For many of us, working from home has given us more time to stand back and take time to consider our working practices and whether they can be amended or improved. And the same goes for those involved in contract drafting. Boiler plates and dispute resolution clauses are often the last items in the box to be looked at. But getting the dispute resolution clause right is vital to effective contract management especially as we enter a new dawn of conducting business in a post Covid-19/Brexit world.
Contracts and agreements
To start from the basics - a contract is a record of how people will interact over a certain period. It governs how services will be supplied, quality, price and what happens if things go wrong. That is all that it is.
That is why comprehensive contracts can be so long. They attempt to cover all eventualities ranging from a global pandemic (what are the chances) to raising a dispute or storage of data. Normally the more complicated the service the more complicated the contract. The documents required for the construction of an aircraft carrier will be substantial when compared to those you might see when you get wifi installed, however, the things they cover will be the same – payment, performance, delivery, complaints and so on.
Like a lot of these things they rarely get used or even looked at unless something goes wrong, much like the instructions to a hoover. However, what happens when things do go wrong and the hoover breaks down the second time you use it? This article attempts to explain the importance of dispute resolution clauses in contracts so you don’t have to read the instructions.
Jurisdiction and Governing law
We were once asked to give a contract a “quick look over”. Hidden away near the end of the document for the supply of goods to a public body in Wales lay a clause that stated that the contract was subject to the laws and Courts of the State of California and in particular Santa Barbara.
The jurisdiction and governing law clause will give you peace of mind for a number of reasons.
- It will tell you which law applies to the contract
- It will tell you which courts will hear any dispute
- You know you can avoid certain courts
- You have clarity
This might seem obvious. However in this day and age with procurement being international it may be very important to you to ensure that your contract is not going to be subject to laws and a forum you are unfamiliar (for example Turkish law with any dispute being heard in Istanbul).
You must decide which law is to apply and which court system will enforce the contract before it is signed. Not to do so can, and generally does, cause a lot of expense and lost time dealing with what should be a peripheral issue.
It is entirely possible to opt for the courts of England to deal with a dispute but use the laws of another country to interpret the contract. However, this approach has not curried favour with Judges in the UK.
For the majority of public bodies in the UK the contract should maintain that it is the law of England and Wales that governs the contract.
However, even then the UK has countries within it that have their own laws in respect of health contracts. Wales is a prime example. Whilst it does not have a separate jurisdiction (yet) it does have different laws. For example it has its own NHS (Wales) Act and not all of the Public Contract Regulations 2015 that govern procurement procedures apply in Wales.
Scotland is another example where health is completely different to England. The same could be said of Northern Ireland.
A simple check can save a lot of time and money not only if there is a dispute, but also if modifications are to be made to the contract.
As I said at the outset a contract is just a way of telling people what will happen in certain circumstances. Knowing what law applies and what jurisdiction will deal with the contract is reassuring at the very least.
The clause must be agreed and in writing.
It must follow whatever practices the parties have used and agreed upon.
If the contract is international it must comply with those requirements that are recognised by both parties and are common to such a trade.
There are a number of types of clause. Put simply they are:
- Exclusive – only one country has jurisdiction and governance of the contract. A party is actively prevented from using another country.
- Non-exclusive – such that certain countries might deal with disputes but have different law applied.
- Asymmetrical – where only one party has the benefit of the clause and the other is prohibited from taking similar steps in that jurisdiction.
Problems do arise and careful thought should be given to what type of clause should be agreed or imposed on another party.
Enforcement, enforcement, enforcement
Another aspect parties should consider when entering into a contract is how am I going to enforce any judgment if things do go wrong? It may be all well and good to obtain vindication of a judgment that you have acted correctly and were right to enforce your rights against someone who has breached an agreement. But practically no one wants a pyrrhic victory with no recourse at the end. So practically how are you going to enforce your rights if your counterparty is based overseas with little or no assets based in the UK?
