What is a “dispute resolution clause” and why is it important?
“Where should the dispute be determined?” – this is a question which has a significant impact on each and every step in resolving a dispute but is often overlooked.
Formulating a dispute resolution clause is one of the ways to manage the risks and costs arising from dispute resolution. In short, a dispute resolution clause refers to the contractual provision by which the parties agree how their dispute is to be resolved, e.g. whether by way of mediation, arbitration or litigation and in which jurisdiction.
We, as litigators, always first examine the dispute resolution clause in a contract as the first step in formulating the game plan to resolve a dispute, as it has a huge impact on the overall strategy, prospect of success of a claim and enforcement of favourable judgments or awards.
What are the key factors to be considered in drafting a dispute resolution clause?
Parties are free to negotiate and agree on the terms of the dispute resolution clause to be included in their contract. Some of the key factors are highlighted:-
1. The dispute resolution clause should be valid and enforceable.
This cannot be overemphasised. Parties should also ensure that the dispute resolution clause is clearly drafted and unambiguous so as to minimise the risk of any unnecessary argument in future.
For example, under Hong Kong law, an arbitration agreement must comply with the formal requirements under the Arbitration Ordinance (Cap. 609), including that it must be in writing. There should also be a clear agreement to submit the dispute to arbitration. Certain issues, such as employment issues, are non-arbitrable under Hong Kong law.
Parties should also exercise caution when drafting multitiered dispute resolution clauses, which provide for the resolution of disputes by a series or waterfall of alternative dispute resolution techniques such as negotiation, followed by mediation, and then arbitration. Uncertainty may lead to problems in the enforcement of such dispute resolution clauses.
2. Courts, arbitration or alternative dispute resolution methods?
Parties may agree to submit their disputes to courts (commonly referred to as a “jurisdiction clause”), arbitration, mediation, or by way of a combination of several means.
Courts and arbitration are two popular choices of dispute resolution methods.
Some parties prefer arbitration over courts because of the following reasons:
- Procedural flexibility in general
- That the parties may nominate and/or appoint arbitrator(s) of their choice depending on the nature of the particular dispute
- Confidentiality in arbitration
- Mutual recognition and enforcement of arbitral awards among parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), which include Hong Kong
- In case of Hong Kong-seated arbitration, parties can make applications to the Courts in the Mainland for interim measures with a view to preserving evidence and freezing assets in the Mainland before or after the commencement of the arbitration (see point 4 below).
How about the cons?
It was often thought that arbitration would be cheaper than court proceedings because of the procedural flexibility. It should be stressed that arbitration can be more costly than court proceedings. Costs of an arbitration generally include fees and expenses of the arbitral tribunal, administration fees (if it is an administered arbitration) and expenses of the facilities such as translation, transcription services and venue booking if so required. Under the 2018 HKIAC Administered Arbitration Rules, parties are required to pay initial deposits for the fees of the arbitral tribunal and HKIAC administration fees before the arbitration may proceed.
Furthermore, the flip side of procedural flexibility is ambiguity which results in room for arguments. For example, rules of evidence are often to be agreed by the parties or at the discretion of the arbitral tribunal.
Certain procedural safeguards in court proceedings, such as the procedures and legal consequences imposed on the persons who make and use false statements in judicial proceedings are not available in arbitration.
Arbitral tribunals may also lack the safety check provided under an appeal system, given that an arbitral award is in general final and not subject to appeal. On the other side of the coin, some parties may prefer the finality of arbitration, which could save the time and costs in appeal proceedings generally available in court litigation.
