Going to court can sometimes be costly and adversarial. However, when dispute resolution clauses are incorporated in your contracts, you can refer to any of the alternative dispute resolution (ADR) methods to have your conflicts resolved other than litigation.
What are dispute resolution clauses in a contract?
When parties enter into a commercial contract, they are bound by the terms and conditions specified in it. That is why it is important to include everything in a contract because it is the guiding document for all parties.
While responsibilities and liabilities of each party are the usual terms included in a contract, it is also prudent to include how future issues or disputes can be resolved. For this purpose, dispute resolution clauses are used in contracts.
Dispute resolution clauses are part of the terms and conditions of contracts. These clauses compel the parties to proceed to negotiation, mediation, or arbitration when contractual disputes arise.
Alternative Dispute Resolution (ADR) principles
If you’re including a dispute resolution clause in your contract, it is important to know the basic principles surrounding ADR:
- Voluntary: you and the other party cannot be forced to undergo any of the ADR methods, unless it has been included through a dispute resolution clause and both parties agreed to it.
- Previously agreed arrangement: in relation to ADR as being voluntary, the weight of a dispute resolution clause’s enforceability rests on whether it has been previously agreed by both parties before finalizing their contract.
- Confidential: the whole ADR process is confidential, and confidentiality clauses may also be part of your contract’s dispute resolution clause.
- Enforceable: the resulting settlement, compromise, or award of an ADR method is generally enforceable between the parties. The courts have limited jurisdiction on changing or setting it aside, but this would depend on the applicable ADR law to the parties.
Types of dispute resolution clauses
Once you and the other party have agreed to include a dispute resolution clause in your contract, you can choose the type of dispute resolution clause:
- Negotiation / Mediation / Arbitration Clause: parties will proceed with a specific ADR method, in exclusion of the other methods; if unresolved, parties will proceed to litigation.
- Med-Arb Clause: the dispute is first submitted to mediation, and then to arbitration if it’s still unresolved; if the ADR methods have been ineffective, parties will proceed to litigation.
What makes a good dispute resolution clause?
The following are some considerations when crafting your dispute resolution clauses to make it more effective:
- Specific terms must be used: words in these clauses must not be vague and must be clear or concise. It may also be helpful to define technical terms if used in your contract.
- Specify the ADR method: the ADR method to be used must be decided early on, including the process to be followed when applicable. You and the other party may also choose the mediator or arbitrator/s.
- Decide on what law will apply: when parties are governed by different laws (i.e., in cases of foreign parties, or parties are governed by different provincial laws), it must be decided on what specific set of laws will apply to your chosen ADR method, or when proceeding to litigation.
A lawyer can help you draft the appropriate dispute resolution clauses for your contracts.
Know more about dispute resolution clauses, such as arbitration agreements, through this video:
A form of arbitration that falls under ADRs is international commercial arbitration – read about it in our guide.
What are the three methods of dispute resolution?
Over the implementation of any contract, you and the other party may find yourselves in a dispute. While the first thing that may come to your mind is to file a case or lawsuit against the other party, you may want to consider any of the ADR methods.
ADR methods
These methods are called “alternative” because they are options to litigation. Instead of going to court, you and the other party will try to resolve the issues through other means.
There are three ADR methods:
- Negotiation
- Mediation
- Arbitration
These methods are voluntary. There is an exception: if the law states that a case must be resolved through an ADR first before it goes to court.
While lawyers are not required in an ADR, it is best to have one. Lawyers can protect your rights and interests, especially if they are knowledgeable on the ADR process and the contract in dispute.
1. Negotiation
Negotiation is the most informal process among the other ADR methods. It can be as simple as talking with the other party’s representatives, or by calling a series of meetings with the other party.
Its goal is to reach a settlement, compromise, or any other solution to the dispute.
2. Mediation
Mediation is an assisted dispute resolution process, where a neutral third party – called the “mediator” – facilitates the discussion between both parties. The mediator is jointly chosen by both parties.
The mediator will try to resolve the issue by listening to both sides, relaying one of the party’s sentiments to the other, and guides the parties to come up with a “win-win” solution.
When successful, parties may agree to a binding settlement or compromise agreement, which will guide both parties moving forward.
Otherwise, the parties may now consider going to court, or to arbitration. Going to arbitration may be decided by the parties after the mediation, or through the enforcement of a “med-arb” clause in their dispute resolution clauses.
3. Arbitration
Arbitration is like a courtroom process. Here, the chosen neutral third-party arbitrator or panel of arbitrators – who have judge-like powers – render an arbitral decision or award in favor of one of the parties. This decision or award must still be based on the facts and applicable Canadian laws.
In arbitration, parties may present evidence or witnesses in support of their cause.
Depending on the arbitrator or arbitrating institution, there are certain rules and procedures which may also be followed. Parties, along with the arbitrator/s, can also include other rules.
If unsuccessful, or when one of the parties disputes the award or decision, an appeal can be filed before the court (if allowed by law).
Benefits of ADR methods
Here are some of the benefits of ADR over litigation:
- Cheaper: depending on your location and your chosen mediating/arbitrating institution, ADR methods may be relatively cheaper compared to litigation costs.
- Timesaving: compared to litigation, issues may be resolved faster in ADR methods; in addition, you and the other party can freely agree on how long the issue must be resolved through ADR.
- Informal process: due to the nature of ADR as more informal than court proceedings, there is more openness between the parties, which provides for more opportunity to resolve the issue among yourselves.
Need help in crafting your dispute resolution clauses? Contact any of the best commodity tax lawyers in Canada as ranked by Lexpert.