The dispute resolution mechanisms in complex commercial agreements can be as important as the deal itself. Well thought-out dispute resolution mechanisms ensure strong safety nets that benefit the commercial interests of all parties to a transaction.

A dispute resolution clause in an agreement is more than a boilerplate provision; it is a critical risk allocation tool that deserves the same attention as the substantive terms of the agreement. A defective dispute resolution clause can have unintended and costly consequences, whereas a well-negotiated and carefully crafted clause saves costs, time and resources.

The clause should contain broad language that covers disputes ‘arising out of or relating to’ the agreement. This ensures it will apply to all possible issues relating to the contract’s formation, validity, performance, interpretation and termination. Non-contractual obligations, such as delict or misrepresentation, may also be included in the clause. A clear trigger notice, such as a formal ‘Dispute Notice’, should be included to start the clock on any dispute resolution procedural timelines.

Level of control

The level of control that should be exercised in the event of a dispute must also be considered. Parties should decide at the beginning of the transaction whether institutional (administered) arbitration or ad hoc (self-administered) arbitration is best suited to the transaction type and value.

Administered arbitration takes place under the rules and using the procedures of a particular organisation, which provides institutional oversight and structure. Some examples include the Arbitration Foundation of Southern Africa (AFSA), the London Court of International Arbitration (LCIA), or the International Chamber of Commerce (ICC). In contrast, ad hoc proceedings, which commonly take place under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, are flexible but need more active management by the parties and/or the appointed arbitral tribunal.

All parties must also be aware of their interim relief options. Arbitral tribunals and courts can act to protect a position before a final award is rendered, but the choice of forum and timing matter.

The cost and speed of arbitrations are another consideration. Parties to a transaction must take care when including a tiered dispute resolution clause that calls for escalating steps, such as negotiation, mediation or expert determination before arbitration. While these procedures can facilitate early dispute resolution and preserve relationships, each step must be clear and time-bound and should not be used to delay a referral to arbitration. The number of arbitrators, the venue, the applicable rules, and the appeal mechanisms all impact the duration and cost of the proceedings.

Seat of arbitration

The seat of the arbitration determines the procedural law governing the proceedings and the supervisory court. This, together with the nationality and expertise of the arbitrator(s), will have a significant bearing on the neutrality, or perceived neutrality, of the process.

South African courts are supportive of arbitration, and our country provides a reliable, pro-enforcement environment for international commercial disputes. It would be wise to consult jurisdiction-specific experts when considering other possible arbitration seats or when attempting to enforce an award in another jurisdiction.

Enforceability

An award that is issued in one party’s favour is only the first step; the enforcement of the award is critical. When negotiating a dispute resolution clause, bear in mind the legal frameworks, court attitudes and asset locations in each relevant jurisdiction. A key consideration is the location of the counterparty’s assets and if the chosen seat supports enforcement under the New York Convention. The Convention requires that its member states recognise and enforce foreign arbitral awards, ensuring they receive similar treatment to domestic awards.

Under the Convention, the grounds on which a court may refuse recognition and enforcement are limited, reinforcing the finality and cross-border reliability of international arbitration awards. The real question will then be how expansively local courts interpret these grounds and whether they adopt a pro-arbitration stance.

Final note

A commercial agreement is only as strong as its ability to survive a dispute. By treating a dispute resolution clause as a primary commercial term rather than a secondary legal requirement, businesses can ensure that if a dispute arises, it is considered a hurdle that may be overcome through procedural orderliness, rather than a deal-breaker.

Jonathan Barnes is a Partner and Samantha Mason a Senior Associate | Bowmans

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
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