It is well-established that alternative dispute resolution (‘ADR’) can be an effective way to resolve disputes, particularly in commercial transactions. ADR is efficient, cost-effective, and capable of producing settlements that the courts cannot replicate. The solutions found through ADR tend to be more imaginative than judicial awards and can be tailored to suit the commercial needs of parties.
Presently ADR is not compulsory in Scotland, meaning it is not a necessary pre-requisite to legal proceedings. However, parties can choose to include clauses within their contracts that require the use of ADR as a first step to resolve any disputes.
Enforceability of ADR clauses in Scotland
While the Scottish Courts actively encourage the use of ADR through pre-action protocols and procedures, they do not have the power to compel parties to engage with ADR. However, they will enforce contractual clauses which require parties to refer their dispute to a specified ADR process.
In Fraserburgh Harbour Commissioners v Mclaughlin & Harvey Ltd [2021] CSIH 58, the Inner House of the Court of Session considered whether a contractual clause — which required parties to refer their dispute to adjudication — would prevent that dispute from being raised before other decision-makers, such as the courts or an arbiter. The Inner House held that the clause precluded the Court from considering the merits of the dispute, although they could still be called upon to enforce an award or agreement between the parties or to consider the merits should the dispute not be resolved by adjudication. However, the Courts will only enforce these clauses if they are drafted appropriately.
It is essential that an ADR clause is unambiguous and describes the process and forum that the dispute is to be referred to. Failure to do so will render the clause unenforceable.
ADR Forums
There are various ADR processes and forums which each have their own unique benefits. The types of ADR that are most commonly used to resolve commercial contract disputes include:
- Negotiation;
- Mediation; and
- Arbitration.
Negotiation is an attempt to resolve the matters in dispute without the assistance of any third party and is often conducted on an informal basis. Mediations and arbitrations require input from an independent third party. In the former, a mediator will facilitate discussions between the parties to explore the issues in dispute and possible settlement options. There is no requirement for the parties to reach a settlement, and any settlement that is achieved is agreed to on a voluntary basis. This contrasts with an arbitration in which the third party, or arbiter, is appointed to make a final and binding decision on the dispute.
If parties decide to engage in Arbitration in Scotland, this will be governed by the Arbitration (Scotland) Act 2010 and is subject to the Scottish Arbitration Rules. Although some of these rules are mandatory, the majority can be contracted out of through agreement, making the process flexible and capable of being tailored to the needs of the parties. One of the main benefits of engaging in arbitration is that arbitral awards are generally easier to enforce cross-border due to the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958. This is why arbitration is often the forum of choice for dispute resolution in commercial contracts with international elements.
Parties can also opt to combine mediation and arbitration into a hybrid dispute resolution process referred to as “med-arb” or “arb-med”. This process can consist of a mediation, followed by an arbitration if the mediation does not resolve the dispute. Alternatively, it can also be an arbitration followed by a short mediation to allow the parties a final chance to resolve the dispute, failing which the arbitral award will be handed down. This gives parties an opportunity to engage in mediation while also providing security that a final decision will be reached. There are some logistical issues associated with this process. For example, a mediator who assumes the role of an arbitrator is arguably conflicted and cannot be fully impartial, therefore tainting the credibility of the arbitral award. This may influence how the parties conduct their mediation and hamper creative settlement discussions.
Drafting an ADR clause
There are three core forms that an ADR clause may take.
1. Hybrid dispute resolution clause
This provides either both parties, or just one party, with the option to choose to refer the dispute to a forum such as arbitration or to litigation. The benefit of this is that the parties can decide which forum is more appropriate once the dispute has arisen.
2. Carve-out clause
These enable parties to refer a specific dispute, or part of a dispute, to ADR. These are typically used to determine technical points in a dispute that ought to be decided by an expert in that area, usually through expert determination.
3. Escalation clause (also known as a multi-tiered dispute resolution clause or waterfall clause)
This type of clause requires parties to pursue one or more ADR mechanisms prior to commencing litigation. For example, the clause could require the parties to engage in negotiation with individuals at a specific title level, such as director to director, before pursuing mediation followed by arbitration or litigation for final resolution.
Once the parties have selected the forum and clause that best suits their circumstances, this must be clearly expressed within the contract. In Holloway v Chancery Mead Ltd [2008] EWHC 2495 (TCC), the High Court identified three requirements that must be present within an ADR clause in order for it to be enforceable. These are that:
- The process must be sufficiently certain and there should be no need for any further agreement at any stage before matters can proceed;
- The administrative processes for selecting a party to resolve the dispute and to pay that person should be defined; and
- The detail of the process or model of the process should be sufficiently clear.
If a clause is lacking in any of these elements it is likely to be considered as an agreement to agree, which is not enforceable under either Scots or English law. Although this is a decision of the English High Court, the Scottish Courts are likely to apply a similar test when considering what information an ADR clause ought to disclose in order to be enforceable.
Conclusion
ADR can be an effective and efficient way to resolve disputes, particularly where parties are looking for a commercial or speedy solution. When agreeing to a commercial contract, parties should consider whether ADR could be a suitable forum for potential disputes and whether they ought to incorporate a carefully drafted ADR clause.
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