Dispute Resolution Clauses in SME Contracts: Why You Need Them

Last updated on August 16, 2023

Two men discussing about a contract

Disputes sometimes arise out of an SME contract. Common disputes include late or non-payment by clients, failure to fulfil contractual obligations by SME owners as well as disagreements over the handling of force majeure events.

Therefore, it is important for SMEs to insert a dispute resolution clause into their contract to ensure certainty when dealing with disputes. By doing so, SMEs can safeguard their interests and resources as well as maintain positive relationships.

This article will explain:

What is a Dispute Resolution Clause and How Does It Work?

A dispute resolution clause is a clause in the contract that serves as a roadmap for how parties should deal with potential disputes which may arise out of their contract. It defines the way parties settle disputes and outlines the steps to be followed when resolving such disputes.

For example, a dispute resolution clause will typically define the method of dispute resolution as well as outline the expected timeline for such resolution and whether the expenses incurred in connection to the resolution are to be shared by the parties. This effectively provides reassurance and clarity to the parties with regard to the time and financial resources invested in resolving disputes.

The validity of a dispute resolution clause is determined with reference to its governing law. Therefore, it is important to set out the jurisdiction that governs the contract. 

Why are Dispute Resolution Clauses Important in SME Contracts? 

As an SME owner, you are well aware that encountering a legal issue can significantly impede your day-to-day operations. In more severe cases, a single substantial legal problem could potentially jeopardise the entire existence of your business. Therefore, having a dispute resolution clause in SME contracts is crucial.  

Cost and time efficient 

A dispute resolution clause provides for much lower costs and less time-intensive ways of resolving a dispute, such as through mediation, which is typically included as the first instance of recourse.

Mediation enhances time efficiency by providing a streamlined process for resolving disputes and yields cost efficiency by minimising unnecessary legal expenses (more below). Consequently, both parties save valuable time and financial resources. This is in contrast to engaging in lengthy and expensive litigation which can pose a tremendous financial burden for SMEs, who often face resource constraints.

Certainty and confidence 

A dispute resolution clause also promotes certainty and confidence in preserving pivotal business relationships that SMEs often rely on for growth and sustainability.

For instance, if two companies were to have a dispute regarding the quality of goods, the inclusion of a dispute resolution clause, such as mediation, would promote certainty by establishing a transparent resolution process as well as instil confidence by showcasing the parties’ dedication to a reliable and effective method of resolving disputes. This certainty and confidence, in turn, strengthens parties’ willingness to continue working together on existing projects or future opportunities, thereby reaffirming business relationships.

Thriving beyond contract termination 

More importantly, dispute resolution clauses survive contract terminations. This means that, even after a contract is terminated, dispute resolution clauses are still given legal effect. This ensures that disputes are resolved as per the dispute resolution clause, maintaining consistency and minimising confusion. Parties can also save on the costs associated with starting a new legal process and benefit from the efficiency of the chosen resolution method. 

For example, if unforeseen challenges arise during a project resulting in disagreements and the eventual termination of a contract, the dispute resolution clause within the contract, which designates arbitration as the chosen resolution method, remains binding. Both parties are obliged to adhere to the clause and resolve the issue through arbitration, effectively sidestepping a prolonged and expensive legal battle for SMEs.

What are the Types of Dispute Resolution Processes That Can be Included in such a Clause? 

Various types of dispute resolution processes can be included in such a clause. Often, alternative and non-adversarial forms of dispute resolution such as mediation and arbitration are the first attempts at resolving the dispute as they do not require recourse to the courts.

Unique to SMEs, flexible dispute resolution processes are needed to adapt to their special limitations, hence the one-size-fits-all approach of formal court proceedings is typically not suitable for SMEs. These special imitations include limited financial and human resources, a greater need for preserving business relationships as well as the importance of time efficiency.

Mediation 

In mediation, a qualified mediator the parties in resolving the dispute by facilitating communication and helping to identify common interests to reach a voluntary and satisfactory settlement.

While the decision that arises out of mediation is not legally binding, it often is the quickest and most cost-friendly method to resolve the dispute. 

In general, mediation can lead to resolution within one to three sessions, with each session lasting approximately three hours. However, the specific number and duration of sessions may vary depending on the parties involved as well as the complexity of the case.

Moreover, mediation services provided by the CDRC (Court Dispute Resolution Cluster) are generally free of charge. However, where cases are referred from the District Court, each party will be required to pay a fee of $250.

In most cases, mediation is particularly well-suited for contractual disputes that arise from the specific provisions outlined in the SME contract.

For example, in a commercial construction contract dispute involving a breach of contract, specifically issues relating to delays and quality of work, the parties may engage in mediation to discuss and explore options such as revising the contract timeline and refining quality control measures or agreeing on a mutually agreeable compensation for the delays or subpar work.

