Tolu OLATUNJI MCIArb(UK)[1]

Introduction

We live in a world of commerce where business transactions and contracts are being consummated per second. Businesses and contracts always involve interests which sometimes clash leading to disagreements or disputes. Disputes are minimised through the observation of preventive law. Of course lawyers have traditionally devoted a large part of their time to anticipating various eventualities and seeking, through skillful drafting and planning, to provide for them in advance. Asides minimising disputes, it is also the concern of a draftsman to ensure that there is adequate provision for how disputes are resolved if the preventive options fail.

In a good number of cases, court action is not an appropriate recourse for seeking justice.^[2] Dispute resolution practitioners are no longer single minded about dispute resolution tools and more people are embracing the now popular Alternative Dispute Resolution (ADR) methods. There has been more discussion and efforts on taking a systemic approach in offering different kinds of options to people who are in conflict, and to foster “appropriate” dispute resolution.[3] It has been observed that the current wave of dispute resolution theories has resulted in the emergence of a vast array of dispute resolution tools.[4]

When parties enter into contracts, a dispute resolution agreement is important as it helps the parties to an agreement understand the consequences of their actions, understand the procedure to be adopted in resolving disputes, gives them the power to choose one or more dispute resolution tools, exclude court intervention until other mutually agreed dispute resolution mechanisms are exhausted, and empowers a third party neutral other than a court to adjudicate over a dispute.[5]

While there are varieties of dispute resolution mechanisms and more flexible approaches are being encouraged, the broad spectrum of dispute resolution tools can be classed into 1. Adjudication which includes: a. Court, b. Arbitration and c. administrative process, 2. Quasi-Judicial mechanism such as Ombudsman, 3. Mediation/Conciliation, 4. Negotiation.[6] Fuller[7] defined adjudication as “a social process of decision which assures to the affected party a particular form of participation, that of presenting proofs and arguments for a decision in his favour.” This involves the use of a third party with coercive power, giving victory to a side over the other. Though mediation or conciliation also involves the use of a third party facilitator, the third party has no coercive power.[8] To Fuller[9] “the central quality of mediation, namely, its capacity to reorient the parties toward each other, not imposing rules on them, but helping them to achieve a new and shared perception of their relationship, a perception that will redirect their attitudes and dispositions toward one another.” Putting it in simple terms, mediation or conciliation can be said to be facilitated or assisted negotiation.

A dispute resolution agreement may be embodied in the matrix contract agreement or in a separate agreement. It can be as simple as stating in a contract that “disputes emanating from this agreement shall be settled by arbitration in Ibadan” and it can also be expansive, running into pages depending on the nature and/or volume of the contract. 

Choice of Dispute Resolution Tools

Minor disputes sometimes snowball into feuds at which point it may be hard to get feuding parties to come together and agree on the dispute resolution tool appropriate for resolving their existing dispute.  A dispute resolution agreement will consider the stakes and proffer an appropriate dispute resolution tool and procedure even before a dispute arises. What are the factors to consider in selecting a dispute resolution mechanism?   Levin and Wheeler[10] while examining the subject stated the following:

1. Nature of Dispute or Envisaged Dispute: Though Marriage is a contract under the law, in Nigeria we still cling to the myth that consent divorce is unacceptable hence parties cannot by contract predetermine how marital disputes are resolved or dissolve a marriage without court interference. Also the Court of Appeal Lagos Judicial Division per J. Y, Tukur, J.C.A recently held that “Section 251 (1) of the Constitution of Nigeria 1999 as amended gives exclusive jurisdiction to the Federal High Court in civil causes and matters connected with or pertaining to the taxation of companies and other bodies established or carrying on business in Nigeria and all other persons subject to federal taxation.”[11] These are examples of disputes that are by law vested in the courts. Conversely large volume commercial disputes, cross-border disputes and some employment disputes are well suited ADR within the law and public policy.

It has also been suggested that the courts have seen some highly repetitive resolutions such that the process is already routinized with application of well-established principles to a large number of individual cases. In such circumstances, once the courts have established the basic principles in such areas, a speedier and less cumbersome procedure than litigation should be used.[12] This may however not apply to disputes that may require expert determination.

2. Relationship Between Parties: This writer recently participated in a mediation at the Citizens’ Rights Department in Ogun State, facilitated by a fine young mediator. A waste contractor had a disagreement with the regulator of waste management in the State over disputed invoices. Parties were at two extremes on the issue and the figures could not be reconciled. Then the only way out of resorting to a coercive dispute resolution tool was to remind the contractor of the commercial relationship and the regulator also offered more business to the contractor. There will always be waste thus there will always be opportunity for mutually beneficial relationship between the parties. An agreement was reached and the dispute was resolved in less than one hour. Opening the eyes of the parties to the implication of the nature of the business and the nature of their relationship and the prospects of retaining the relationship played a major role in mediation being the perfect fit for resolving their dispute.

