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Dispute Resolution in United Kingdom

Dispute Resolution in Contract Formation

It is often advisable to include this term in any contract.

In Pinsent Mason’s words: The procedure to be followed if the parties have a dispute should be included. For example, if there is an option for arbitration or mediation where the issue cannot be resolved through internal escalation.

Dispute Resolution in Contract Law

At first glance, recourse to the courts appears to be the obvious means by which a party to a contract can enforce their contractual rights in the event of default or non-compliance by the other party. However, in practice, a whole host of factors may militate against the commencement of litigation as a means of securing enforcement. In this chapter we consider the various ways in which the parties to a contract might go about resolving their dispute. In an introductory text of this kind, it is not possible to describe the full range of dispute resolution techniques employed by parties in disagreements about a contract. As a result, some processes, such as early neutral evaluation and the mini-trial, can only be mentioned in passing. What we are able to do is to focus on the three forms of dispute resolution most discussed in legal circles: litigation, arbitration and mediation.

DISTASTE FOR LITIGATION

During the course of studying for your law degree you will spend thousands of hours reading the judgments of our superior courts. Legal education is renowned for its court-centric approach and this is inevitable given the emphasis placed on doctrine in subjects such as contract. But most research on disputes demonstrates that cases which are litigated, let alone reach the Court of Appeal or House of Lords, are atypical. There are a number of reasons for this. Perhaps, most importantly, the pursuit of litigation can involve an immense commitment of resources, both in legal costs and management time. For the commercial party, even if the claim is successful, not all of the costs will be recovered and time spent by personnel in protracted preparation for litigation might be better spent devoted to core business.

Successive empirical studies of contractual practice have demonstrated that few disputants in the commercial sector even consider going to a lawyer to help them resolve contractual disputes. This is because the use of litigation to resolve disputes is seen as costly in terms of financial outlay, reputation and commercial relationships. Even when they do approach lawyers, Macaulay (1963) found that disputants in the commercial sector rarely resort to litigation. In their study of the engineering industry, Beale and Dugdale (1975) found that, even where a liquidated damages clause for late delivery was in a contract, buyers were loath to use it on breach to obtain compensation. To their mind, the key purpose of such causes was to encourage the setting of realistic delivery dates. Their study found that frequent citation of contractual terms actually served to destroy the relationship rather than make it more efficient. Lewis (1982) found that the parties were much more likely to use non-contractual remedies when disputes arise such as peer pressure, re-negotiation or the threat of withdrawal of future business. Some of these self-help remedies are evident from the cases that do end up in court. The first reaction of the contractor and sub-contractor in Williams v Roffey was not to litigate but to re-negotiate the terms of the contract so that completion of the building project could be achieved.

Even where the parties are disposed to litigate, there are a number of structural barriers to using the courts. The delay involved in obtaining a judgment and the inevitable commercial consequences of this. Even having obtained a judgment, the defaulting party may have insufficient assets to pay damages. There are also the uncertainties associated with litigation. Whatever the rights and wrongs of the case, there may be insufficient evidence fully to support a claim and the risk of losing. As any litigator will tell you, there is no such thing as a certain case. However strong your claim, you may have the misfortune to meet a judge who does not agree with your assessment of the case. For consumers, these same factors come into play but are exacerbated by worry caused by involvement in stressful and unfamiliar litigation procedures. These various factors have led many researchers to suggest that many disputants react to a grievance by ‘lumping it’ and cutting their losses.

Costs and the ‘win or lose’ nature of litigation have also led the business community, from the late nineteenth century onwards, towards increased self-regulation as regards contractual disputes. Various techniques have been adopted by the business community in advance of disputes to avoid entering the litigation arena. At the mid-to high-value end of commercial transactions, contracts have become increasingly more sophisticated as lawyers seek to avoid ambiguity and so reduce the scope for dispute. Most contracts for large-scale projects now contain carefully drafted exclusion and limitation of liability provisions, geared to risk management. In addition, liquidated damages provisions which regulate the amount of compensation to be paid on occurrence of a specified breach are commonplace. This means that disputes can be settled quickly and contractual performance completed with minimal delay.

The adoption in commercial contracts of ‘escalation procedures’ is also designed to contain disputes and encourage their settlement at an early stage. Such provisions will generally provide for representatives on both sides to engage in negotiations about a dispute which has arisen within a specified time period. If discussions fail, the matter is referred to senior management, perhaps in the form of a mini-trial (see below) and, if that is unsuccessful, then to mediation. Only if all of these various processes fail will the parties resort to litigation or another form of adjudication.

The conclusion to be drawn from the above factors is that, in making a decision as to whether or not to pursue a legal claim following a breach of contract, a variety of factors will have to be taken into account. Figure 19.1 summarises the most important of these considerations. Whilst not exhaustive, Figure 19.1 illustrates that, in the real world, contractual provisions cannot be determinative of how a breach of contract is resolved. This is because it is only in an adjudicatory process, such as litigation, that these principles will be given priority. In light of the various factors mentioned above it should not be assumed that bringing legal proceedings is possible or even desirable in the majority of cases.

