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Choose the right Dispute Resolution Clause for your Contract

caveat 1By the time the ‘big ticket’ items in a contract have been decided, it is tempting to ignore the rest and hope for the best. As anyone who has had to end a business relationship or deal with a dispute governed by a contract can attest to, although no one may have given the dispute resolution clause much attention when it was time to conclude the agreement, it becomes vital to resolve, or effectively dissolve a contractual relationship.

The three dispute resolution mechanisms you are most likely to come across in contracts are mediation, arbitration and litigation. There is no ‘right’ choice; it all depends on what mechanism is the most appropriate for the parties and the types of disputes which might arise.

Mediation in a commercial setting is typically characterised by the parties hiring a trained mediator whose role is to facilitate rather than to adjudicate. Any resolution of disputes is party-led. Mediation can be useful as a standalone mechanism to resolve a dispute, or as a precursor to another mechanism; e.g. a successful mediation may not resolve all the disputes but may narrow the issues to be decided during arbitration or litigation, ultimately saving the parties time and money. Resolutions agreed on are not fettered by what an arbitrator or judicial officer may order. Mediation is also particularly useful to resolve disputes between parties who must continue to work together.

Unlike a mediator, an arbitrator listens to the parties’ arguments, reviews evidence presented and makes a decision (which may or may not be binding and/or subject to an appeal procedure). Arbitration is similar to mediation in that the parties agree on the arbitrator and the process is confidential. It is more akin to a court process in that it is an adversarial mechanism. Although arbitration is often touted as being more cost-effective than litigation, this is not always the case especially if the arbitration is administered by an arbitration body rather than the parties themselves.

Litigation, the resolution of disputes in court by a magistrate or judge, is the most adversarial of the processes discussed here. While it is often the most costly manner to settle a dispute, parties may decide that litigation is the appropriate mechanism; for example, if obtaining a precedent or making a decision public is important.

When choosing which dispute resolution process, or which combination of processes, is appropriate for your contract, think about the following:

  • Do the parties need to continue working together?
  • Is the ideal outcome one which an arbitrator or judicial officer is able to order?
  • What are the cost implications of the chosen process?
  • Could the parties administer the process themselves?
  • Is the confidentiality of the dispute important?

When drafting your contract, remember that you can always call on legal specialists to consider the options and design the most appropriate dispute resolution clause for your agreement and circumstances.

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.

Read Mieke’s other article on dispute resolution clauses here.

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