While the court can also order that parties explore settlement, it is very unlikely that the court will have an atmosphere auspicious enough for parties to genuinely commit to settlement.

3. Amount or Volume of Transaction and Cost of Dispute Resolution: Drafters sometimes insert arbitration clauses in employment contracts, some lease/tenancy agreements, and low volume contracts without being mindful of the cost of arbitration and the fact that parties will bear the cost. But upon referring the dispute to an arbitrator(s) and the fees are stated, parties may discover that they cannot afford arbitration or that the cost of arbitration is excessive compared to the amount in dispute. The amount in dispute seem to always be an item considered to determine the cost of the process of dispute resolution. There are Small Claim Courts and some arbitral institutions also have small claim procedures depending on the volume of the claim.[13] It should however be noted that some transactions are low in volume but as complex as a typical large volume transaction and best suited for expert determination.

High volume commercial transactions are best suited for arbitration especially where they involve parties from different jurisdictions, but when the anticipated disputes in a commercial transaction are such that are likely to require expert determination, the amount or volume will not be the ultimate consideration.

4. Speed: Arbitration which was promoted as a means of avoiding the contention, cost, and expense of court trial, is now equally described in similar terms as “judicialized”, formal, costly, time-consuming, and subjected to hardball advocacy. While “court-like” arbitration has alienated many business users, others strive to make arbitration even more like a court trial, through agreements for expanded judicial review of arbitration awards.[14] If this is the case with arbitration, the fate of other non-binding mechanisms cannot be any better. Some even apply boxing march terms to it by referring to mediation as round one of the dispute, arbitration as round two, litigation over the award as round three and it goes on till the right or appeal is exhausted.

The above does not however take away the fact that speed is still a major selling point for arbitration and ADR generally. Jurisdictions with firm judicial infrastructure ensure that recalcitrant parties are not allowed to take undue advantage of the right to approach the court to challenge an award.[15]

5. Interest of the Parties: When advising on and drafting a dispute resolution agreement, one must always take the interest of the parties as paramount. Issues such as confidentiality, enforceability and forum must be considered with the best interest of the parties in mind. 

Types of Dispute Resolution Agreements/Clauses:

The language of Dispute resolution agreements should be plain, simple and as clear as possible. It should also be flexible to cover for minor changes or issues not specifically covered in the agreement or clause; otherwise an overly specific or inflexible dispute resolution agreement may become unenforceable. Where a dispute resolution agreement is ambiguous, there is always a risk that it becomes unenforceable.

Dispute resolution clauses can be classified broadly into;

1. Basic Dispute Resolution Clauses: Basic Dispute Resolution Clauses mostly select a dispute resolution method and often state the scope, whether it will be by an institution, method of selection of a neutral, representative of parties, venue, language, length of time and governing law among others. Basic clauses are often used in simple commercial transactions. More often than not institutional model clauses are basic and are usually adopted for simple transactions.[16]

Details are important to achieve clarity and certainty of the intention of parties on their dispute resolution agreement. Care must however be taken to avoid over-specification or contradictions that may render the agreement void.[17]

2. Multi-Tier Dispute Resolution Clauses: These are also referred to as “escalation clauses” or “multi-step clauses”. Multi-Tier Dispute Resolution Clauses give the parties the opportunity to resolve any disputes through less formal dispute resolution procedures, including negotiation and mediation, either before or in parallel to court or arbitration proceedings. They typically require the parties to first approach negotiation and if that fails, they involve a mediator before the dispute is referred to adjudication by an arbitrator or the court. They are usually used for relatively large commercial transactions with a higher probability of things going wrong and it is in the best interest of parties to employ more amicable dispute resolution and avoid inordinate delays. A properly drafted multi-tiered clause can help parties resolve disputes in a less adversarial setting, preserve ongoing commercial relationships and save significant amounts of time and money. It can however also lead to fruitless prolonged negotiation if not properly structured.

3. Hybrid Clauses: The most common forms of hybrid clauses are those that seek to combine more than one dispute resolution mechanism e.g. litigation and arbitration by including an option to arbitrate in favour of one party or a mutual option for both parties to choose arbitration or litigation. Hybrid clauses can include one-sided/asymmetrical/sole option clauses where one party has the choice of mechanism and/or forum or mutual option clauses where both parties have the choice of mechanism and/or forum. Under English law, unilateral options are recognised as enforceable.[18] It is established that a disputes resolution provision which contains an arbitration agreement between parties but also gives one party with an option to litigate will be upheld provided it is clear and unequivocal.[19] However, some national courts have refused to recognise such clauses on the grounds that they are “potestative” – that is, one-sided.[20]

4. Carve-out Clause: As the name implies, a carve-out clause gives parties the option to carve out certain types of disputes from the agreed dispute resolution procedure and submit same to a separate dispute resolution mechanism. Where there is likely to be great diversity between the types of disputes that may arise under a particular contract, parties may wish to consider a carve-out clause where certain, precisely identified disputes are carved out from the main dispute resolution process and treated differently. A carve-out clause is best where aspects of a dispute requires different expert determination. Some parties also opt to litigate some disputes while others are resolved by arbitration.

