When drafting business agreements, dispute resolution clauses are usually not the main concern of the parties, and are sometimes referred to as ‘midnight-clauses’, in reference to the fact that discussions about these clauses are frequently left for the final stages of negotiations, just before the execution of the relevant agreement. As practice shows, disputes do arise from time to time, and a well-drafted dispute resolution clause is essential to enforce several of the obligations set forth in an agreement.

A dispute, at least in an ideal world, should be solved quickly and with minimum cost to the involved parties. Unfortunately, this does not happen all the time. In this regard, to avoid long and costly arbitration or judicial proceedings, alternative dispute resolution (ADR) has seen its popularity grow significantly over the past few years. Generally inserted into business agreements in the form of multi-step clauses, they have become very popular in both domestic and international commercial agreements worldwide.

The idea is to set several steps, mandatory or otherwise, which the involved parties should follow in order to solve disputes arising out of or in connection with their agreements. The first step is usually a fast and low-cost procedure, such as negotiation, sometimes followed by dispute boards (mainly used in construction contracts), mediation and, if the dispute remains unresolved, arbitration or judicial courts.

However, inserting multi-step clauses into business agreements can be tricky, as poorly drafted clauses may backfire and have the opposite effect, leading to costly and time-consuming discussions. Hence, it is imperative that multi-step clauses inserted into contracts have clear and precise provisions to avoid any ambiguity or misinterpretation.

This article will firstly analyse the possible procedures involved in commonly used multi-step clauses and their benefits to the involved parties. Secondly, it will examine the main issues concerning such clauses and, finally, will comment on some important issues to be considered as regards dispute resolution clauses.

Dissecting multi-step dispute resolution clauses – the possible steps

In the past few years, some dispute resolution clauses have been making reference not only to arbitration or judicial courts, but also to ADR, usually in the form of a multi-step clause. Such clauses usually refer to several steps, comprised of an initial period of negotiation between the parties, followed by mediation and/or dispute boards procedures, before submission to arbitration or judicial proceedings.

Oct-Dec 2015 issue

Pinheiro Neto Advogados