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Contractual disputes & dispute resolution clauses - avoiding problems

View profile for Hem Gujadhur
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Contractual disputes & dispute resolution clauses - avoiding problems

Every business involves contracts of one sort or another and for most businesses, contracts with suppliers, customers or staff are critically important.

However, in practice contractual disputes can arise quite easily from basic misunderstandings or the failure by one party to do what is expected and can have a huge impact on B2B and supplier relationships.

In her latest article, Corporate & Commercial Legal Assistant Hem Gujadhur outlines how these disputes can be avoided and mitigated using a dispute resolution clause.

What causes contractual disputes?

Most commonly, contractual disputes arise where one party fails to carry out what they have promised to do under the contract, but they can occur for a wide variety of reasons.

Areas that might cause dispute include (but are not limited to):

  • One party not completing the terms within the contract
  • The contract (or terms within it) not being in a single written document at all, and have instead been agreed orally or through emails
  • Where there is uncertainty within a contract regarding the agreed certain terms
  • Where there is ambiguity as to whether certain terms and conditions apply
  • Whether or not a contract has come into existence at all

Even when a contract has been prepared to the best of both parties’ abilities, because of the uncertainties in language itself, disputes can still arise, and these will often be difficult to resolve and can be costly.

Related: What makes a strong business contract?

How to prevent contractual disputes

Although there is no way to completely prevent contractual disputes, both parties can do their best to decrease the risk by properly and carefully drafting the contract terms and, potentially, including a dispute resolution clause.

Including such a clause will allow both parties to be prepared for a dispute and set out steps to resolving the dispute. It also can prevent court involvement which can be costly and time consuming.

It is not appropriate to all contract situations but can be especially helpful where there is a dispute about a technical, accounting or legal matter, where a third party can provide their expert input.

What is a dispute resolution clause?

A dispute resolution clause is one that sets out what should happen if the parties were to have a disagreement.

These are intended to set out a mechanism to settle the issue before either party has to go to court or to terminate the contract. Dispute resolution clauses fall into a number of categories, including:

  • Referring the issue in dispute to a formal arbitration;
  • Providing for the referral of the dispute to an independent “expert” who is given power to decide the issues
  • An “escalation clause” so that the dispute, if not resolved, is referred to higher levels of management on the basis that the senior members of the teams will have powers to agree a resolution of the issue.

In any case, the clause should set out an agreed way for the dispute to be resolved, preventing the situation from worsening.

Do you need a dispute resolution clause?

No, having a dispute resolution clause in place is not required but we highly recommend it particularly for contracts involving technical issues, such as IT contracts and construction agreements.

It is also appropriate for confidential agreements, such as partnership agreements where the partners may want to keep details of their dispute private.

Like we’ve said, including this clause in the contract can diminish the risk of business relations breaking down completely between parties and disputes escalating too quickly since the dispute resolution clause will set out steps to resolve disagreements as they arise.

Related: The Importance of having a properly drafted partnership agreement

What happens if there is no dispute resolution clause in a contract?

If there is no clause in place, disputes will escalate and may result in court involvement being required, which, not only is costly and time consuming, but also stressful. 

Furthermore, there is a high probability that the desired outcome will not be achieved in some cases since there is an inherent uncertainty in most litigation.

Are dispute resolution clauses binding?

Yes, correctly drafted, clear and obligatory dispute resolution clauses are legally binding and enforceable in court. 

However, both parties must agree to a dispute resolution clause and the mechanism that follows should things go wrong. This is particularly important and that is why speaking with a solicitor and having them draft these clauses properly should be a client’s priority. 

A badly drafted dispute resolution will cause confusion as well as delay and further costs in resolving the matter.

However, where there is a carefully drafted clause, the parties can be bound to use it before one of them has recourse to the courts.

At Frettens, our bright Corporate & Commercial Team is one of the largest in the region and members of the team would be happy to assist you in drafting a dispute resolution clause into a contract. You can get in touch on 01202 499255, or by filling out the form at the top of this page.

How much does a dispute resolution clause cost?

A dispute resolution clause does not attract an additional cost since it forms part of the body of the type of legal document being drafted.

It is entirely the client’s choice whether to include such a clause or not, although our advice would be to always consider including it.

How do you write a dispute resolution clause?

As mentioned above, there are different types of dispute resolution clauses. These can be multi-tiered, hybrid and carve-out clauses. The dispute resolution clause can also be as brief or as detailed as the client wants it to be, but the golden rule is to keep the clause as comprehensive as possible and for it to have a wide scope. 

What makes a good dispute resolution clause?

A good and properly drafted dispute resolution clause will:

  1. Specify clearly when it can be used, e.g. for a dispute involving the contract itself or circumstances in which the contract was agreed;
  2. Specify clearly the need to use the procedure and which one applies;
  3. Deal with the appointment of any third party to be involved; and
  4. Clarify how the costs of the procedure will be divided.

It is always the best policy to have a clear and unambiguous contract to avoid the need for disputes on the contract itself. For example, it should clearly show who can bring a claim in and in what capacity.

For this reason, the exact names of parties in contracts must be correct to ensure that in the event of litigation or a dispute, the court will not reject the claim on the basis of parties being unknown or unidentifiable.

It is also important that the most appropriate governing law and jurisdiction are included in the clause. If the client is based in the UK and operates primarily in the UK, the chosen court and governing law are likely to be one of the jurisdictions, such as England and Wales or Scotland, in the UK.

If the parties opt to use a jurisdiction outside the UK, they will have to ensure that they are in a position to instruct foreign lawyers and be prepared to attend the overseas court whether remotely or in person if a dispute arises, which is very often not ideal.

Alternative dispute resolution (ADR)

Alternative Dispute Resolution can have a number of advantages. It can be much quicker than litigation and therefore involve lower legal costs. It can also be more informal and private.

Even if there is no ADR provision in a contract, the parties can still resort to the ADR mechanism if they agree to it between them.


Arbitration is a traditional form of alternative dispute resolution but, over the years, it has become more complex and regulated and so today it is mainly used in certain industries such as shipping or overseas trade or highly technical contracts.

If arbitration is one of the preferred resolution options, it might be a good idea to have a stand-alone arbitration agreement rather than drafting a “messy” clause. It is also sensible to try and avoid complex carve-out clauses.

Is ADR better than litigation?

As a general rule, it is generally preferable for the parties to resolve any dispute outside of court before turning to litigation, consequently keeping costs down and maintaining a good working relationship between the parties to an extent.

Special business contract solicitors in Dorset

If you have any questions following this article, or would like some tailored advice on your business' contracts and dispute resolution clauses, please don’t hesitate to get in touch with our bright team.

Our team have experience in drafting effective and legally sound contracts to include dispute resolution clauses that best reflect our clients' interests.

You can call us on 01202 499255, or fill out the form at the top of this page, for a free initial consultation with our bright team.

The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.