Business managers, directors and entrepreneurs entering into contracts on a regular basis will be familiar, when reading through the contract before signing, with ensuring that it contains an arbitration clause.

However, when a dispute arises between the parties in the contract, the arbitration clause is rarely invoked by either side. If the dispute cannot be resolved, the parties frequently resort to litigation before the courts. Why would this be the case, particularly in circumstances where the parties have stated that their chosen method of resolution would the arbitration clause?

It is highly probable that within the business community there is a lack of understanding of the benefits of arbitration and what the process entails. So what exactly is arbitration and how can it help your business?

Arbitration is governed by the provisions of the Arbitration Act 1996. The underlying purpose of the Act is to “obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense”. It is designed to encourage agreement between the parties as to how their dispute is to be resolved. The courts should not intervene, except in the limited circumstances provided in the Act. For example, if your contract contains an arbitration clause, and the other party issues court proceedings, a court will pause those proceedings to allow the arbitration to continue, unless your agreement is “null and void, inoperative or incapable of being performed”.

The structure of the Act means that the parties may arbitrate without having to incorporate into the contract any institutional arbitration rules. So even in the absence of a clause within the contract, business can still opt for resolution via arbitration to avoid costly court proceedings.

Jul-Sep 2017 issue