Dispute resolution – check your contract before rushing to a solicitor

Wright Hassall
July 24, 2014

Well drafted contracts usually contain a clause setting out how the parties should deal with disputes. These can be complex clauses requiring several hoops to be jumped through before anyone can issue a claim at court. They are intended to allow the parties to deal with the dispute well before heavy legal costs are incurred. However, the courts can be reluctant to enforce vague clauses. What of a contract that says “the Parties shall first seek to resolve the dispute or claim by friendly discussion”?

This was considered in Emirates v Prime. Two parties had contracted to supply and purchase iron ore, but a dispute arose. One party terminated and gave notice that if US$45,472,800 was not paid within 14 days the matter would be referred to arbitration in accordance with the dispute resolution clause in the contract.

However, the other side objected to that referral by relying on the earlier part of the dispute clause that required friendly discussions. A period of four weeks was given to allow those to resolve matters and only then could the matter be referred to arbitration. The objecting party issued a claim at court for determination of the arbitrators’ jurisdiction.

The party seeking damages claimed that the ‘friendly discussion’ clause was unenforceable, because it was a mere agreement to negotiate, but that if it were enforceable then it had been satisfied and therefore the arbitrators had jurisdiction.

As the judge noted, there is obvious commercial sense in such a dispute resolution clause. Arbitration can be expensive and time consuming. It is far better if it can be avoided by friendly discussions to resolve a claim. The same could be said of court proceedings.

The clause required the discussions for a period of 4 continuous weeks, which ensured both that a defaulting party could not postpone arbitration indefinitely by continuing to discuss the claim and that a claimant eager to refer the dispute on must have the opportunity to consider such proposals as might emerge from a discussion of the claim before commencing arbitration.

Although the courts have often declined to enforce clauses that require alternative dispute resolution, in this case the four week time period made a difference in making it sufficiently defined. The judge also decided that an obligation to seek to resolve a dispute by friendly discussions in good faith was an identifiable standard, being fair, honest and genuine discussions aimed at resolving a dispute.

The judge then reviewed the discussions between the parties that preceded the notice to arbitrate and found that there had been sufficient friendly discussion to satisfy the clause. So it was enforceable but had been satisfied.

This shows that dispute resolution clauses can be trip wires preventing one party from going to court when they really want to, and can be the target of expensive legal challenges. But overall they are a good way to avoid expensive litigation even if we may never know how many disputes are successfully resolved by the variety of steps that are possible prior to court proceedings.

The court here has shown a willingness to support this sufficiently certain dispute clause and it is also helpful to note that any party to litigation is obliged to take certain steps under the court pre-action protocols before issuing a claim. By complying with a dispute resolution clause you may be neatly ticking off the steps in the pre-action protocol and therefore wasting very little time in your route to court if the other options fail.

Susan Hopcraft is a solicitor who advises on all aspects of dispute resolution and has extensive experience of professional negligence work. Susan deals with claims against solicitors, valuers, surveyors, brokers and accountants, fraud issues and recoveries for lenders