Here is an example of a dispute resolution clause involving mediation:

If a dispute arises out of this contract, or the alleged breach thereof, the parties agree first to try in good faith to settle the dispute by mediation within 30 days before resorting to arbitration, litigation, or some other dispute resolution procedure. In the event that parties are unable to agree on a mediator, a mediator shall be appointed by a named administrator.

Generally, mediation clauses in SME contracts would outline mediation as the designated or foremost method for resolving the dispute, along with stipulations regarding timeframes and the appointment of an administrator and/or mediator.

It is also important to note that careful drafting of the clause must be undertaken as unclear wording results in ambiguity, which would result in the need to seek independent legal advice to interpret the terms, thereby further delaying the dispute resolution process. 

For more information, please refer to our other article on the mediation process in Singapore

Arbitration 

In arbitration, one or more arbitrators aid in resolving the dispute by making a legally binding decision on behalf of the parties.

For example, in a commercial contract dispute involving the breach of performance obligation terms, the parties may submit their arguments and evidence to an arbitration panel, which will then make a final decision on the performance obligations as well as any associated damages.

Including arbitration clauses in SME contracts can be advantageous, particularly when potential disputes involve intricate technical matters. This is because arbitrators possess specialised knowledge and expertise in the pertinent field, enabling them to grasp the intricacies at hand and make more informed decisions.

Moreover, opting for arbitration helps avoid the creation of a public record as the hearing will take place in a private setting and the final outcome will not be accessible to third parties. This effectively safeguards the reputation of the SME business which holds particular significance during the early stages of an SME’s growth and establishment. 

However, arbitration provides a single, legally binding outcome, hence if you are dissatisfied with it, there are no additional avenues for appeal.

For more information, please refer to our other article on arbitration for business disputes in Singapore.

Litigation 

Alternatively, litigation may be resorted to in the event mediation and arbitration are unsuccessful or unsuitable. In litigation, the dispute is brought to the courts where it will be heard by a judge. Like arbitration, parties will present their case before a judge, who will then make a legally binding judgment.

With this legally binding judgment in hand, you can enforce the court’s decision and compel the other party to comply with it.

Although litigation is generally considered a measure of last resort, there are instances where it may be the most favourable course of action at the outset. For example, in instances where there is a clear violation of the law, such as an unauthorised disclosure of confidential material, initiating litigation from the outset can play a pivotal role in enforcing your legal rights as well as safeguarding the interests of your business.

In the case of the example above, an immediate action, such as a court’s order of specific performance to recall the confidential material, would help protect your business’ confidential information, reputation as well as intellectual property.

Nevertheless, SMEs may often encounter financial limitations, making it difficult to bear the substantial costs associated with litigation. Moreover, this burden is compounded by the protracted nature of court proceedings and the potentially adversarial environment, which can strain vital business relationships.

For more information, please refer to our other article on civil litigation in Singapore. 

What Does a Good Dispute Resolution Clause Look Like? 

There is generally no hard and fast rule in crafting a good dispute resolution clause. More often, the particularities of the clause would depend on the nature of your SME contract as well as what you and the other parties want, including the form of dispute resolution. Nevertheless, it is important to ensure that the dispute resolution clause is drafted in a clear, concise and reasonable manner in which certainty is provided to the parties.

A good dispute resolution clause generally encompasses the following principles:

  • Defines parties’ rights and obligations;
  • Outlines the process which the parties must follow in the event of a dispute;
  • Addresses alternative processes in the event the dispute resolution processes are unsuccessful; and
  • Outlines the method in which the dispute resolution might be enforced (eg in which jurisdiction).

Here is an example of a clear, well-drafted dispute resolution clause: 

In the event of any dispute arising between the Parties in connection with this agreement, senior representatives of the Parties will, within 10 Business Days of a written notice from either Party to the other, meet in good faith and attempt to resolve the dispute without recourse to legal proceedings.

In this example, the dispute resolution clause aims to foster direct communication and constructive discussions between the parties. The objective is to reach a mutually agreeable resolution without resorting to legal proceedings.

In summary, including a dispute resolution clause in your SME contract brings several advantages.

Incorporating a dispute resolution clause facilitates efficient resolution for SMEs while simultaneously safeguarding vital business relationships that are integral to their growth, and saving valuable time and limited financial resources.

SMEs should, therefore, give due consideration to dispute resolution clauses at the outset of contractual negotiations, ensuring clarity and alignment on the preferred method of resolving potential disputes.

Should you need legal advice on interpreting your contract’s dispute resolution clause, and/or would like to hire a lawyer to assist with the drafting and negotiation of the terms of your contract, you may get in touch with one of our corporate and commercial lawyers.

We also offer carefully drafted contract templates which you can easily amend/add to, any terms, as you deem suitable.

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