The Hidden Power of Dispute Resolution Clauses in Commercial Contracts

Several contractual provisions are often spelled out in fine print that even businesspeople overlook. Dispute resolution clauses are no exception. The problem is that the importance of dispute resolution clauses far outweighs the attention they receive at the negotiation and drafting stage. It is easy to understand why: before a dispute materializes, potential litigation is an afterthought.

But when a conflict does arise, the dispute resolution clause carries significant practical, legal, and even commercial ramifications: If the contract contains boilerplate language and the dispute resolution clause was not properly negotiated, Israeli companies could be forced to litigate in a foreign jurisdiction with unfamiliar procedures; if the provision was given little to no thought, the parties may find themselves facing significant legal uncertainty resulting in unexpected costs and delays; alternatively, if the contract contains a mandatory arbitration clause, Israeli companies could face significant disadvantages if they are unprepared. On the other hand, a carefully formulated dispute resolution clause provides predictability and certainty.

Cross-border disputes are increasingly resolved through arbitration. Arbitration offers several advantages such as privacy, efficiency, and adaptability to evolving commercial realities. More importantly, arbitration is effective given the widespread enforceability of arbitration agreements and awards. For example, over 160 jurisdictions – including Israel – have entered into binding commitments to recognize and enforce international arbitration agreements and awards by ratifying the New York Convention. This makes arbitration significantly more advantageous compared to cross-border litigation, as court judgments are not easily enforceable in Israel or abroad.

Mediation is another option that has the potential to save significant time and resources. Many arbitral institutions also administer mediations, and have developed rules that seamlessly integrate the mediation and arbitration processes thereby creating a robust and streamlined ADR ecosystem.

But all of these advantages can be lost in the absence of a properly drafted dispute resolution clause. The importance of a carefully-drafted dispute resolution agreement cannot be overstated, not only in terms of preserving these advantages but also because it is virtually impossible for disputing parties to agree on how a dispute will be resolved once one arises. An arbitration agreement therefore not only preserves the advantages of the arbitral process, but also places binding obligations on the parties to abide by that process and thereby mitigates the effects of dilatory tactics. The difference between an effective arbitration agreement can be the difference between resolving a multimillion-dollar dispute within six months while maintaining business ties, and being forced into years of resource-draining and reputation-damaging litigation.

When drafting dispute resolution provisions, businesses should carefully consider the governing law, the forum, the language of proceedings, and whether arbitration or litigation best suits the transaction. Far from being minor details, these clauses are strategic tools that protect businesses when relationships break down.

Ultimately, dispute resolution clauses function as insurance policies. They do not prevent disputes, but they determine how painful or painless the resolution will be. With legal counsel, businesses can ensure their contracts contain mechanisms that minimize risk and maximize efficiency.