Placed at the back end of commercial agreements and in most (if not all) of the cases not the subject of lengthy negotiation between the parties, are dispute resolution clauses. Simply because they are at the end of a contract by custom does not mean that they should be relegated to the end of the list of important provisions since they can become critical in the event of a dispute as things can and do sour in many transactions. Therefore, such clauses should be considered carefully and be given a real thought from the early drafting stage.
With the above in mind, the most common question when drafting a dispute resolution clause is which forum to choose for the resolution of any dispute arising under the agreement, with the usual rivalry being court litigation or arbitration? The answer to this question can radically affect the outcome of a dispute and can make a major difference in how a dispute is resolved, thus making the decision even more important. In deciding between the two, an understanding of the advantages and disadvantages of these different forums is of essence and therefore below we will try to summarise the key pros and cons of both forums.
For starters and before elaborating on this debate between the two, it is important to understand how a dispute resolution clause works: In a nutshell, the parties of an agreement have the option to choose for any dispute arising under or in connection to the agreement to be decided either by the national courts (for example, the Cyprus courts) or by an arbitral tribunal. When it comes to the dispute resolution clause itself, the general principle is that such a clause should be clearly drafted and unambiguous since the courts will endeavour to give effect to the parties’ agreement on how they wish to resolve their disputes, but if such an agreement is not clear because of poor drafting, parties could find themselves in a different forum to the one they chose.
Recent years showed that most of the parties in a commercial agreement prefer for their contractual related disputes to be submitted to arbitration. However, there are still many who maintain a more conservative and traditional approach, choosing litigation over arbitration, because the latter lacks facets of the procedural and legal structure of the former and because they believe that only litigation will ensure an outcome that is truly premised on the facts and the law.
Admittedly, there are potential advantages and disadvantages to either forum, depending really upon the nature of the dispute. Below, we have set out a comparison between litigation and arbitration, highlighting the most important factors for the parties to consider when deciding whether to opt for arbitration or litigation.
The drafting of an agreement typically occurs at a time when the parties are focused on commercial opportunities and the prospects of a successful agreement, and not what will happen if things don’t go as planned, though things can and do sour in commercial agreements, making the consideration of having a clear dispute resolution clause in the agreement a must! It is evident from the above that both arbitration and litigation have their pros and cons. The preference between them depends on the business relationship at issue and the type of dispute that is likely to arise. Before simply passing over the dispute resolution clause, which most probably you will consider as just another unimportant or standard provision, consult with our team of experts to determine the right choice for you.