This should be forefront in your mind when entering into a contract. If your counterparty is based in the UK with assets in the UK, it should be relatively straightforward to enforce an English judgment if they have assets to enforce against. If your counterparty is based in Europe, again under Brussels Recast it is relatively straight forward to enforce an English judgment. However, post Brexit and once the transitional period comes to an end (currently due to end on 31 December 2020), Brussels Recast will cease to apply. No replacement regime has been agreed as of yet and the current position is that a party would need to rely on the 2005 Hague Convention which has its own limitations although the UK has applied to join the Lugano Convention although that has not yet been approved by member states. For more information about what will happen post Brexit, see here.
Outside of the EU, enforcement of reciprocal judgments can be trickier still. Every jurisdiction has its own regime and parties should therefore check when entering into contracts whether it is possible to enforce a judgment in a jurisdiction where a counterparty is based and/or has assets. For example, in Kuwait, Kuwaiti courts will enforce foreign judgments if there is a reciprocal arrangement or evidence of reciprocal treatment to enforce its judgments in that foreign jurisdiction. As no reciprocal arrangement exists between the UK and Kuwait, reports have suggested that Kuwaiti courts are reluctant to enforce English judgments.
Mediate before breakfast, before dinner and before tea
As set out above, contracts (more often than not) contain a dispute resolution clause.
Some parties opt to include in their dispute resolution clause a requirement that they try and resolve the dispute through alternative dispute resolution (such as mediation) before referring the matter to the courts or arbitration. Some parties alternatively agree at the outset of a dispute or during proceedings to mediate. Further still, courts sometimes exercise their case powers directing parties to mediate to see if a settlement can be reached before proceedings can progress.
But what is mediation? It is generally a mechanism by which the parties meet to see if they can (amicably) resolve any problems they might have. It is normally a process that has stages.
- The people dealing with the contract on a daily basis try and resolve it but if they cannot a notice can be served indicating that there is a dispute.
- People higher in the “food chain” will then attempt to resolve it.
- If that does not work then sometimes a final step is included to bring in the Chief Execs of the parties to try and bring matters to a conclusion.
- If that fails then mediation can be tried.
Mediation is often a dirty word. Why mediate if you have done nothing wrong. Put simply no one goes to a trial in court thinking that they will lose but someone has too. The court procedure is time consuming, expensive and stressful. Mediation will reduce all of those burdens and in some cases retain the commercial relationship which is almost always damaged beyond repair once parties are in Court.
The process for mediation involves the appointment of a suitably qualified 3rd party. The costs are shared 50/50. The parties can agree on one or they can elect an independent body (such as the CEDR (Centre for Dispute Resolution)) to appoint one. Once agreed, a venue is arranged and the parties attend.
The process of how the parties undertake their mediation is flexible and is driven by what the parties and the mediator agree. The most normal process however is that the parties exchange a short statement setting out their cases a few days before the mediation. At the start of the day, the parties meet in a room and expand on their opening statements. The mediator describes what their role is and lays out how the day will be managed. Shuttle diplomacy will then take place. Generally a settlement can be reached. It is often surprising that parties that seem miles apart can (after a very long day of horse trading) either resolve their differences or leave just the end of an issue to be resolved. Even if matters do not settle on the day, we have seen in practice that settlements can often follow as a result of a mediation. The very fact that parties have moved during the day to narrow the points in issue can often be a decisive factor in parties acting cooperatively afterwards to see if an amicable settlement can be reached.
Of huge importance, as well, is cost. The courts are also now much more likely to penalise those who do not at least try to mediate. In the context of government contracts, it may be advisable to include a requirement to mediate in the dispute resolution clause. Many contracts we have seen are drafted to prevent parties from litigating until mediation has been tried.
My counterparty is based overseas or confidentiality is crucial to me. Is arbitration the answer?
What is arbitration? Put simply, it’s a private form of dispute resolution in which hearings are generally conducted in private. Again, it is a creature of contract and parties have to agree in writing to refer their disputes to arbitration. For more information on what arbitration is, please see here.
