Drafting a Dispute Resolution Agreement

Alternative Dispute Resolution

Introduction 

We live in a world of commerce where business transactions and contracts are being consummated per second. Businesses and contracts always involve interests which sometimes clash leading to disagreements or disputes. Disputes are minimized through the observation of preventive law. Of course lawyers have traditionally devoted a large part of their time to anticipating various eventualities and seeking, through skillful drafting and planning, to provide for them in advance. Asides minimizing disputes, it is also the concern of a draftsman to ensure that there is adequate provision for how disputes are resolved if the preventive options fail.

In a good number of cases, court action is not an appropriate recourse for seeking justice. Dispute resolution practitioners are no longer single minded about dispute resolution tools and more people are embracing the now popular Alternative Dispute Resolution (ADR) methods. There has been more discussion and efforts on taking a systemic approach in offering different kinds of options to people who are in conflict, and to foster “appropriate” dispute resolution. It has been observed that the current wave of dispute resolution theories has resulted in the emergence of a vast array of dispute resolution tools.

When parties enter into contracts, a dispute resolution agreement is important as it helps the parties to an agreement understand the consequences of their actions, understand the procedure to be adopted in resolving disputes, gives them the power to choose one or more dispute resolution tools, exclude court intervention until other mutually agreed dispute resolution mechanisms are exhausted, and empowers a third party neutral other than a court to adjudicate over a dispute.

While there are varieties of dispute resolution mechanisms and more flexible approaches are being encouraged, the broad spectrum of dispute resolution tools can be classed into 1. Adjudication which includes: a. Court, b. Arbitration and c. administrative process, 2. Quasi-Judicial mechanism such as Ombudsman, 3. Mediation/Conciliation, 4. Negotiation.6 Fuller defined adjudication as “a social process of decision which assures to the affected party a particular form of participation, that of presenting proofs and arguments for a decision in his favor.” This involves the use of a third party with coercive power, giving victory to a side over the other. Though mediation or conciliation also involves the use of a third party facilitator, the third party has no coercive power. To Fuller “the central quality of mediation, namely, its capacity to reorient the parties toward each other, not imposing rules on them, but helping them to achieve a new and shared perception of their relationship, a perception that will redirect their attitudes and dispositions toward one another.” Putting it in simple terms, mediation or conciliation can be said to be facilitated or assisted negotiation.

A dispute resolution agreement may be embodied in the matrix contract agreement or in a separate agreement. It can be as simple as stating in a contract that “disputes emanating from this agreement shall be settled by arbitration in Ibadan” and it can also be expansive, running into pages depending on the nature and/or volume of the contract.   

Choice of Dispute Resolution Tools 

Minor disputes sometimes snowball into feuds at which point it may be hard to get feuding parties to come together and agree on the dispute resolution tool appropriate for resolving their existing dispute.  A dispute resolution agreement will consider the stakes and proffer an appropriate dispute resolution tool and procedure even before a dispute arises. What are the factors to consider in selecting a dispute resolution mechanism?   Levin and Wheeler while examining the subject stated the following:

