Whether it’s a new relationship or a fledgling business venture, nobody likes to think about something going awry at some point down the line when they’re in the optimistic early stages.
But “Have you planned how you are going to fall out?” is one of the first questions I will ask a client when they come for advice about a dispute with their fellow business partners or one involving a contract with a supplier.
Often this question is met with a mixed reaction. In many cases the client will concede that they haven’t got a plan in place for what should happen if the relationship between them and their business partner(s) or supplier were to break down.
In another context, when I’m advising clients about the risk element of a contract before they enter into it, I’ll often ask if they’ve considered including a Dispute Resolution Clause. The answer in that scenario is similar. Understandable, given no one thinks about the relationship ending when it’s only just starting out.
What is a Dispute Resolution Clause?
A Dispute Resolution Clause in a contract or partnership agreement essentially sets out how parties should deal with any disagreement they have. They can be short, straightforward clauses simply allowing parties to take any dispute straight to the courts, or they can be longer clauses, setting out a staged process for dealing with a dispute.
An example of a longer staged process might be to hold a meeting between parties within 14 days of a dispute arising, to see if a resolution can be found. Where this isn’t possible, the clause may bind parties to next try and resolve matters at mediation, before - as a last resort - they progress to raise court proceedings.
In some cases, the longer staged process can remove the jurisdiction of the courts and require parties to instead appoint an independent expert to make a final and binding determination on a dispute. This can be especially useful where the dispute is technical in nature, relying on someone with sector specific knowledge to make a decision.
The benefits of planning for a breakdown
There are many advantages to using a dispute resolution clause. First and foremost, it provides a clear path forward for parties to follow should they find themselves in a dispute. Often a great deal of time is spent at the start of a dispute considering what forum to use and what approach to take. Where this is planned in advance it removes that issue and allows time to be spent instead on a resolution.
Depending on the process agreed in the dispute resolution clause it can also often lead to a quicker and more cost-effective resolution. Mediation and arbitration can in many cases be arranged and carried out more quickly than it would take parties to get to a court determination.
The clause could also enable parties to manage a dispute privately, out of the public gaze of the court room. This brings two benefits: firstly, it can mitigate against reputational risks arising from court reports in the press; secondly, it can give parties an opportunity to restore or preserve what are often close and longstanding relationships, compared to the sometimes destructive impact of settling disputes in court.
Still unconvinced about the need for a dispute resolution clause?
Perhaps think of it this way: changes in circumstances are inevitable and unavoidable. Whilst you wouldn’t enter into business expecting to fall out, by agreeing a dispute resolution clause, you have accepted the possibility of change positively should things break down in future.