To the extent that an aggrieved party concludes that they do wish to pursue a claim, they must next give consideration to the best means of doing so. As explained in the opening paragraphs of this chapter, the natural inclination of most businesspeople will be to look for a quicker and cheaper form of dispute resolution than that offered by the courts, although in some circumstances the litigation process may still offer advantages over other forms of procedures. We will now turn to consider the various forms of dispute resolution process available, what is involved in using them and the factors that may influence a party in deciding whether to adopt a particular procedure.

VOLUNTARY AND MANDATORY PROCEDURES

Before looking at the range of dispute resolution procedures available, it is very important to understand the distinction between mandatory and voluntary procedures. The best example is litigation in which the parties must comply with the judgment imposed on them by a judge. Subject to certain limitations, an aggrieved party always has the right to take their claim to the court and the court will nearly always have the necessary authority over the defending party to compel it to submit to its authority. Similarly, many contracts contain an agreement to submit disputes to arbitration and to comply with the decision of the arbitrator. The basis of the tribunal’s power will be the parties’ prior agreement to submit a dispute to an arbitrator for determination. Mandatory procedures necessarily involve the appointment of an independent third party charged with determining the ‘correct’ legal position on the matters in dispute between the parties. Subject to any right of appeal that may exist, such decision is binding on the parties, that is in general terms they have no choice but to accept the decision. If the losing party fails to comply with the decision, the successful party will be entitled to look to the court to assist in enforcement.

By way of contrast, voluntary procedures are much more flexible and enable parties to keep their options open while exploring the possibility of compromise. They tend to be aimed at bringing the parties to an agreement on how the dispute is to be resolved. A prime example is mediation which seeks to facilitate the parties coming to their own agreement. As a general rule, voluntary procedures are conducted on a without prejudice basis, that is communications between the parties and documents created for the purposes of the procedure cannot be relied upon should the case go to court. If at the end of a voluntary procedure the parties are unable to reach terms of settlement which each feels that it can accept, they are free to walk away from the process without having prejudiced their legal position in any way.

A further important distinction lies in the nature of the remedy that may be achieved through each of these two categories of process. Where a dispute is referred for mandatory or binding determination to a third party acting in a judicial or quasijudicial capacity, the role of the parties to the dispute is strictly limited. They have no control over the outcome of the process because that aspect is determined by the third party. Moreover, the third party charged with such responsibility is confined to adjudicating upon the specific issues referred to them and in strict accordance with the legal merits of the case. Many voluntary procedures, on the other hand, involve active participation by the parties in the formulation of an agreed outcome, the form of which often embraces matters which may be unconnected with the formal legal issues in dispute. They may, however, enable a commercially viable solution to be achieved.

FORMS OF DISPUTE RESOLUTION

As a result of growing concerns about the efficiency and effectiveness of litigation, a substantial overhaul of the civil justice system has taken place in the last two decades. This has been brought about by a combination of private enterprise, government intervention and industry pressure and has gone some way to meeting the concerns of the commercial sector. These changes have occurred in tandem with an increase in the range of dispute resolution procedures available to parties. The result is that the emphasis in modern dispute resolution is on selection of the best process to achieve a favourable outcome by the most efficient means. As already discussed, this is not the same thing as securing proper application of contractual principles in order to prove a good legal case. For most businesspeople, a favourable outcome is defined in terms of their commercial objectives and financial cost.

LITIGATION

Where resort to binding determination by a third party cannot be avoided, litigation remains the last port of call. In common with other forms of adjudication like arbitration, it involves a neutral third party listening to the arguments of two opponents and, on the basis of the evidence presented, determining which of the two best explains the legal position. It follows that adjudication produces a winner and a loser and that, in this country at least, the approach to the presentation of evidence is an adversarial one. It is also important to stress that adjudication is undertaken by someone with the authority to impose a decision upon the parties.

The landscape of court-based adjudication is, however, significantly different to how it was 10 years ago. This is because of the radical changes made to civil litigation as a result of the Woolf reforms. The aims of this review were to address the key problems of cost, delay and complexity of proceedings. After extensive consultation, Lord Woolf published his final report which led to new Civil Procedure Rules (CPR) which became law in April 1999. The reforms were driven by a perceived need to offer appropriate legal procedures at reasonable costs which are proportionate to the case and to deal with cases with reasonable speed. However, in reality, it remains an inescapable truth that parties with deep pockets, assisted by able lawyers, can exert considerable procedural and commercial pressure within the litigation landscape. This reinforces the fact that, however far the reforms may have improved procedures, litigation remains very much a process of last resort.

Source: Linda Mulcahy, Contract law in perspective, 5th edition, Taylor &​ Francis, New York, 2008.

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  • Article Name: Dispute Resolution
  • Author: W.S.M. Knight
  • Description: Dispute Resolution in Contract Formation It is often advisable to include this term in any contract. In Pinsent Mason's [...]

This entry was last updated: November 4, 2020

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