Why dispute resolution provisions matter in contracts

01 May 2024 ,  Mark le RicheMillisant√© de Wee 195
No one enters into marriage anticipating divorce. Similarly, when parties negotiate and conclude a commercial contract, the last thing on their minds is a dispute that may arise in future. However, just as divorce happens, so contractual disputes are commonplace. Selecting suitable dispute resolution mechanisms in your contract is therefore crucial to navigating any future disputes. In this article, we touch on various dispute resolution mechanisms available to parties involved in commercial contracts. 

The most common dispute resolution mechanisms that can be relied on for contracts include alternative dispute resolution mechanisms and litigation procedures. The first prize however is always that contracting parties can reach an amicable resolution amongst themselves when a contract dispute arises. Contracts can therefore provide for a more informal team of executives or managers of the parties to first try and resolve the dispute amicably before proceeding to more formal processes. Even if contracts do not provide for the amicable scenario specifically, it is in any event a useful tactic to deploy informally before proceeding with more formal steps.

Where this is not successful, there are other conciliatory processes that parties can follow for dispute resolution of a contract instead of heading off straight to court. Some of these alternative dispute resolution mechanisms can include the following: 

Informal mediation

Contracts can provide for informal mediation between the parties, with or without an independent mediator involved. This is usually more formalised than the informal conflict resolution engagement mentioned above and can contain aspects of mediation, but without the formality of a formal mediation process. Informal mediation is not binding and is a voluntary option, provided contractually with the intent to create a conciliatory environment to resolve issues expeditiously.

Formal mediation 

Rule 41A of the Uniform Rules of Court defines mediation as follows:

“a voluntary process entered into by agreement between the parties to a dispute in which an impartial and independent person, the mediator, assists the parties to either resolve the dispute between them, or identify issues upon which agreement can be reached, or explore areas of compromise, or generate options to resolve the dispute, or clarify priorities, by facilitating discussions between the parties and assisting them in their negotiations to resolve the dispute”.

Mediation is also a voluntary alternative dispute mechanism in which the disputing parties are assisted by an independent third party known as the ‘mediator’ appointed by the parties. The primary distinction between mediation and other forms of alternative dispute resolution is that it is private in nature (similar to arbitration). Nothing that could potentially harm the case in the future is recorded, either publicly or privately.

To date, mediation has not played a considerable role in commercial conflicts. However, with the introduction of Rule 41A, the Courts are clearly providing more attention and preference to mediation as an alternative dispute resolution mechanism. It is important to note that mediation can be agreed upon by the parties contractually. Among the array of dispute resolution mechanisms, mediation stands out as the least formal, potentially swift and cost-effective option. However, when considering incorporating mediation into commercial contracts, certain key points warrant emphasis:

  • Mediation operates “off the record,” with its primary goal being to facilitate a settlement between parties. 
  • t is crucial to understand that for a settlement agreement to be valid, all parties must willingly agree and reach a consensus. 
  • While these agreements hold legal enforceability, parties also have the option to formalise by having the signed agreement made an order of court.
Arbitration 

Arbitration is an alternative dispute resolution process conducted typically in South Africa in accordance with the provisions of the Arbitration Act 42 of 1965, although alternative arbitration clauses can also be contractually provided for, particularly in respect of cross-border contracts. In such an instance a contract may provide for international dispute mechanisms procedures such as arbitration in terms of the Rules of Arbitration of the International Chamber of Commerce, the London Court of International Arbitration or the International Trade Law Arbitration Rules.

The arbitration provisions must contain clear procedures and timeframes for the arbitration, from the notice of arbitration to procedures for the appointment of the arbitrator to procedural requirements for the conducting of the arbitration as well as the binding nature of the arbitration proceedings. 

Litigation 

Litigation may follow where parties do not follow other alternative dispute resolution mechanisms or where litigation has contractually been determined to be the last resort after other alternative dispute resolution mechanisms have failed. In this instance, litigation entails a party approaching a court of law or other appropriate legal forum to settle a dispute between themselves with the assistance of a presiding officer who will preside over the matter following predefined statutory or practice procedures and issue a judgment after having considered the facts, evidence and arguments. Practically, litigation proceedings should always be considered as a last resort mechanism as they can be costly, and time-consuming, and proceedings are public due to court records being regarded as public documents. When considering litigation, the contract may still determine whether a specific court or legal jurisdiction will apply to any litigious dispute and the parties will have to adhere to the terms as agreed to in the contract. 

For commercial contracts, it is prudent to consider including appropriate dispute resolution mechanisms that can assist in the resolution of disputes when they arise. The term “appropriate” is however important as it will prove pointless to have for example international arbitration provisions in a contract that is typically concluded between South African parties and can be mediated or arbitrated locally. Contractual dispute resolution mechanisms should therefore not be a “once-size-fits-all” approach. 

For assistance on appropriate dispute resolution mechanisms for your business contracts or guidance on the drafting and inclusion of dispute resolution provisions in your commercial contracts, feel free to contact our Compliance Team for assistance. 

Visit our Compliance Team page.


Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 
 
Share: