Do your business contracts protect you from the risk of expensive court action?
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Do your business contracts protect you from the risk of expensive court action?
Are the dispute resolution clauses in your commercial and business contracts delivering the outcome you want? Are they effective and binding? A valuable guide has recently been provided by the High Court on this subject to help those who are responsible for drafting and negotiating business contracts.
Agreements in the course of business and commerce frequently include clauses setting out a process to resolve any disputes concerning the contract before any claim is issued in a court. The purpose of such clauses is understandable, being to avoid the costs and disruption associated with adversarial court litigation.
Such clauses typically require the parties to negotiate and, if necessary, mediate before any court proceedings are considered.
What happens if one party commences a claim in the court before the dispute resolution process in the relevant clause has run its course? Who might bear the cost of such proceedings, bearing in mind that the court issue fee might be £10,000? The Court has made it clear that such contractual clauses will be upheld if 3 specific criteria are met:
- The wording of the agreement must be such as to create a binding obligation for the parties to negotiate and/or mediate/commit to another forum for alternative dispute resolution (ADR)
- The dispute resolution clause must make it clear that proceedings are not to be commenced before the stated negotiations or specified ADR have been attempted
- The clause must be clear as to the ADR process to be followed including such detail as the process for the appointment of a mediator.
If these conditions are met by the wording of the relevant clause, then the court may stay ( ie suspend) proceedings issued before the process detailed in the clause has run its course. In providing this steer as to the consequences of premature issue of proceedings, the courts are, once again, actively encouraging parties to disputes to seek to resolve their differences outside the court process.
The wording of dispute resolution clauses is crucial if they are to have the effect you want them to achieve. Getting it wrong could prove costly and result in court action being commenced when it is such action you are seeking to avoid by including such a term in the agreement.
For more information or any advice on this article please contact myself or Helen Brown.
Visit our Business and Commercial Disputes page on our website to find out more about the services we provide in this area.