  • Nature of Dispute or Envisaged Dispute: Though Marriage is a contract under the law, in Nigeria we still cling to the myth that consent divorce is unacceptable hence parties cannot by contract predetermine how marital disputes are resolved or dissolve a marriage without court interference. Also the Court of Appeal Lagos Judicial Division per J. Y, Tukur, J.C.A recently held that “Section 251 (1) of the Constitution of Nigeria 1999 as amended gives exclusive jurisdiction to the Federal High Court in civil causes and matters connected with or pertaining to the taxation of companies and other bodies established or carrying on business in Nigeria and all other persons subject to federal taxation.” These are examples of disputes that are by law vested in the courts. Conversely large volume commercial disputes, cross-border disputes and some employment disputes are well suited ADR within the law and public policy. It has also been suggested that the courts have seen some highly repetitive resolutions such that the process is already routinized with application of well-established principles to a large number of individual cases. In such circumstances, once the courts have established the basic principles in such areas, a speedier and less cumbersome procedure than litigation should be used. This may however not apply to disputes that may require expert determination.
  • Relationship Between Parties: This writer recently participated in a mediation at the Citizens’ Rights Department in Ogun State, facilitated by a fine young mediator. A waste contractor had a disagreement with the regulator of waste management in the State over disputed invoices. Parties were at two extremes on the issue and the figures could not be reconciled. Then the only way out of resorting to a coercive dispute resolution tool was to remind the contractor of the commercial relationship and the regulator also offered more business to the contractor. There will always be waste thus there will always be opportunity for mutually beneficial relationship between the parties. An agreement was reached and the dispute was resolved in less than one hour. Opening the eyes of the parties to the implication of the nature of the business and the nature of their relationship and the prospects of retaining the relationship played a major role in mediation being the perfect fit for resolving their dispute. While the court can also order that parties explore settlement, it is very unlikely that the court will have an atmosphere auspicious enough for parties to genuinely commit to settlement.
  • Amount or Volume of Transaction and Cost of Dispute Resolution: Drafters sometimes insert arbitration clauses in employment contracts, some lease/tenancy agreements, and low volume contracts without being mindful of the cost of arbitration and the fact that parties will bear the cost. But upon referring the dispute to an arbitrator(s) and the fees are stated, parties may discover that they cannot afford arbitration or that the cost of arbitration is excessive compared to the amount in dispute.  The amount in dispute seem to always be an item considered to determine the cost of the process of dispute resolution. There are Small Claim Courts and some arbitral institutions also have small claim procedures depending on the volume of the claim. It should however be noted that some transactions are low in volume but as complex as a typical large volume transaction and best suited for expert determination.  High volume commercial transactions are best suited for arbitration especially where they involve parties from different jurisdictions, but when the anticipated disputes in a commercial transaction are such that are likely to require expert determination, the amount or volume will not be the ultimate consideration.
  • Speed: Arbitration which was promoted as a means of avoiding the contention, cost, and expense of court trial, is now equally described in similar terms as “judicialized”, formal, costly, time-consuming, and subjected to hardball advocacy. While “court-like” arbitration has alienated many business users, others strive to make arbitration even more like a court trial, through agreements for expanded judicial review of arbitration awards. If this is the case with arbitration, the fate of other non-binding mechanisms cannot be any better. Some even apply boxing march terms to it by referring to mediation as round one of the dispute, arbitration as round two, litigation over the award as round three and it goes on till the right or appeal is exhausted.  The above does not however take away the fact that speed is still a major selling point for arbitration and ADR generally. Jurisdictions with firm judicial infrastructure ensure that recalcitrant parties are not allowed to take undue advantage of the right to approach the court to challenge an award.
  • Interest of the Parties:  When advising on and drafting a dispute resolution agreement, one must always take the interest of the parties as paramount. Issues such as confidentiality, enforceability and forum must be considered with the best interest of the parties in mind.

Types of Dispute Resolution Agreements/Clauses: 

The language of Dispute resolution agreements should be plain, simple and as clear as possible. It should also be flexible to cover for minor changes or issues not specifically covered in the agreement or clause; otherwise an overly specific or inflexible dispute resolution agreement may become unenforceable. Where a dispute resolution agreement is ambiguous, there is always a risk that it becomes unenforceable. 

Dispute resolution clauses can be classified broadly into; 

  • Basic Dispute Resolution Clauses: Basic Dispute Resolution Clauses mostly select a dispute resolution method and often state the scope, whether it will be by an institution, method of selection of a neutral, representative of parties, venue, language, length of time and governing law among others. Basic clauses are often used in simple commercial transactions. More often than not institutional model clauses are basic and are usually adopted for simple transactions. Details are important to achieve clarity and certainty of the intention of parties on their dispute resolution agreement. Care must however be taken to avoid over-specification or contradictions that may render the agreement void.
  • Multi-Tier Dispute Resolution Clauses: These are also referred to as “escalation clauses” or “multi-step clauses”.  Multi-Tier Dispute Resolution Clauses give the parties the opportunity to resolve any disputes through less formal dispute resolution procedures, including negotiation and mediation, either before or in parallel to court or arbitration proceedings. They typically require the parties to first approach negotiation and if that fails, they involve a mediator before the dispute is referred to adjudication by an arbitrator or the court. They are usually used for relatively large commercial transactions with a higher probability of things going wrong and it is in the best interest of parties to employ more amicable dispute resolution and avoid inordinate delays. A properly drafted multi-tiered clause can help parties resolve disputes in a less adversarial setting, preserve ongoing commercial relationships and save significant amounts of time and money. It can however also lead to fruitless prolonged negotiation if not properly structured.
  • Hybrid Clauses: The most common forms of hybrid clauses are those that seek to combine more than one dispute resolution mechanism e.g. litigation and arbitration by including an option to arbitrate in favor of one party or a mutual option for both parties to choose arbitration or litigation. Hybrid clauses can include one-sided/asymmetrical/sole option clauses where one party has the choice of mechanism and/or forum or mutual option clauses where both parties have the choice of mechanism and/or forum. Under English law, unilateral options are recognized as enforceable.18 It is established that a disputes resolution provision which contains an arbitration agreement between parties but also gives one party with an option to litigate will be upheld provided it is clear and unequivocal. However, some national courts have refused to recognize such clauses on the grounds that they are “potestative” – that is, one-sided.
  • Carve-out Clause: As the name implies, a carve-out clause gives parties the option to carve out certain types of disputes from the agreed dispute resolution procedure and submit same to a separate dispute resolution mechanism. Where there is likely to be great diversity between the types of disputes that may arise under a particular contract, parties may wish to consider a carve-out clause where certain, precisely identified disputes are carved out from the main dispute resolution process and treated differently. A carve-out clause is best where aspects of a dispute requires different expert determination. Some parties also opt to litigate some disputes while others are resolved by arbitration.