The biggest benefit arbitration has in its arsenal is the New York Convention 1958. The convention allows for the enforcement of arbitration agreements and awards across the globe. Whilst the UK has some similar arrangements in respect of its court judgments, they are not on the scale which the New York Convention provides for. There are currently more than 160 contracting states to the New York Convention. Under the New York Convention, contracting States are required to recognise and enforce arbitration agreements and Awards save or limited exceptions. What that means in practice is that the courts of contracting States are required to:
- require any party to submit their dispute to arbitration if they have agreed to refer their disputes to arbitration; and
- recognise any arbitration award issued as binding and enforce them under their local procedural law.
Therefore, if you are dealing with a party who is based overseas and you are concerned about enforcement, arbitration may be the answer. Many institutional arbitration centres (such as the London Court of International Arbitration (LCIA)) have model arbitration clauses on their websites which can be copied and pasted into agreements. If you are considering adopting an arbitration clause, it is important to specify: (a) expressly that the parties refer any disputes under the agreement to arbitration; (b) where the arbitration is to be seated (whether in London etc); (c) what institutional rules the parties want to apply (if they do wish so) (such as LCIA Rules etc); (d) what language the arbitration will be in; and (e) the number of arbitrators they wish to resolve the dispute (it is generally cheaper to appoint a sole arbitrator than three).
Another major advantages of arbitration is that proceedings are conducted in private and are kept confidential. That means that the subject matter and the contents of a dispute should be kept out of the public domain. Court litigation by contrast is almost always conducted in public in order to allow for due process and transparency of justice. Whilst the English Arbitration Act 1996 does not include a provision that parties to arbitrations are required to keep the existence of the arbitration confidential, English common law does dictate that it is an implied term of every arbitration agreement that the existence of the arbitration and the documents produced during the proceedings are to be kept confidential. That can only be fettered in limited circumstances. The privacy of arbitration can be important to parties in particular where parties do not wish their sensitive, commercial and/or proprietary information to be disclosed to the public.
What happens if it does go wrong: five top tips
Unfortunately contracts do sometimes go wrong and parties end up in a dispute (either because a party hasn’t performed an obligation or there is a dispute as to what a clause means). If you can foresee a dispute on the horizon, below are some general tips of what parties can do to ensure they are in the best position possible if litigation is commenced. The below is not intended to be exhaustive of course and we would recommend you seek legal advice if you believe a dispute is on the horizon.
What do your contract terms say: Review the terms of the contract to see what your rights are, whether there has been a breach and what your remedies are and if they are subject to any applicable limitation periods.
Where are your witnesses: Consider where your witnesses are and whether they are in the business. Cases turn on witness evidence and if your witness leaves the business especially on bad terms, it may be difficult to encourage them to help and provide evidence when the matter gets to court or arbitration.
Where are your documents: Consider where any documents which are relevant to a dispute may be held? E.g. are there hard copy documents or are there electronic documents held with particular custodians on particular devices? If litigation is reasonably in contemplation, steps should be taken to preserve those documents to prevent them being lost or destroyed.
Dealing with the other side: If you are corresponding with the other side and are making concessions or admissions, consider whether you should mark such correspondence “Without Prejudice” to prevent it being referred against you during any litigation.
Maintaining litigation privilege: Privilege is always a complex issue and separate regimes apply as to whether privilege is legal advice privilege or litigation privilege. When disputes are on the horizon, litigation privilege usually comes to the fore. The scope of when litigation privilege will apply was put under close scrutiny recently by the Court of Appeal in SFO v ENRC. If internal investigations are being conducted when it appears that litigation is on the horizon, it is important that steps are taken to make clear that the dominant purpose of the investigation is to investigate events in light of contemplated litigation. It is important that great caution is taken so that any documents created maintain privilege.
When entering into a contract, the last thing on a parties’ minds is what happens if things go wrong and the hoover breaks down the second time you use it. However, making sure at the outset that an effective dispute resolution clause is put in place to meet the objectives you will have if things do go wrong is of fundamental importance. The dispute resolution clause is not one which should be neglected as being a dull clause at the back of the boiler plates.