DR Essentials: How Not to Lose a Dispute Before it's Started - Provisions to bear in mind at the contract stage

13 November 2017

Victoria Hobbs, Matthew Foote

When negotiating and drafting commercial contracts, parties understandably focus on the key commercial terms. Contracts are often finalised when the parties are positive in their views of each other and the business that will be done together. Often this positivity is warranted.

However, we see time and again the issues that arise from little or no attention having been given to the boilerplate or 'midnight' clauses usually found at the end of a long contract.  If poorly drafted, these clauses can have a very significant effect on both the outcome of any subsequent dispute and also on the process and costs incurred in seeking to resolve the same. They should be carefully considered.

A contract's primary dispute resolution clauses, namely its governing law clause and jurisdiction clause, provide fundamental examples of the importance of getting these clauses right.

Expressly stipulating a governing law avoids wasting time and money on internal determination, or potential satellite litigation, concerning the often complex question of which "default" governing law applies. The clause also goes to the heart of the validity and interpretation of all of the other terms contained within the contract. Being clear on your choice of governing law provides certainty for the parties and clarity (as far as is possible) to the terms that have been agreed.

Likewise, a poorly drafted jurisdiction clause can also create unnecessary and costly satellite litigation. In addition, failing to select an appropriate jurisdiction can open the door for parties to seek to start proceedings anywhere in the world, at which point you could be at the mercy of unpredictable local courts and their own rules of private international law.

Choose the wrong jurisdiction and you may run up against problems on enforcement, if you are the party most likely to be in the position to bring an action. It is against this background that the litigation vs. arbitration choice, and even Brexit, should be considered.

As part of the contract's dispute resolution clauses the parties may want to consider an escalation clause. Appropriate forms of alternative dispute resolution (or "ADR") may save you from entering costly litigation/arbitration proceedings. Conversely a poorly thought through escalation clause can very possibly add to those costs.  

In addition to the clauses referred to above there are a number of other clauses to consider at this stage in the drafting process as they raise various issues that could affect any potential dispute:

  • Process agent clause: if one of the parties is outside of the chosen jurisdiction, tactically do you want to make service easy?
  • Notice provisions: how do you avoid costly games on the validity of your interparty communications?
  • Amendments: can you rely on a "written variation only" clause?
  • Waiver: will a no-wavier clause protect you from post-breach inaction?
  • Execution and authority: can you rely on your counterparty's signatory?

What this means for you?

In our breakfast seminar on 22 November 2017, Victoria Hobbs and Matthew Foote will be considering the various issues highlighted above with a view to providing practical advice on how to approach these clauses the next time you are faced with them (hopefully at least a few hours before midnight). If you would like to attend please click here to request an invitation.