This week: Lorna MacFarlane considers how to draft dispute resolution clauses to encourage the rapid resolution of disagreements.

Life's greatest learning opportunities often come from things that go wrong. Only businesses that are properly vested in learning from mistakes are truly positioned to maximise their potential.

The aviation industry has this down to a fine art. When things go wrong, the black box flight recorder ensures that their errors are "data rich". That industry's ability to learn from its mistakes has taken it from one of the most dangerous forms of transport to one of the safest.

The law is no different. As part of the world's largest law firm, our disputes team is also "data rich": so here we use our knowledge of why things go wrong to help you to either avoid disputes in the first place, or to identify opportunities for fighting your client's corner.

Drafting dispute resolution clauses to avoid protracted disputes

Dispute resolution (DR) clauses often fall within the category of "midnight clauses" – those considered at the last minute at the closing stages of a transaction. They are usually found towards the end of documents and may not be a priority in negotiations.

However, a properly drafted DR clause ensures that resolution of the dispute is not unnecessarily delayed, and allows for efficient and cost-effective means of addressing the issues.

As well as ensuring that the DR clause provides for an appropriate jurisdiction and governing law, the clause should also consider means of dispute resolution other than litigation. In particular, in most commercial agreements, we would recommend a "tiered" DR clause, providing that disputes are to be addressed as follows:

• Step 1 – Negotiation: In the first instance, the parties will seek to negotiate an appropriate outcome at a time and place suitable to them.
• Step 2 – Mediation: The parties will attend a more structured process, in which a mediator facilitates discussion between the parties to find a mutually acceptable solution.
• Step 3 – Litigation: In the event that the parties cannot resolve their dispute amicably, they will proceed to resolution in the courts.

Express provision for negotiation and mediation can assist in avoiding the (steep) costs of litigation, and ultimately provide for a swifter outcome to the dispute. This is of particular importance as the courts continue to clear their extensive Covid back-logs. Mediation allows the parties to stay in control of the ultimate outcome and resolve issues between them confidentially. The flexible nature of mediation also allows wider commercial issues and solutions to be explored and creative solutions to emerge.

Including negotiation and mediation in a DR clause serves as a reminder to the parties that they had previously committed to a non-adversarial option prior to commencing proceedings. It may otherwise be difficult to encourage parties with limited knowledge of mediation to attempt to mediate after a dispute has arisen. Once already embroiled in a dispute, parties may be unwilling to be seen to engage a process designed to find common ground. While there is a growing appreciation of the benefits of mediation, some still harbour concerns that proposing mediation is viewed as a weakness. The party suggesting mediation without prior reference to this in the agreement may be concerned doing so will undermine their position.

Multi-tier DR clauses need not be overly complex (although that may be appropriate in the context of detailed commercial agreements) or burdensome for drafters. Our team would be delighted to assist with providing template wording for multi-tier DR clauses. 

Previous Black Box Tips

• 24 August 2022 - Black Box Tips: The importance of preserving evidence when things go wrong
• 10 August 2022 - Black box tips from Dentons' Scottish Disputes team: Ensuring the enforceability of exclusion and limitation clauses
• 27 July 2022 - Black Box Tips: Maintaining privilege over legal advice within an organisation
• 13 July 2022 - Black Box Tips: Ensuring your terms and conditions apply in a "battle of the forms"
• 29 June 2022 - Black Box Tips: No oral modification clauses
• 9 June 2022 - Black Box Tips: "Standstill" agreements in Scotland