauses under regular review. For example, if you are a UK trading company you may have previously included the use of platforms such as the European Commission Online Dispute Resolution (ODR) platform – which is something that UK consumers and traders can no longer use post-Brexit.

You may also want to assess how your dispute resolution clause has been working for you. Has it been effective at resolving disputes in a cost-effective manner, or is it costing your company lots of time and money without results? Might there now be other ADR providers that suit your needs better?

What if I don’t have a dispute resolution clause?

There is no general legal requirement to include a dispute resolution clause within your contracts or terms and conditions, and you may not wish to be locked into a process.

ADR would still be available if you don’t have a dispute resolution clause, as it is available for every dispute, provided both parties agree to engage in it.

Consumer regulations require traders to inform consumers of approved ADR entities if the trader’s internal complaints procedure has not resulted in a resolution, but do not generally oblige the trader to agree to using ADR. However, ADR is compulsory for traders within some specific business sectors – for example some financial services consumers can insist their complaint is dealt with by the Financial Ombudsman Service. It is therefore important to check the rules of your relevant trade association as these may require you to engage in ADR with particular ADR entities, even if your contract with the consumer does not provide for that.

From a litigation perspective, the courts strongly encourage parties to engage in ADR, and can order cost penalties against a party who refuses to engage in some form of ADR without good reason, but ultimately cannot force unwilling parties to mediate. Proposals have been put forward to change this, but are still a work in progress at this stage.

Need some guidance?

If you would like advice on drafting dispute resolution clauses, or are in the midst of a dispute and have queries as to how a dispute resolution clause applies, please contact our Commercial Litigation team.

Speak to one of our Commercial Litigation specialists

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