A dispute resolution clause is a key – but often overlooked – element of commercial agreements. Its purpose is simple, yet crucial: to guide parties on how to handle conflicts if they arise.
At its core, a dispute resolution clause outlines the steps parties must take before turning to the courts. Many agreements adopt an “escalation” approach – beginning with good-faith negotiation, followed by mediation, and finally arbitration or litigation if the earlier steps fail. This structured process encourages early resolution, helping parties to avoid unnecessary costs and to preserve valuable business relationships.
As highlighted in previous blog posts and in our newsletter last month, arbitration has become an increasingly popular dispute resolution option for businesses. It is generally faster, more flexible, and more confidential than traditional court proceedings. A typical arbitration clause specifies key details such as the governing rules, location, number of arbitrators, and applicable law.
Mediation, by contrast, allows parties to work collaboratively with a neutral facilitator to reach a voluntary settlement. A major advantage of mediation is confidentiality: matters discussed during the mediation process cannot be introduced as evidence in court.
A well-drafted dispute resolution clause will also address practical considerations such as timeframes, jurisdiction, and whether urgent court orders – such as injunctions – can be sought even when arbitration is agreed upon.
In short, including a clear dispute resolution clause in an agreement ensures that, if a conflict arises, both parties understand exactly what steps to follow. This clarity not only reduces disputes over the dispute process itself, but also creates a smoother, more predictable path to resolution.
Ming Yip
Lawyer
