Are Your Breach and Dispute Resolution Clauses Causing Disputes?
Typically, when entering a business deal, much time is spent considering and negotiating the primary performance-related provisions of the contract (e.g. the price and services provisions). Standard dispute resolution, breach and notice clauses are often simply imported into the contract or brushed over with little thought. This is a mistake.
We have seen how dispute resolution, breach and notices clauses that are not considered properly can make resolving disputes and enforcing a party’s rights difficult, unnecessarily complicated, and time-consuming. This amplifies the stress involved with what is normally an already stressful set of circumstances.
In preparing your contract, it is therefore worth paying attention to dispute resolution, breach and notice clauses. Below are a few tips to consider when doing so.
1. Remember that Notice, Termination and Breach are related, and ensure that they’re clear on process
The following are some examples:
Period to remedy a breach: When negotiating the time period given to a defaulting party to remedy a breach (before a right to terminate is triggered), parties sometimes forget that this time period only starts to run after a notice is deemed to have been received in terms of the notice clause. Without considering the interplay between the breach and notice clauses, there is a risk that the non-defaulting party might terminate the agreement too soon, without having allowed the periods in the notice and breach clauses to pass. This puts at risk the validity of the termination and could put the non-defaulting party at risk of having repudiated the agreement.
Similarly, consider the interplay between (a) any provision that limits the time period in which a party may take a specific action or make a claim under the contract, and (b) the periods after which a notice is deemed to have been received in the notice clause. If the periods for deemed receipt in the notice clause are unusually long, a party may be caught without enough time to make a claim or take an action by notice, even though the time limit for taking such action or making such a claim might not yet have been reached at the time of the sending of the notice.
Notice: Where reference is made in a notice clause to a physical address set out elsewhere in the agreement (either in the parties clause or on the cover page) ensure that a complete physical address is actually set out in the relevant place. This might seem like an obvious point, but we have seen many cases in which no address is set out, resulting in a party being unable to comply strictly with the requirements in the notice clause.
If under the notice clause a notice is to be sent by email/fax and post/hand, consider whether this may be interpreted as meaning that a notice will only be deemed to have been received when received both by email/fax and post/hand. To the extent that it is clear that notice by email/fax has been, or will be received, it would be cumbersome only to be able to regard the notice as having been received later, when the notice by post/hand is deemed to have arrived.
Check if provision is made in a notice clause for the deemed receipt of a notice sent by a certain method, but there is no provision made for the notice actually to be sent by that method. We have seen many clauses in which there is a deeming provision regarding the date of receipt of a notice by email but in which it is provided that a notice may only be sent by post. In these cases, the deeming provision may be superfluous and could mislead a party to send a notice by the incorrect method under the contract.
If there is a good chance that a stakeholder will send a notice without regard to the notice clause, then for the sake of practicality consider stating in the notice clause that a notice sent by any means will be deemed to have been duly given if it is actually received by the relevant party.
“Irremediable” and “remediable” breaches: Be cautious of provision being made in a breach or termination clause for “irremediable” and “remediable” breaches. It is often provided in contracts that a party would be entitled to terminate immediately following an irremediable breach by the other party, and to terminate after a certain notice (remedy) period following a remediable breach by the other party. However, sometimes it is not clear whether a breach is irremediable or remediable. If a right to terminate (or claim damages or performance) arises differently depending on whether the breach was remediable or irremediable, the distinction between a remediable and an irremediable breach may create fertile ground for a dispute. If there could be doubt about whether a breach of contract is remediable or irremediable, we suggest removing the distinction and referring only to a breach.
Material Breach: If a termination right under a breach or termination clause only arises pursuant to a “material breach”, but it may be difficult to determine what a material breach is, consider allowing the termination right to arise pursuant to any breach (whether material or not). People are often anxious about this as it appears unreasonable, but the search for reasonableness here might come at the expense of certainty and too much so. Bear in mind too that the law in South Africa already allows a party to terminate immediately for material breach. The law in England and Wales is similar, although it is a repudiatory breach (which has been found to be more egregious than a “material” breach) which entitles an innocent party to terminate at common law. Accordingly, it is arguable that allowing the innocent party to terminate only for material breach, and after giving the defaulting party a chance to remedy, is really the unreasonable position.
