When you’re involved in a contractual dispute, the process for resolving the dispute should be set out in the contract itself.
If the contract is silent on the point and you can’t resolve your dispute, you will have to use the courts. This can lead to disagreement about which courts have jurisdiction, so it is important to include clauses dealing with both governing law(what law applies) and jurisdiction (which courts can decide a case) in your contract.
‘Alternative dispute resolution (ADR)’ refers to using mediation and/or arbitration as an alternative to the courts for resolving contractual disputes. These should also be included in the contract. Parties often hope that these procedures will resolve conflicts more quickly and possibly with less cost. Depending on the complexity of the dispute, the costs might not be much less, but the process could take less time than it would in the court system.
The contract can provide that some matters will be dealt with by the courts (eg. claims for less than $50,000 which can be heard in a small claims court), while other matters will be dealt with by arbitration. The contract can provide that mediation will be used first, and then the courts or arbitration if the dispute is not resolved by mediation. The parties are free to design dispute resolution clauses to best serve their needs. If the contract provides for arbitration, the contract should specify which courts will have jurisdiction to enforce any arbitration award.
Instead of stepping into the decision-making role, mediators act as facilitators. They provide the parties with guidance to help the parties come to their own decision – rather than force a decision on the parties. This approach can preserve, and possibly repair, relationships between parties that may need to work together following the dispute. This can be chosen as the first step in resolving a dispute, and the parties can set timelines to limit the amount of time spent in a futile mediation.
If the dispute is not resolved within those time periods, a party can decide to move to arbitration (or the courts, if the contract does not provide for arbitration).
An arbitration clause should lay out the process that the parties must follow, and the arbitration laws that will apply, such as Canada’s Commercial Arbitration Act. Often this will include the procedure for giving notice of arbitration, the time periods that must be met, and the length of time within which an arbitration decision must be made.
Generally, there is one arbitrator or a panel of three arbitrators, and the contract should deal with the process for the selection of the arbitrator(s). The contract can provide that arbitrators must have specific expert qualifications relevant to the nature of the contract and the business of the parties.
The contract should also specify if arbitration is binding, and whether there will be any appeal from the arbitrator’s decision.
Of course, it is best if disputes can be resolved before using dispute resolution procedures - and it is even better if the contract has been drafted as clearly as possible so that potential misunderstandings are avoided.
Check out various dispute resolution clauses in the Clausehound Small Business Law Library!