To What Extent is an ADR or Arbitration Clause Effective?

The most commonly used method for enforcing the terms of a commercial contract is to issue proceedings in the High Court or County Court.  Since those proceedings are conducted within the public domain, there are certain situations in which parties might agree that it would not be appropriate to resolve their disputes in this way.  In those cases, they will include within their commercial contracts some form of clause providing for an Alternative Dispute Resolution (“ADR”) procedure.

The most common form of procedure is that the dispute will be referred to arbitration.  Arbitration operates in a similar way to the Court process, save that the parties have the opportunity to appoint their own Judge (the Arbitrator).  The Arbitrator need not be a lawyer and may have particular specialist skills.  The arbitration process can be more flexible; it is determined by the Arbitrator himself and the action will be conducted away from the public gaze.

Other forms of dispute resolution can involve mediation, expert determination and other processes.  Increasingly, parties are now including specific dispute resolution provisions within the contract which seek to encourage or require the parties to resolve their issues through one of these more informal and confidential processes, rather than immediately going to Court.

However, unless these dispute resolution clauses are drafted well, they can lead to as much debate as the underlying issue itself.  If both parties require confidentiality, then there may be a measure of co-operation needed in order to  determine which of these confidential processes might be used when a dispute arises; problems are unlikely to develop where both parties agree upon the process.  What is more likely to happen is that one party determines that the very threat to confidentiality (by threatening to go to Court and resisting any reference to ADR or arbitration) might be tactically to its advantage.

If Court proceedings are issued in circumstances where the contract contains a binding arbitration clause, Section 9 of the Arbitration Act 1996 entitles the party against whom legal proceedings are brought to apply to the to stay the proceedings as far as they concern that matter.  On such an application, the Court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

However, although Section 9 gives the Court wide powers to stay the proceedings, it must still be satisfied that the dispute in question is governed by the arbitration clause.  For example, does a clause which reads “any dispute or question in connection with the Partnership or this Deed shall be referred to a single arbitrator …” cover arguments concerning the formation of the partnership or any dispute between the parties as to how the partnership should be dissolved?

Clauses requiring parties to take steps to mediate their differences prior to commencing proceedings are even more difficult to interpret and enforce since there is no provision equivalent to that contained in Section 9 of the Arbitration Act which can be called upon.


Clauses seeking to promote alternative dispute resolution need to be drafted carefully so that the scope is clear.  If they seek to set out some form of ADR process other than arbitration, then the process itself needs to be clearly laid out with an unambiguousmethod for initiating the process, time limits by which certain things should be done and an indication as to how the ADR process is to unfold.

When faced with interpreting such an ADR clause, do not assume that because such a clause has been included within the contract it will therefore cover every type of dispute which arises.  Be clear about whether or not the issue in question (or any one of several issues) might fall within the scope of the clause.  If it does, then you may be at risk of having to pay the other party’s costs in the event that you commence proceedings, when the case should have been referred to arbitration in the first place.