On dispute resolution clauses, and design thinking: part 3.

[Sales professionals, contract negotiators, and legal managers: this series is for you.]

In the last installment, we discussed one of the reasons we enter into written contracts: to allow the innocent party to sue the non-performing party.

In this installment, let's talk about how dispute resolution clauses affect the innocent party's practical ability to sue.

I'll illustrate with a case study.

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Suppose Party A enters into a contract with party B, under which Party A pays the contractual sum for Party B to deliver widgets. Party A pays half upfront, but the widgets are never delivered.¹

Party A naturally looks to Party B for recompense. But Party B cannot or will not (a) deliver the widgets; or (b) repay Party A.²

So, naturally, Party A wants to sue Party B, and looks for a lawyer.

So the lawyer looks at the sale contract. It specifies that the Courts of Narnia have exclusive jurisdiction over any dispute arising out of or in connection with the contract.³

So in practical terms, this means:

(a) Party A has to engage lawyers in Narnia, to sue Party B in Narnia. If the lawyers in Narnia don't speak English, Party A will have to arrange for translators at its own expense - too bad. If lawyers in Narnia are 3 times more expensive than lawyers in Singapore - too bad. If Court proceedings in Narnia take an average of 5 years to conclude - too bad.

(b) if Party A decides, to heck with that clause, I'm just going to sue in Singapore, Party B would likely be able to apply to "stay" the Singapore Court proceedings (i.e. halt the Singapore proceedings) in favour of Narnia. Party A would have wasted time and legal costs on the Singapore proceedings, would likely have to pay costs to Party B for its successful application, and would have to go to the Courts of Narnia anyway.

And obviously, none of these issues had crossed Party A's mind when it signed the sale contract. Party A may well have overlooked the dispute resolution clause, especially if the sale contract was signed late at night after a protracted negotiation, and Party A was told that the clause was the "standard legalese".

But the reality is that these issues may well affect Party A's practical - as opposed to theoretical - ability to sue Party B for its breach of the contract.

And if Party A does not have the practical ability to sue, then...

...what's the point of the contract in the first place?

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In the next installment, I'll discuss some practical considerations when deciding where dispute resolution clauses should point towards.