3. If the parties opt for court proceedings …
The parties have to decide a number of issues, including but not limited to the following:-
- Which court shall have jurisdiction
- Whether the court of their choice shall have exclusive jurisdiction or non-exclusive jurisdiction (i.e. the named forum will not be exclusive and a party is at liberty to institute proceedings in other jurisdictions) to hear the dispute
In deciding the court of their choice, the parties may consider the following factors:-
- The preferred judicial system
- Location of parties’ assets (taking into account the issues arising from enforcement)
- Location of the potential witnesses if a dispute arises under the contract
- Governing law of the contract (which has an impact on whether expert evidence on foreign law is required and thus the legal costs)
- Costs of litigation in general in that jurisdiction
4. If the parties opt for arbitration …
Parties should include an arbitration clause in the contract, as arbitration is a consensual process and an arbitrator has no power to determine a dispute unless the parties agree to arbitration.
The parties have to decide a number of issues, including but not limited to the following:-
- Seat of arbitration
- Governing law of the arbitration agreement
- Choice of arbitration institution to administer (if it is an institutional arbitration), such as HKIAC, ICC, LCIA and CIETAC
- Choice of arbitration rules
- Number of arbitrators and any necessary qualification required
- Language of arbitration
It is noteworthy that the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”) came into force on 1 October 2019, which provides a formal mechanism for the PRC courts to grant interim measures (such as preservation orders) in aid of Hong Kong-seated arbitrations administered by certain institutions or permanent offices, including HKIAC. The Arrangement provides an incentive for parties to choose Hong Kong as the seat of arbitration in cases where a party’s assets are located in the PRC.
5. What if there are multiple contracts between the parties?
If a series of contracts are to be or have been executed in a single or related transaction(s), the parties are encouraged to include consistent dispute resolution clauses in the contracts unless they prefer that different dispute resolution clauses govern different aspects of their relationship.
In our experience, inconsistent dispute resolution clauses in contracts executed between the parties may give rise to satellite litigation over the proper forum for the resolution of a dispute which may be caught under those inconsistent dispute resolution clauses.
If the parties intend to have their disputes under different contracts to be determined at different forums, such intention should be clearly reflected in the respective dispute resolution clauses.
Sample dispute resolution clauses
Parties are encouraged to seek legal advice as to the form of dispute resolution clause to be incorporated in their contract to ensure that it would be valid and enforceable, as well as tailored for the purpose of reflecting the parties’ intention.
Sample exclusive jurisdiction clause
The parties hereby irrevocably agrees that the courts of [Hong Kong] shall have exclusive jurisdiction to hear and determine any dispute arising out of or in connection with this Agreement or its formation, existence, validity, legality, enforceability, interpretation, termination and effects, for these purposes, each party irrevocably submits to the jurisdiction of the courts of [Hong Kong].
Sample non-exclusive jurisdiction clause
The parties hereby irrevocably submit to the non-exclusive jurisdiction of the courts of [Hong Kong] for the purpose of hearing and determining any dispute arising out of or in connection with this Agreement or its formation, existence, validity, legality, enforceability, interpretation, termination and effects.
Model clause for Arbitration under the HKIAC Administered Arbitration Rules
Any dispute, controversy, difference or claim arising out of or relating to this contract, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non- contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted.
The law of this arbitration clause shall be … (Hong Kong law).
The seat of arbitration shall be … (Hong Kong).
The number of arbitrators shall be … (one or three). The arbitration proceedings shall be conducted in … (insert language).
Dispute resolution clauses could have profound implications when a dispute arises.
Parties are encouraged to consult lawyers specialised in commercial litigation and dispute resolution at an early stage regarding the implication of the particular dispute resolution clause (or the absence of the same) in their contract out of which the dispute arises, which is at the heart of the design of the overall strategy for a swift and effective dispute resolution process.
Frequently Asked Questions
What is a dispute resolution clause?
A dispute resolution clause is a contractual provision by which the parties agree how their dispute is to be resolved.
Why are dispute resolution clauses important?
Dispute resolution clauses are important for certainty and they have a huge impact on the overall strategy, prospect of success of a claim and enforcement of favourable judgments or awards.
Who chooses the dispute resolution clause?
The dispute resolution clause is a matter of the parties’ agreement.
Do dispute resolution clauses survive termination?
Yes, dispute resolution clauses generally do survive termination.