While drafters are often not the people who have to “pick up the pieces” when a dispute arises over a dispute resolution agreement, “it is important that people are aware of the different types of options available to them” and the implication of their choices before such dispute resolution agreement is executed.[21] Parties should also be aware of the pitfalls inherent in complex and expansive dispute resolution clauses or agreements. As a general point, drafters should avoid drafting long and complicated clauses. While such clauses are intended to confer greater flexibility in finding the most appropriate way to resolve any disputes, they may have the unintended effect of delaying the ultimate resolution of the dispute if they are not sufficiently tightly drafted.[22]

“Catch all” provision

To avoid the risk of disputes falling between the gap and/or leading to arguments over what constitutes a legal dispute in an agreement, drafters employ what is called a “catch all” provision. Hence, wordings such as “All or any differences, disputes or claims” “arising out of”, “in connection with”, “in relation to”, or “regarding”, “concerning alleged breaches of this contract”, “with respect to the construction of”[23] are often employed  but are not fool-proof substitutes for drafting a dispute resolution agreement with precision.[24]

The aim when drafting a dispute resolution agreement is to ensure that it clearly states a workable and enforceable intention of the parties. Where an agreement is so defective that it is found to be unenforceable, the parties will be deprived of the benefits of their selected dispute resolution mechanism and forced into litigation which they had sought to avoid in the first place. In other circumstances, parties attempting to initiate the dispute resolution mechanism selected may be able to prove that the defect in the agreement can be cured through the proper interpretation of the agreement but this also will likely require litigation to first settle the validity of the agreement.[25]

Pitfalls to Avoid

In ensuring that an arbitration agreement serves its purpose, draftsmen should among other things, be mindful of the following:[26]

• Ensure they observe the laws of the seat of arbitration or likely place of enforcement. For example, an award to be enforced in most countries in the Middle-East can be invalidated by the mere mention of the word “interest” regarding money.
• Be mindful of the proposed dispute resolution institution when referring to an institution to ensure it will still be in existence when dispute arises. State the name of the institution clearly.
• Avoid naming a particular person as mediator or arbitrator. This may be a problem if that person becomes unavailable.
• Avoid too much specificity in the qualification of the neutral.
• State clearly the procedure to be adopted.
• In multi-tier clauses, state clear timeline for negotiation, mediation or arbitration but also give the arbitrator the power to extend time reasonably.

Concluding, draftsmen have the duty to ensure that arbitration agreements capture the intentions of the parties within the law. A dispute resolution agreement should provide a mechanism for a final, binding and enforceable resolution of the dispute. When drafting a dispute resolution agreement, parties should specify a particular ADR procedure. The reality is that once a dispute has arisen, agreement may be difficult to reach, so providing for this in the contract is to be preferred. The scope of the dispute and what will amount to a dispute, the language and applicable law(s) or rules must also be stated as clearly as possible.

Dispute resolution agreements/clauses can be brief and allow the parties to agree on the details if and when the dispute arises. The danger in this is that some of the details that parties can ordinarily control if not agreed on before the dispute arises may be difficult to agree on later. Conversely, expansive agreements/clauses can contain all the details and box parties to a corner when there is a change in circumstance that was not envisaged or contradictions that affects the enforcement of the agreements/clauses.

Each agreement/clause should be treated with the interest of the parties and the volume of the transaction in the matrix contract in mind to ensure that the agreement is functional and does not fail.

REFERENCES

[1] Tolu Olatunji is a Dispute Resolution Specialist, a researcher and a member Chartered Institute of Arbitrators United Kingdom. He practices law at T&A Legal. [email protected]

[2] Chandra, S. 1997. ADR: Is Conciliation the Best Choice?  Alternative Dispute Resolution: what it is and how it works. Eds. P.C Rao & W. Sheffield, New Delhi, Universal Law Publishing Co. Ltd. Rpt 2010. 82

[3] Lynch, J. 2001. ADR and Beyond: A Systems Approach to Conflict Management. Negotiation Journal. 3.17: 213

[4] Sourdin, T. 1997 Matching Dispute Resolution Processes – The Australian Context. Alternative Dispute Resolution: what it is and how it works. Eds. P.C Rao & W. Sheffield, New Delhi, Universal Law Publishing Co. Ltd. Rpt 2010. 103

