Disputes in contracts: the importance of dispute resolution clauses in avoiding costly and timely litigation

An often overlooked part of a commercial contract are clauses that set out what the parties must do if a dispute arises between them under or in relation to the contract. This is often overlooked because, at the time of entering into the contract, the parties anticipate that everything will go to plan.

Such clauses are known as ‘dispute resolution’ clauses and their function is to ensure that the parties have exhausted non-litigious methods of dispute resolution before restoring to litigation, which can be costly, uncertain and time-consuming.

Types of dispute resolution clauses

Dispute resolution clauses may be:

- mandatory, requiring the parties to comply with the mechanism going to court; or

- permissive – allowing the parties to comply with the mechanism without affecting their rights to go to court.

Dispute resolution clauses often involve the parties attempting to resolve disputes by escalating alternative dispute resolution methods such as negotiation, non-binding mediation and binding arbitration.

What you need to consider in a dispute resolution clause

If you are entering into a contract that includes a dispute resolution clause or you believe that the contract should include a dispute resolution clause, you carefully consider the following:

- What are the likely areas or sources of disputes under the contract?

- Which dispute resolution processes are best suited to resolve a dispute and what should the escalation process and the timing of such process look like?

- Does the contract deal with technical industry matters (such as in building and construction) and is independent expert determination a suitable alternative resolution method?

- Will the dispute resolution clause be mandatory or permissive?

- Should the dispute resolution clause impose an obligation on the parties to act ‘in good faith’, requiring them to make an honest and genuine attempt to resolve the dispute?

- How will the parties bear the costs of complying with the dispute resolution processes?

Seeking legal advice

A dispute resolution clause is an important part of a contract and the parties to a contract should not overlook it when negotiating the contract.

Accordingly, you should seek legal advice on all aspects of a contract, including a dispute resolution clause and a solicitor will be able to assist you in ensuring that such clauses are enforceable, contain a mechanism that is appropriate to the subject matter of the contract and set out a clearly defined process to provide the parties with the opportunity to resolve a dispute without having to resort to litigation.

If you would like advice or assistance in relation to commercial law matters, please contact our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.