The king of clauses

A contract is only as good as the dispute resolution clause in it. Unfortunately, as the least interesting clause of the contract, it has often been left to be drafted during the quiet hours of the night, when the chief negotiators had already shaken hands and set out to have a beer. That’s why it is also known as the “midnight clause”. It has often been copied from previous contracts, concerning totally different issues between totally different parties from totally different countries. And nobody really gave any thought to possible consequences.

The dispute resolution clause may alter the entire balance of the contract. A carelessly drafted dispute resolution clause may lead to significant contractual imbalance between the contracting parties. The dispute resolution clause can be deliberately drafted to be asymmetrical so that it is especially favourable for the other party. An asymmetrical dispute resolution clause may easily result in one contracting party having more reasons to avoid litigation, which again puts the other party in a more favourable position to start behaving as they wish in the contractual relationship.

Key choices in terms of willingness to initiate legal proceedings are, for example, the dispute resolution mechanism (local court or arbitration proceedings), seat of arbitration (defines the procedural legislation applied in the litigation), arbitration rules (institute selection), legal culture and possibility to affect the judge or arbitrator selection. It is obvious that if the legal proceedings are agreed to be conducted in accordance with unfamiliar proceedings, legislation or legal culture, the threshold for initiating the proceedings is very high even when there are grounds for it. This is the reason why it is essential for the outcome and the quality of the contract to seek to influence the aforementioned issues when drafting the dispute resolution clause.

An unclear and ambiguous arbitration clause may lead, for example, to a situation where the arbitration clause, which was meant to avoid litigation, will be litigated for years in order to know where the dispute finally should be resolved. I personally started my career with a cross-border arbitration case in which we travelled, for the first one and a half years, to Stockholm to arbitrate the dispute resolution clause in order to know where to arbitrate the substance matter itself.

It is often stated at the beginning of the dispute resolution clause that in case of a dispute, the parties undertake to conduct negotiations in order to find an amicable settlement between the parties before starting legal proceedings. A typical plea of trial at the beginning of the legal proceedings very often is that these negotiations between the parties have not been conducted in accordance with the contract or they have not yet been completed. In such cases, the parties have to undergo a lengthy process of trying to prove whether the negotiations were conducted in accordance with the contract or should the initiated proceedings be discontinued in order to conduct the negotiations. Therefore, it is crucially important to define when the negotiations are deemed to have started and ended as well as agree on a deadline for the end of the negotiations in the dispute resolution clause.

Simplicity is the ultimate sophistication where dispute resolution clauses are concerned.

For the outcome of the legal proceedings, it is far from irrelevant who makes the final decision on the dispute. If the dispute resolution clause is formed so that the case is resolved by judges from a totally unfamiliar legal culture, whose selection cannot be influenced, it is obvious that there will be no guarantees of the outcome of the dispute, which raises the threshold for initiating legal proceedings.

After all, one of the most crucial elements of a controlled dispute resolution process is predictability – the predictability of the process itself as well as the outcome. This is the reason why it must be ensured that the legal culture, mechanism, law and rules applied in the dispute resolution process are familiar and reliable and, thereby, enable the predictability of the process as well as the outcome.

Simplicity is the ultimate sophistication where dispute resolution clauses are concerned. The more complex the dispute resolution clause, the easier it is to create disagreements in a situation in which both parties are, in any case, hunting for contract sections with which they can disagree. Complicated, complex dispute resolution clauses, which may sometimes be several pages long, pose a risk of disagreements. The preferred option is to choose a standard clause drafted by an arbitration institution, which is carefully thought out and repeatedly tested.

It should be noted that all contracts belonging to the same contract package should always have identical dispute resolution clauses. Otherwise, the parties can argue that the same disagreement is based on different contracts. Unidentical dispute resolution clauses within the same contract package easily lead to a situation in which it must be first arbitrated where and how the case will be finally arbitrated.

Dispute resolution clauses are all about making choices. At the end of the day, the quality of the contract is ultimately created by these choices, leading to the dispute outcome reached on the basis of the dispute resolution clause. ‘Tis the reason and ’tis the season, why the dispute resolution clause should be treated as the most important clause of the contract, the king of the clauses.

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