[5] Candide-Johnson, C and Shasore, O, 2012. Commercial Arbitration Law and International Practice in Nigeria, LexisNexis. 39

[6] Beyond the basic ADR types, there are other different forms of ADR such as: 1. Case Evaluation which is a non-binding process in which parties present the facts and the issues to a neutral case evaluator who advises the parties on the strength and weakness of their respective positions and the dispute is likely to be resolved by an adjudicator. This helps parties decide on a settlement; 2. Early Neutral Evaluation: Similar to Case Evaluation above but the case is referred to an evaluator after it has been filed in court; 3. Neutral Fact-finding: This is a process where a neutral third party, selected by either the disputing parties or by the court, investigates an issue and reports to or testify in court; 4. Hybrid processes such as Med-Arb, e.t.c.

[7] Fuller, L. 1963. Collective Bargaining and the Arbitrator. Wis. L. Rev. 1

[8] Levin, A. L and Wheeler, R.R. 1979, The Pound Conference: Perspective on Justice in the Future. Proceedings of the National Conference on the Causes of Popular Dissatisfaction with the Administration of Justice. West Publishing Co., St. Paul, Minnesota. 69

[9] Fuller, L. 1971. Mediation-Its Forms and Functions, 44. So. Cal. L. Rev. 305, 325

[10] Levin, A. L and Wheeler, R.R. Op.Cit.

[11] CNOOC Exploration and Production (Nig.) Ltd & Anor v. NNPC & Anor (2017) LPELR-43800(CA) p. 11

[12] Levin, A. L and Wheeler, R.R. Op.Cit.

[13] The International Chambers of Commerce Arbitration Rules, 2017 made provision for the Expedited Procedure which automatically applies to arbitrations where the arbitration agreement was entered into on or after 1 March 2017, and where the sum in dispute is less than $2 million, unless the ICC Court deems the procedure inappropriate in the circumstances.

[14] Stipanowich. T. J. 2010 Arbitration “The New Litigation” University of Illinois Law Review 2010. 1: 1 Retrieved 17 April 2012 from http://works.bepress.com/thomas _stipanowich/1

[15] The District Circuit Court in Washington DC has dismissed Nigeria’s request for it to set aside an $8.9billion arbitration award against Nigeria over alleged breach of contract. Read more at:  http://ow.ly/6eoQ30lezuc

[16] Candide-Johnson, C and Shasore, O. Op.Cit. 39-40; Examples of basic clauses:  1. “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of the Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” 2. “All dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within fourteen days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators.” 3. “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules.”

[17] Sutton D and Gill J. 2007 Russell on Arbitration 23rd ed. London, Sweet and Maxwell. 61; “One of the briefest arbitration agreements to be reported merely stated “arbitration will be settled in London” Although that agreement was enforced, it required a court action to achieve that result.”

[18] Mauritius Commercial Bank Ltd v Hestia Holdings Ltd and another [2013] EWHC 1328 (Comm); Law Debenture Trust Corp. Plc v. Elektrim Finance BV [2005] EWIIC 1412

[19] Sutton D and Gill J. Op.Cit. 39

[20]For example, in the well-known Rothschild case, the French Supreme Court, on the basis of Article 23 of the 2001 Brussels Regulation, regarded as invalid, a jurisdiction agreement which provided for the parties to submit their disputes to the exclusive jurisdiction of the Luxembourg courts, whilst reserving for the lender the right to bring proceedings in any other competent court. (X v Rothschild (French Supreme Court, First Civil Chamber, 26 September 2012, No 11-26.022), See: Greenwood, L. 2018. Hybrid, multi-tiered and carve-out dispute resolution clauses https://uk.practicallaw.thomsonreuters.com/

[21] Rogers, A. 2017. The perfect dispute resolution clause. https://www.cdr-news.com/categories/arbitration-and-adr/7506-the-perfect-dispute-resolution-clause

[22] Greenwood, L. Op.Cit

[23] Sutton D and Gill J. Op.Cit. 74-76

[24] 2156775 Ontario Inc. v. Just Energy Ontario LP, 2014 ONSC 3276

[25] A dispute resolution agreement may be termed a pathological clause when it contains one or more defects in its drafting which prevent the intended operation of the clause. e.g. 1. “[The Parties] shall proceed to litigate before the Arbitration Court of the International Chamber of Commerce in Paris with the seat in Zurich” “The Court ruled that it could not determine whether the parties intended to submit to ICC in Paris or to the Zurich Chamber of Commerce, both of which maintained permanent arbitral tribunals.”, 2.”all disputes shall be resolved by the High Court of Lagos State or be arbitrated in Lagos.” this provides for both arbitration and litigation.

[26] Candide-Johnson, C and Shasore, O. Op.Cit. 42