While drafters are often not the people who have to “pick up the pieces” when a dispute arises over a dispute resolution agreement, “it is important that people are aware of the different types of options available to them” and the implication of their choices before such dispute resolution agreement is executed.21 Parties should also be aware of the pitfalls inherent in complex and expansive dispute resolution clauses or agreements. As a general point, drafters should avoid drafting long and complicated clauses. While such clauses are intended to confer greater flexibility in finding the most appropriate way to resolve any disputes, they may have the unintended effect of delaying the ultimate resolution of the dispute if they are not sufficiently tightly drafted.

“Catch all” provision 

To avoid the risk of disputes falling between the gap and/or leading to arguments over what constitutes a legal dispute in an agreement, drafters employ what is called a “catch all” provision. Hence, wordings such as “All or any differences, disputes or claims” “arising out of”, “in connection with”, “in relation to”, or “regarding”, “concerning alleged breaches of this contract”, “with respect to the construction of” are often employed  but are not fool-proof substitutes for drafting a dispute resolution agreement with precision. 

The aim when drafting a dispute resolution agreement is to ensure that it clearly states a workable and enforceable intention of the parties. Where an agreement is so defective that it is found to be unenforceable, the parties will be deprived of the benefits of their selected dispute resolution mechanism and forced into litigation which they had sought to avoid in the first place. In other circumstances, parties attempting to initiate the dispute resolution mechanism selected may be able to prove that the defect in the agreement can be cured through the proper interpretation of the agreement but this also will likely require litigation to first settle the validity of the agreement.

Pitfalls to Avoid 

In ensuring that an arbitration agreement serves its purpose, draftsmen should among other things, be mindful of the following:

  • Ensure they observe the laws of the seat of arbitration or likely place of enforcement. For example, an award to be enforced in most countries in the Middle-East can be invalidated by the mere mention of the word “interest” regarding money. 
  • Be mindful of the proposed dispute resolution institution when referring to an institution to ensure it will still be in existence when dispute arises. State the name of the institution clearly. 
  • Avoid naming a particular person as mediator or arbitrator. This may be a problem if that person becomes unavailable. 
  • Avoid too much specificity in the qualification of the neutral. 
  • State clearly the procedure to be adopted. 
  • In multi-tier clauses, state clear timeline for negotiation, mediation or arbitration but also give the arbitrator the power to extend time reasonably.

Concluding, draftsmen have the duty to ensure that arbitration agreements capture the intentions of the parties within the law. A dispute resolution agreement should provide a mechanism for a final, binding and enforceable resolution of the dispute. When drafting a dispute resolution agreement, parties should specify a particular ADR procedure. The reality is that once a dispute has arisen, agreement may be difficult to reach, so providing for this in the contract is to be preferred. The scope of the dispute and what will amount to a dispute, the language and applicable law(s) or rules must also be stated as clearly as possible.  

Dispute resolution agreements/clauses can be brief and allow the parties to agree on the details if and when the dispute arises. The danger in this is that some of the details that parties can ordinarily control if not agreed on before the dispute arises may be difficult to agree on later. Conversely, expansive agreements/clauses can contain all the details and box parties to a corner when there is a change in circumstance that was not envisaged or contradictions that affects the enforcement of the agreements/clauses.  

Each agreement/clause should be treated with the interest of the parties and the volume of the transaction in the matrix contract in mind to ensure that the agreement is functional and does not fail. 

Leave A Reply

Subscribe Your Email for Newsletter

  • +234 (0) 913 626 5322
  • [email protected]
  • Entrance 2, 1st Floor East Pavilion, Tafawa Balewa Square Lagos, Nigeria