A contract is only as good as the dispute resolution clause in it. Unfortunately, as the least interesting clause of the contract, it has often been left to be drafted during the quiet hours of the night, when the chief negotiators had already shaken hands and set out to have a beer. That's why it is also known as the "midnight clause". It has often been copied from previous contracts, concerning totally different issues between totally different parties from totally different countries. And nobody really gave any thought to possible consequences.
The dispute resolution clause may alter the entire balance of the contract. A carelessly drafted dispute resolution clause may lead to significant contractual imbalance between the contracting parties. The dispute resolution clause can be deliberately drafted to be asymmetrical so that it is especially favourable for the other party. An asymmetrical dispute resolution clause may easily result in one contracting party having more reasons to avoid litigation, which again puts the other party in a more favourable position to start behaving as they wish in the contractual relationship.
Key choices in terms of willingness to initiate legal proceedings are, for example, the dispute resolution mechanism (local court or arbitration proceedings), seat of arbitration (defines the procedural legislation applied in the litigation), arbitration rules (institute selection), legal culture and possibility to affect the judge or arbitrator selection. It is obvious that if the legal proceedings are agreed to be conducted in accordance with unfamiliar proceedings, legislation or legal culture, the threshold for initiating the proceedings is very high even when there are grounds for it. This is the reason why it is essential for the outcome and the quality of the contract to seek to influence the aforementioned issues when drafting the dispute resolution clause.
An unclear and ambiguous arbitration clause may lead, for example, to a situation where the arbitration clause, which was meant to avoid litigation, will be litigated for years in order to know where the dispute finally should be resolved. I personally started my career with a cross-border arbitration case in which we travelled, for the first one and a half years, to Stockholm to arbitrate the dispute resolution clause in order to know where to arbitrate the substance matter itself.
It is often stated at the beginning of the dispute resolution clause that in case of a dispute, the parties undertake to conduct negotiations in order to find an amicable settlement between the parties before starting legal proceedings. A typical plea of trial at the beginning of the legal proceedings very often is that these negotiations between the parties have not been conducted in accordance with the contract or they have not yet been completed. In such cases, the parties have to undergo a lengthy process of trying to prove whether the negotiations were conducted in accordance with the contract or should the initiated proceedings be discontinued in order to conduct the negotiations. Therefore, it is crucially important to define when the negotiations are deemed to have started and ended as well as agree on a deadline for the end of the negotiations in the dispute resolution clause.
Originally published 21 Dec 2021
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.
