Guidance on dispute resolution clauses in contracts
This guidance covers the essential issues you need to consider for dispute resolution clauses when drafting a contract.
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It is important to seek legal or other professional advice when negotiating or agreeing a contract. This guidance does not constitute legal advice.
Overview
Contracts come in different forms and are used in a range of settings. Contracts can be verbal or in writing. Written contracts provide greater clarity about the parties’ expectations and can help prevent misunderstandings. If a problem or dispute does arise, a good written contract will set out the process for addressing the problem. Contracts are legally binding; written contracts are more easily enforced.
It is important for any contractual relationship to have an agreed approach to resolving disputes. Dispute resolution clauses in a contract are an important expression of the parties’ intention about how they’re going to work together. Robust dispute resolution clauses generally provide lower cost and timely approaches to resolving disputes and may help preserve relationships. They can prevent the parties from ending up in court.
There is no single dispute resolution clause that can be used for all contracts. Rather there are a number of factors that should be considered.
The content of the dispute resolution clause(s) should be deliberately and carefully considered and drafted to meet the particular context and needs of the situation. Investing the time and resources to do this up front can save time, costs and problems later on.
Good dispute resolution clauses
Good dispute resolution clauses should be clear, concise and anticipate, as far as possible, any future problems that may arise. Ideally dispute resolution clauses will:
- clearly define the rights and obligations of the parties in the event of a dispute
- outline the process the parties must follow
- be tailored to reflect the parties’ interests and their circumstances, and enable resolution in a way that is fair
- provide for ongoing performance of the contract obligations while parties engage in the dispute resolution process
- address what happens if the dispute resolution processes are not followed, or are unsuccessful
- address whether the dispute resolution clauses and/or any agreement will survive termination of the contract
- provide clarity about the avenues for enforcement of any agreement reached through the dispute resolution processes. This usually happens through the Courts or Tribunals.
Scope of the clauses and when they are triggered
Dispute resolution clauses need to be clear about what they apply to and when they come into play. They need to specify:
- the definition of what is considered a dispute
- the scope of the dispute resolution clauses in relation to the contract
- when the clauses will be initiated
- how the dispute resolution process is to be triggered. A common approach is to require that a party must give a written notice specifying the nature of the dispute to the other party or parties to the contract.
When deciding how to define a dispute, the parties should consider whether they want a narrower or broader scope, and use wording to reflect this intention. For example:
- “Any dispute arising out of the contract”
This has been interpreted by the courts as a narrower type of clause. It only applies to disputes and some of those disputes arising between the parties to the contract may be found to be outside the scope of this definition (e.g. a breach of related agreements). - “Any dispute, difference or question which may arise at any time between [x] and [y] with respect to this agreement”
This clause has wider coverage, including more than just disputes. It could cover different views about the interpretation or application of certain contractual provisions. However, it is unlikely to extend to matters:
- where one party caused damage to another by breaching a duty (tort);
- that are covered in legislation (e.g. section 9 of the Fair Trading Act 1986);
- that relate to equity or fairness under common law, sometimes called equitable claims.
- “Any dispute, difference or question arising out of or in connection with this agreement or its formation”
This clause has the widest coverage. Using the word ‘formation’ makes it clear that pre-contractual conduct is covered, including disputes about whether there is a contract in existence. The words ‘in connection with’ are wide enough to include disputes relating to pre-contractual misrepresentation (as provided in the Contractual Remedies Act 1979) and related statutory and tort claims, not generally covered by the above clauses.
Provide a clear mechanism, while retaining some flexibility
The dispute resolution clause(s) must provide certainty and set out a clear mechanism for the resolution of a dispute. They need to be more than an agreement to agree to resolve any dispute. They should provide some detail about the dispute resolution process and how this will be undertaken. If the clause lacks certainty, the court may find the clause is unenforceable.
The dispute resolution clause(s) should include details on:
- the process to be followed or relevant process rules, such as those provided by professional associations and some providers, by specific reference
- clear timeframes for key stages of the process
- a clear mechanism for selecting any third party, for example a mediator or arbitrator (professional associations and some depute resolution service providers can assist)
- a way for the parties to determine when the entire dispute resolution procedure has come to an end. A time period can be a useful way to do this.
There can still be some flexibility within the clause by providing windows for agreement between the parties. For example it can be helpful to specify that:
- the parties will agree the identity and fees of the mediator or other dispute resolution practitioner
- a fall back process for deciding these matters where parties are unable to agree. This is often achieved by delegating these decisions to an independent appointment body or person.
- specify that parties will pay any dispute resolution practitioner’s (mediator’s) fees equally.
Options for dispute resolution
It is important to consider which dispute resolution process to include in a contract. There are a range of dispute resolution processes, with each having particular strengths. Care needs to be taken in selecting an approach that is appropriate for the particular circumstances of the contract, the parties, the nature of any potential dispute and the contracting relationship.
Options include:
- negotiation
- conciliation
- mediation
- expert determination
- neutral fact finding
- arbitration.
The Glossary contains definitions of these processes and there is a discussion on the considerations in making choices between them in the ‘Designing your scheme’ section.
Single or multi-tiered dispute resolution processes
It is possible to rely on a single dispute resolution approach such as mediation. This may be suitable where the dispute is likely to be a discrete matter.
Alternatively multi-tiered dispute resolution clauses can be used, which provide for escalation and different approaches where a dispute is not able to be resolved. A typical multi-tiered clause may provide for direct negotiation between parties, mediation and then either arbitration or litigation. Multi-tiered dispute resolution clauses may be appropriate where matters are likely to be complex and there is an interest in preserving an ongoing relationship between the parties.
Care needs to be taken when considering multi-tiered dispute resolution mechanisms as they are not suitable in all circumstances. It is important to seek professional advice when considering this approach. Multi-tiered dispute resolution processes should:
- include time limits for each of the stages
- set out how the dispute will move from one stage to next
- specify a clear trigger between the stages which is an indisputable event, such as the expiry of a set time frame.
While multi-tiered processes can encourage parties to resolve a dispute at a lower level, there are also risks. If the earlier intervention is not successful, it may mean increased time and cost as parties have to go through each step. This approach may not be constructive in time sensitive circumstances.
Dispute resolution clauses and the role of the courts
Dispute resolution clauses provide an agreed process for resolving a dispute and ideally avoid the need for litigation. They do not replace the role of the Courts or remove the rights of parties to seek justice through civil litigation.
Situations when the Courts may become involved include:
- Where a matter is urgent and requires immediate attention. A temporary injunction may be sought to compel or prevent a party from taking certain actions until the matter can be fully heard and determined.
- Dispute resolution processes specified in a contact are not followed.
- Dispute resolution processes specified in a contract are followed, but no resolution is reached.
- There is some doubt about the certainty or application of dispute resolution clauses. This may arise due to poor drafting or a lack of internal consistency.
- An agreement arising from a dispute resolution process specified in a contract needs to be enforced.
- Where a party wishes to set aside an arbitral award (though this is available only in limited circumstances).
If one party tries to take court action without first using the dispute resolution processes agreed in the contract, the other party can take legal action for breach of contract. Courts tend to deal with disagreements about dispute resolution clauses through a ‘stay of proceeding’ where the case does not proceed in the Court until the agreed dispute resolution process is completed.
Further information
Further information on where to find an independent dispute resolution practitioner and examples of dispute resolution clauses can be found through the links below:
- Resolution Institute(external link)
- AMINZ(external link)
- New Zealand Law Society(external link)
- Government Procurement - see clause 11 [PDF 507KB](external link)