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7 April, 2017
In most business contracts, the dispute resolution clause is usually buried at the end of the contract and hidden among many other boilerplate clauses. Some simple contracts do not even contain a dispute resolution clause.
From our experience, many parties are not interested in spending too much time considering the dispute resolution clause. The reasons for this are myriad – some view it as “standard” or “not as important” as the other commercial terms of the contract, while others are so optimistic about the contract that they do not foresee disputes as being a real possibility.
What is a dispute resolution clause?
Like the name says – it is a clause that governs how parties to a contract intend to resolve disputes. A typical dispute resolution clause could look something like this:
“This Agreement shall be governed by Malaysian law. All disputes arising out of or in connection with this Agreement shall be referred to the exclusive jurisdiction of the Courts of Malaysia.”
or:
“Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be decided by arbitration in accordance with the Rules for Arbitration of the Kuala Lumpur Regional Centre for Arbitration. The appointing authority shall be the KLRCA. The number of arbitrators shall be one. The place of arbitration shall be Malaysia. The language to be used in the arbitration proceedings shall be English. The law applicable to this contract shall be Malaysian law.”
Why should contracts have a dispute resolution clause?
The purpose of a dispute resolution clause is so that parties have a clear understanding about how any potential conflicts will be dealt with, and this can save a lot of time and money in the long run.
This is especially important in cross-border contracts, where issues like jurisdiction are not so straight forward.
What could possibly go wrong?
A contract that doesn’t have a dispute resolution clause (or one that has a badly drafted clause) creates the possibility of having “pre-dispute” disputes on things like governing law, jurisdiction and procedure.
For a particularly litigious party with deep pockets, these types of preliminary disputes can drag a conflict for years, before parties even get to the substance of the main dispute. Parties end up wasting time and money arguing about what their dispute resolution clause is supposed to mean, instead of actually resolving their disputes.
Here are some of the other things that could go wrong with a badly drafted or poorly considered dispute resolution clause:
You could end up having to resolve your disputes in a manner that is not commercially viable. For example – imagine having to arbitrate a US$20,000 claim with 3 arbitrators using the International Chamber of Commerce Rules. The estimated costs of arbitration would already be approximately 75% of the claim amount, and that’s before taking into account your legal fees.
Estimated arbitration costs for a US$20,000 claim before 3 arbitrators using the ICC Rules.
You could end up having to resolve your disputes in a foreign country, which has various tactical, logistical and costs disadvantages.
As a consequence of these undesirable outcomes of a badly drafted clause, you could be spending a lot of time and legal fees in trying to challenge the enforceability of the dispute resolution clause.
Every clause in a contract should have its purpose, and a dispute resolution clause is no different. It should not be overlooked as a boilerplate term that can be glossed over. It is too ironic if a dispute resolution clause becomes the cause of a major dispute.
For further information, please contact:
Donovan Cheah, Partner, Donovan & Ho
donovan@dnh.com.my
