Dispute Resolution Clause

The dispute resolution clause in civil and commercial contracts holds significant importance. Poor or defective drafting can adversely affect the validity and effectiveness of the clause, or delay its implementation for several reasons—most notably, the parties’ inability to agree on a single interpretation of its provisions. In fact, a poorly drafted clause can be worse than the absence of such a clause altogether.

A dispute resolution clause constitutes an explicit agreement on the methods agreed upon to address any disagreements that may arise during or after the execution of the contract. The drafting of this clause must be clear, precise, specific, and direct, leaving no room for ambiguity or multiple interpretations. For example, a clause drafted in general terms stating merely that any dispute shall be resolved through “amicable means” is insufficient if it does not precisely define what those amicable means entail.

A proper formulation would be: “In the event of a dispute between the parties regarding the execution of this contract, the dispute shall be resolved through conciliation or mediation. If no solution is reached through these methods, the dispute shall be referred to the judiciary (or alternatively, to arbitration).”

The clause may also combine judicial and arbitration jurisdiction within the same contract—for instance, specifying that the dispute shall initially be resolved through arbitration, and if unresolved, then referred to the courts. However, such wording may allow one party to delay the resolution process by choosing the forum that seems more advantageous to them. For example, if the expected arbitration ruling is unfavorable, the party may bypass arbitration and pursue litigation in court, and vice versa.

Therefore, drafting this clause is a critical aspect of contract formation. Often, parties may avoid discussing or drafting this clause at the outset of their relationship for fear of misunderstanding each other, which can lead to persistent and escalating disputes. Clear and precise agreements from the beginning prevent ambiguity, as contracts are meant to be sufficient in themselves.

To address these issues, it is recommended that the clause explicitly specify jurisdiction over the dispute and be drafted with multi-stage conditions, ensuring that the parties commit to resolving foreseeable disputes through negotiation or mediation within a specified timeframe. If this fails, the clause should provide for recourse to litigation or arbitration. The clause should avoid references to other contracts, memoranda, or correspondence without clarifying their relationship to the executed contract. Over-detailing should be avoided to prevent redundancy or inclusion of irrelevant matters. Additionally, the clause should define territorial jurisdiction for dispute resolution.

In conclusion, drafting a dispute resolution clause requires a comprehensive understanding of the intentions of both contracting parties, which can only be achieved through clarity of purpose and absolute transparency.