Appropriate Dispute Resolution Clauses are vital in Commercial Agreements

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By Jackie Lafleur, Senior Associate,
Dispute Resolution Practice,
Baker McKenzie Johannesburg


Parties that conclude any sort of commercial agreement must consider the mechanism by which any dispute arising under the agreement will be resolved. This is where the insertion of an appropriate dispute resolution provision, which clearly and concisely sets out the process to be followed by the parties in the event of a dispute arising, becomes hugely important. Too often parties will insert a standard dispute resolution provision into a commercial agreement without giving any thought to the context of the clause, often to the detriment of the contracting parties. In actuality, the dispute resolution clause is one of the most vital clauses in a contract and can assist parties in resolving their dispute far more cost effectively and efficiently than would otherwise be the case.

There are a number of factors that need to be considered when determining an appropriate dispute resolution clause. The most important decision parties are faced with is what forum they wish to choose for the resolution of a potential dispute. Contracts that contain a multi-tiered approach to dispute resolution are becoming more frequent. This approach means that parties are required, or can elect,  to first engage in alternative means of dispute resolution (such as negotiation, mediation or adjudication) before proceeding straight to arbitration or litigation. Where the clause is phrased in such a way that these steps are mandatory, they must be followed before a dispute can be referred to litigation or arbitration. If they are not followed, then a party cannot refer the dispute to arbitration or litigation on the basis that its pre-conditions, as prescribed by the contract, have not been met. An arbitrator or judge will generally require that all pre-conditions should first be met.

In our view, a multi-tiered approach to dispute resolution is preferable, especially given the increasing costs of arbitration and litigation. Attempts to resolve disputes outside of litigation and arbitration also offer the parties an opportunity to mend and continue their working relationship. Given the adversarial nature of arbitration and litigation, it is common for the process to cause a complete breakdown of the working relationship between the parties.

A dispute resolution clause will commonly make provision first for bona fide negotiations between the parties’ authorised representatives when a dispute arises under the contract. If such negotiations fail, parties will often elect to proceed to mediation, which can be an extremely effective means for settling disputes, especially if parties approach the process with the right attitude and do not view it simply as a box ticking exercise. Dispute resolution outside of arbitration or litigation has the added benefit that any decision reached by the parties will generally be beneficial to both of them. This is often not the case in arbitration and litigation, where the arbitrator or judge will rule in favour of one party and against the other.

The means of alternative dispute resolution that are set out in a dispute resolution clause will also depend on the nature of the contract and the likely nature of any dispute that might arise. Where there is a dispute over a technical point or another discrete issue, the parties may prefer to refer their dispute to adjudication or for it to be determined by an independently appointed expert.

As a last resort, a dispute resolution clause will often provide for the referral of the dispute to arbitration where attempts to negotiate or mediate have failed. Arbitration is often favoured over litigation because it offers a much speedier resolution to the dispute. Parties that refer their dispute to litigation could wait years before receiving a judgment. Arbitration is also preferred because it allows the parties to elect who will arbitrate over their dispute, which means that the parties can choose someone with specific expertise as an arbitrator in circumstances where a dispute may raise technical issues.

In this regard,  dispute resolution provisions should carefully set out the requirements of a potential arbitrator, depending on the nature of the dispute. For example, parties will often provide that, where the dispute is purely of a legal nature (for example where a party’s termination is disputed or the interpretation of a clause is in issue), then the arbitrator should be a legal practitioner with a certain number of years standing, depending on the complexity of the dispute. However if, for example, the dispute concerns technical issues under a mining contract, the parties may wish to appoint someone with knowledge and expertise in the mining field who will be better equipped to resolve such a dispute.

Parties will also need to decide under which arbitral body they wish to proceed. In South Africa, it is common for parties to elect to proceed under the auspices of the Arbitration Foundation of Southern Africa (AFSA) or the Association of Arbitrators.  Once this has been decided, the parties will need to specify the rules that will apply to the proceedings (under AFSA, the parties may elect to proceed under the expedited commercial rules).

Parties should also consider whether they wish to include the right to appeal any arbitration award. Making provision for an appeal process could, naturally, have the result of increasing the costs and duration of the arbitration. However, where the award could have significant impact on a party, it may wish to have the option to appeal.

In conclusion, there are a number of factors that need to be considered, and a party to a commercial contract should always carefully consider the provisions of a dispute resolution clause (and preferably have their attorney consider it) in order to ensure that if any disputes do arise between the parties, both parties are adequately protected and the dispute is handled in the most appropriate, efficient and cost-effective manner.

This article has set out factors to be considered when agreements are concluded between parties who are both in South Africa, and not cross-border disputes when one or both parties are outside of South Africa. In those circumstances, there will be a number of additional factors to consider, for example the enforcement of any arbitration award granted, the law that will govern the dispute, the seat of arbitration and the international arbitral body that will administer the dispute.