Allowing the termination right to arise pursuant to any breach addresses the issue of certainty. We suggest that allowing the defaulting party a sufficient period to remedy before the termination right arises addresses reasonableness.
Alternatively, consider calling out specific breaches which are deemed material, but give this careful thought to avoid erroneously omitting to call out any specific breach.
In many contracts it is provided that a party will have the right to terminate pursuant to a “series of breaches which together constitute a material breach”. The issue of interpreting “material breach” is already dealt with above. This kind of provision has the added uncertainty of what constitutes a “series” of breaches and whether any series of breaches which are not each material, could amount to a material breach. We propose that if the right to terminate arises pursuant to any breach which is not remedied within a certain period, as suggested above, there is no need for a termination provision of this kind. If what the parties are trying to address is a party persistently breaching and then remedying within the remedy period, and they want to give the innocent party the right to terminate as a result, then, for more certainty, we suggest specifying the time period within which the breaches would need to occur, and the number of breaches that would need to occur within that period.
2. Be cautious not to create a very lengthy process that must be followed before a party could actually institute legal proceedings in court or arbitration if necessary
Many contracts contain alternative dispute resolution procedures because they result in disputes being resolved pragmatically, quickly and relatively cheaply. In many jurisdictions there is also a requirement (whether set out in law or based on practice) for parties to attempt to resolve disputes before seeking assistance from the courts.
The dispute resolution processes in a contract could include, for example, internal business stakeholder escalation or mediation. Beware, however, that a mandatory lengthy process could result in a party incurring significant costs, or having to wait a relatively long time, before being able to have its claim determined or resolved. The issue could be further complicated if a party is reaching a legal or contractual limit on the time in which it may institute court or arbitration proceedings. One way to deal with this is to have a clause stating that nothing in the dispute resolution provisions would prevent a party from instituting court proceedings which are urgent, or which would need to be instituted urgently for the party to protect its rights, including court proceedings for injunctive/interdictory relief.
If there is a requirement in a dispute resolution clause for the parties to engage in a specific process in attempting to resolve a dispute, ensure that it is clear what triggers the move to each successive stage in that process and that it is clear how long, or under what circumstances, the parties would be required to engage in each stage of the process. We have seen contracts in which this is not clear, rendering the provisions unworkable and making it complicated or difficult for a party to comply with the dispute resolution provisions before being entitled to institute formal proceedings.
3. In the lead up to a contractual dispute, ensure that you properly understand and correctly follow the prescribed procedures
When a dispute arises, always check first what the contract says about dispute resolution – in particular if there is a time limit in which a party is entitled to give a “dispute notice”, and if there are any limits on the time within which a party is entitled to bring a claim.
When sending a breach or termination notice, or engaging in the dispute resolution process, ensure that the contractual provisions, including those in the notice clause, are followed correctly. If the process is not followed correctly, the party’s right to terminate or claim performance or damages, or its right to institute formal proceedings, may not actually have arisen under the contract. The last thing a party wants is to get to court or an arbitration and be scuppered because it failed to follow the contractual provisions regarding breach, termination, notice and/or dispute resolution. Similarly, if the other party has sent a breach or termination notice or raised a dispute, check that it has followed the provisions of the agreement clearly.
Contractual disputes are not always avoidable so it’s worth taking some time to ensure that the dispute resolution, breach, and notice mechanisms in a contract are clear, practical, and efficient for your business environment.
Bruce Campbell is a litigation specialist at Lighthouse Law and assists commercial clients navigate and, where possible, avoid disputes by developing practical processes around issues like internal escalation, good faith engagement and workable dispute resolution provisions.
The information and views contained in this article does not constitute legal advice. If you do require legal advice, please contact us on hello@lighthouse.law.
