New Zealand: Effective use of arbitration agreements and dispute resolution clauses in commercial contracts

Dispute resolution clauses are rarely excluded from commercial contracts and the inclusion of arbitration agreements within those clauses are becoming increasingly common. Dispute resolution clauses come in a range of forms and it is important that parties drafting or entering into agreements with dispute resolution clauses are familiar with the consequences of doing so.

Arbitration agreements in particular are becoming increasingly common as they offer contracting parties a cost-effective and private way of resolving disputes. Arbitration agreements provide a range of benefits which other dispute resolution mechanisms do not, which is why they ought to be considered as the primary mechanism for resolving commercial disputes.

One of the major upsides to arbitration agreements, as distinct from other dispute resolution clauses (for example, agreements to negotiate/mediate or use an expert determinator), is that arbitration awards entered following an arbitral process are final and binding as if made by a High Court Judge. Upon an arbitration award being entered, it can be enforced the same way as a High Court judgment. Arbitral awards can typically be enforced by foreign Courts or tribunals more simply than domestic Court awards, which is why parties contracting internationally ought to seriously consider including arbitration agreements as their default dispute resolution mechanism.

Arbitration agreements are also supported by a statutory framework under the Arbitration Act 1996. Where there is doubt as to the agreed procedure of an arbitration, the Act can fill the gaps. We encourage contracting parties to agree to the arbitration procedure within the contract itself for the avoidance of any doubt. The New Zealand Dispute Resolution Centre and the Arbitrators' & Mediators' Institute of New Zealand have procedures for expedited and full commercial arbitrations that can be adopted via these clauses.

Contrast arbitration agreements with other dispute resolution clauses which are only enforceable as a contractual term; if a contracting party refuses to follow an agreed dispute resolution process, the other party might be forced to litigate over the enforceability of the dispute resolution process (i.e. allege a breach of contract) even before the substance of the dispute can be questioned. In those circumstances, the very clause designed to avoid costly litigation may itself become the subject of a litigated dispute.

Courts in New Zealand are now clear in their view that contractual agreements to engage in a certain dispute resolution process will be binding just as any other contractual term and that parties seeking to avoid following that process will be prohibited from issuing proceedings. The Courts will stay proceedings where they recognise that a party has breached the dispute resolution mechanism by not engaging in the agreed process (whether that is negotiation, mediation, expert determination or arbitration) and has instead elected to issue proceedings.

Enforceability needs to be at the forefront of contracting parties' minds, and those parties drafting these agreements need to understand the practical risks which flow on from the process included in a contract. It seems too common that parties are including these clauses without actually having regard to how they will operate so as to avoid litigation.

Multi-tiered dispute resolution clauses are also something that we are seeing increasingly in commercial contracts; these are the never-ending clauses that involve a tiered approach to resolving disputes, i.e. giving notice of a dispute, informal negotiation, referral to mediation, or an expert determinator, and, failing that, referral to arbitration or litigation. Parties entering into commercial contracts or drafting contracts need to properly consider whether these are actually appropriate, rather than simply including them from a standard-form agreement.

Commonly, these clauses are added as a courtesy at the contracting stage when the parties see eye-to-eye and perhaps naively hope to resolve disputes on the same footing. Drafters need to remember that when disputes arise the contracting parties are unlikely to be so accommodating or understanding. Drafters should also have regard to the likely areas of dispute; if the contract is likely to give rise only to discrete disputes then it will not be appropriate for a drawn out multi-tiered resolution process to be set down when it could instead be determined swiftly (e.g. by an expert determinator).

Expert determination clauses provide a middle ground between the regulated process of arbitration and the alternatives which see the parties try to reach mutual agreement, whether through informal negotiations or assisted mediations. It needs to be remembered however that expert determination clauses are again enforced only as a normal contractual term and an expert determination is not enforceable like an arbitral award. Because there is no statutory framework supporting expert determination mechanisms like there is with arbitration (Arbitration Act 1996), the contract needs to be explicit about what powers a determinator has and what review/appeal powers the parties will have (if any).

Such clauses do offer parties some flexibility as to resolution and allow the parties to put the decisional power in the hands of an independent third party who is an expert in the chosen field (which is typically not the case with mediators or Judges). Expert determination is typically cost-effective for that reason and is particularly appropriate where only discrete issues require determination, e.g. valuation disputes in a leasing/property/business sale context, or determinations around taxation or accounting.

Civil proceedings may still be necessary to give effect to an expert finding in circumstances where parties refuse to be bound by the determination of an expert appointed under a dispute resolution clause. Courts will commonly give effect to the intention of the parties to submit their dispute to expert determination and accordingly uphold/enforce the determination, but parties need to be aware that unlike arbitral awards, expert determinations are not automatically enforceable, nor are they enforced as simply in foreign jurisdictions.

In summary, when drafting dispute resolution clauses, parties should consider the following questions in order to ensure that the most appropriate dispute resolution clause is included in the agreement:

  • What types of disputes are likely to arise under the contract?
  • Should it be multi-tiered and allow first for the parties to try and resolve the dispute between themselves?
  • Should an arbitration agreement be included?
  • Is an expert determination process appropriate?
  • What procedure should be put in place?
    • What appeal/review rights should be allowed for, if any?
    • How will an arbitrator/expert be appointed?
    • How will related costs be funded?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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