Dispute Resolution Clauses: Worth Careful Consideration

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caveat 1Too often dispute resolution clauses are treated as part of the boiler plate provisions and copy-pasted into agreements as an afterthought, or even left out altogether. Best case scenario the parties will never need to rely on these clauses. However, when they do, parties may find that the provisions of their dispute resolution clause were not tailored to their specific needs; and the time to negotiate a dispute resolution mechanism is not when things have already turned sour! Taking time while drafting an agreement on a dispute resolution process will pay off for all parties should they find themselves needing to rely on it at a later stage during their business relationship. The  two primary issues to consider are set out below:

Litigation, Arbitration, Mediation or a combination?

Going straight to court, or even arbitration, is unlikely to be in the best interests of the parties. Including a facilitated process, prior to these litigious ones, can either result in the resolution of a dispute, or, at the very least narrow the focus of the dispute to a limited number of issues. Even if the parties are unable to reach agreement, this narrowing of the dispute will result in a more streamlined arbitration or court case which ultimately means cost savings. Parties can even consider a three-stage process of negotiation between principals, followed by mediation, followed by referral to arbitration or litigation. This will depend on the nature of the business relationship and the likely monetary value of the disputes.

Which Rules to rely on?

There is often a discrepancy between the advisors (and clients) who are drafting agreements, and those who will be involved should a dispute arise. This often results in the drafting advisors not being familiar with dispute resolution processes, and in particular the practicalities of the various dispute resolution rules. Commercial lawyers are often under the impression that reference to the provisions of the Arbitration Act 42 of 1965 is sufficient: this is not so! The Act provides no useful guidance or provisions for parties when they find themselves needing to resolve differences.

Another issue to consider is that reference to the rules of an organisation, such as AFSA or the ICC, will have cost implications for the parties as the rules are drafted with the intention that the parties will rely on these organisations to administer the dispute resolution process. Many parties feel comfortable stipulating that in particular, arbitrators, should rely on the Uniform Rules of Court. This is an issue best discussed with a legal advisor who is familiar both with the business relationship in question, and has experience in litigation and arbitration. Another possibility is to reference UNCITRAL’s Arbitration Rules. The advantage of these is that the arbitration process is party-determined and does not rely on any external service provider, although provision is made for such referral should the parties be unable to come to an agreement.

Although it doesn’t have quite the same ring to it as ‘a stich in time saves nine’, when drafting it is worth remembering that ‘time spent on a dispute resolution clause at the beginning of a business relationship will save everybody time, energy and money in the long run’!

Mieke Krynauw

Mieke has a BSocSc PPE LLB from UCT and an LLM from NYU. She was admitted in 2011 after having completed her articles at Bowman Gilfillan where she rose to the level on senior associate. Mieke subsequently moved into the public sector and joined Caveat in 2017.