Contract 101: The Need for A Dispute Resolution Clause

Looking for legal advice for your contract clause?

What happens if there is a dispute between contracting parties? Is litigating the dispute in court the only way forward? In today’s article, we will briefly share a particular clause that people often do not insert into their agreements that would provide an alternate avenue or method for settling their dispute without them having to fight tooth and nail in court. This particular clause is also known in the legal industry as a dispute resolution clause.

What is a dispute resolution clause?

Dispute resolution clauses (in a contract) are usually clauses which state how the parties to a contract wish to resolve their dispute (if there is any). These clauses:

  1. Could range from arbitration, mediation, adjudication and even litigating the matter in a different country; and
  2. Could also be multi-tiered (or commonly known in the legal industry as an “escalation clause”. This means the contracting parties will have to first go through a series of dispute resolutions in a specific order before they could bring their dispute to court.

For example: In the event, there is a dispute, A and B would have to:

  1. First, resolve their matter via an expert;
  2. Thereafter, if the matter cannot be resolved, to refer their dispute to an arbitrator/ mediator; and
  3. Only then could the matter be referred to the court, subject to the provisions of law.

Why is there a need for such a clause/ What are the advantages of having such a clause?

  1. In a case where it involves multinational companies in several jurisdictions, having a dispute resolution clause could potentially save parties a lot of time as the parties are able to determine in advance the governing laws in relation to the contract and the jurisdiction governing the dispute should one arise- effectively saving cost and time to determine the issues later on.
  2. A matter, especially in mediation, can be dealt with discretely without the need to attract the attention of an outsider. Furthermore, anything that is said in mediation proceedings, saved under certain exceptions, cannot be used in court as evidence later on1.
  3. It allows parties to resolve a dispute in a mutually advantageous manner- both parties win when they are able to set their sight on a commercial objective which they both can agree upon in an event a dispute arises.

The status of the dispute resolution clause in Malaysia

In Malaysia, the court held that dispute resolution/ escalation clauses must be complied with (if there is one in the contract) before parties are allowed to commence legal proceedings in court2. In this regards:

  1. A and B agreed to enter into a contract, and in the event, there is a dispute, they agree to resolve the matter by way of dispute resolution;
  2. If the dispute resolution is going nowhere i.e. either party feels unsatisfied, they could refer the matter for arbitration (escalation clauses);
  3. At the end of the arbitration, only then the matter could be referred to the court.
    **However, it must be noted that the award that was given in arbitration proceedings is final i.e. not appealable3 unless it can be set aside4 or the award is varied, affirmed, or remitted back to the arbitrator for further consideration after the High Court determined that a particular question of law might have affected the outcome of the award5.

The statement above was seen in Juara Serata Sdn Bhd v Alpharich Sdn Bhd6, where the Federal Court held that parties who decided that when parties decided to be bound by dispute resolution/ escalation clauses in a contract, the parties must follow through with the agreement and cannot resile from their agreement as by doing so would literally mean that the parties are allowed to take advantage of their own wrong/ misfortune.

Therefore, it is prudent to not only have a dispute resolution clause(s) but a properly drafted dispute resolution clause(s) in a contractual agreement, as a good contractual agreement would prevent parties wasting their time and money disputing the meaning of their agreed-upon dispute resolution clause when they could have in fact resolve their dispute expediently, saving them for heartache.

1. Section 16, Mediation Act 2012.
2. Juara Serata Sdn Bhd v Alpharich Sdn Bhd [2015] 9 CLJ 37.
3. Section 36, Arbitration Act 2005
4. Section 37, Ibid.
5. Section 42, Arbitration Act 2005.
6. [2015] 9 CLJ 37.