IN complex negotiations the dispute resolution clause is often an afterthought. For many, it is a perfunctory clause which is included after the more substantive or contentious parts of their contract have been agreed. This view is compounded by the fact that many parties enter into contracts in good faith, never believing that a dispute will arise between them. While laudable, such a view may be costly in the end if a dispute does arise. Consequently, it might be useful to consider a dispute resolution clause as an insurance policy to settle any potential disputes quickly rather than a harbinger of non-performance by the other party.

In some cases the parties may agree to have some disputes settled by national courts while having other matters decided in arbitration. For example, some parties may desire that questions about the validity of the contract be settled by national courts but may deem arbitration more suitable for issues regarding the performance of the contract. However, where the clause is unclear as to the forum for settling a particular dispute, a poorly drafted dispute resolution clause may result in parties subjecting more matters to arbitration than they intended.

Traditional Approach

The traditional view was that such a result could be avoided by mere stylistic differences in the wording of the clause. From that emerged a largely artificial distinction between whether the dispute is said to “arise under the contract” or “arise from the contract”. The thinking was that the former was a narrower clause which only included those disagreements which are explicitly covered by the contract, such as breach of a term. In contrast, “disputes arising from the contract” was deemed to be broader because if a dispute were to arise from the contractual relationship but not the terms of the contract itself, that dispute might still have been covered by the arbitration clause. However, this was unsatisfactory because it was a fine distinction turning on the use of under vs from in circumstances where the parties often did not give it that much thought.

Modern Approach: The ‘One-Stop Arbitration’

The modern approach is set out in the leading case of Fiona Trust & Holding Corporation v Privalov [2007] 4 ALL ER 951, a case, decided by the then United Kingdom House of Lords (now the United Kingdom Supreme Court). The court found that if a contract has two clauses — one sending disputes to English courts and another to arbitration — the presumption is that the parties intended for the same tribunal to handle all disputes, unless the clause says otherwise.

On one hand, this position brings simplicity to the procedure for settling disputes as it reduces the likelihood of conflicting decisions. However, on the other hand, it may enlarge the scope of the arbitration beyond what the parties intended. Notably, the Fiona Trust principle may also apply where there are separate but related agreements between the parties with different jurisdiction clauses.

This modern approach exemplifies the importance of properly drafting dispute resolution clauses. It is not sufficient for ‘boilerplate’ or standard clauses to be used without regard to what is most prudent, based on the commercial interest of the parties.

Practical Considerations

If you are contemplating having two dispute resolution mechanisms in a contract or related contracts, here are some of those practical considerations to avoid the pitfalls above:

• Determine whether it is necessary to have two separate dispute resolution clauses and the rationale for doing so, including by considering if the commercial purpose of the contract(s) may be satisfied by having one dispute resolution clause;

• Use specific language when delineating which disputes are subject to the arbitration and which are not; and

• Carefully interrogate the clauses used to assess whether the purpose of the clauses would be achieved if a dispute were to arise.

A dispute resolution clause may be the shortest in a contract but it may have the most far-reaching consequences for a party who ends up dealing with more than what he bargained for on account of a poorly drafted one.

Ronaldo Richards is an associate at Myers, Fletcher and Gordon and a member of the firm’s litigation department. He may be contacted at ronaldo.richards@mfg.com.jm or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.