Decision-makers face complex challenges every day, and one of them is managing potential contractual disputes with business partners (customers, suppliers, commercial allies).
These disputes can generate costs, attrition and a time investment that can spiral out of control if mechanisms are not in place to generate clarity, reduce risk or minimize their impact in the negotiation phase. Anticipating these scenarios is essential to maintain business continuity and stability of operations and business alliances.
To this end, it is recommended to implement dispute resolution clauses in contracts. These components establish a predictable framework for resolving disagreements and potentially complicated situations.
Below, we will explore the key aspects to consider when drafting a dispute resolution clause. By adapting each to the specific circumstances of your business, you can ensure that your contract includes effective mechanisms for resolving issues that may arise.
Judicial Route
Disputes can be resolved before the courts of law so that a judge can issue a ruling. When parties agree to resolve disputes in this way, the following aspects should be considered when drafting clauses in their contracts:
1. Define jurisdiction and competent court
The clause should specify the country or territory whose laws will govern the contract, as well as the competent court to resolve disputes. The aim is to prevent the same dispute from escalating on multiple fronts and jurisdictions.
This section must comply with laws that are explicitly required to be included in certain types of business or that are considered public policy. For example, a commercial contract with a banking entity should be governed by the laws that regulate that economic sector.
2. Proceeding
A route for legal action must be established. It can be agreed, for example, that a written notice must first be given to the other party detailing the dispute. In addition, steps of alternative mechanisms (such as mediation) can be established prior to resorting to legal action. Depending on the case, a time limit can be set for a solution to be found, otherwise judicial proceedings must move forward. The objective is to provide certainty to potential disputes.
3. Legal notices
One factor that delays legal proceedings is communication problems. When contracts do not have updated addresses for the companies or parties involved, it is difficult to notify them of any legal action.
To avoid delays in the process, the parties should include an address where they can receive legal notices and add that if a change is not communicated in writing, any notices made at such addresses will be valid.
4. Exclusions or limitations
Not all disputes require escalation to a court of law to be solved. Certain types of disagreements can be excluded in the contract so that not every one of them becomes a legal dispute. For example, a dispute over a minor breach could be excluded from going to court and resolved by another route.
The disadvantage of the judicial route is the delay of its processes. According to the Rule of Law Index of the World Justice Project (WJP), in 2023 Guatemala ranked 141 out of 142 countries globally on the indicator "civil justice is not subject to unreasonable delays". This means that Guatemalan civil justice is considered one of the slowest in the world.
Alternative Dispute Resolution (ADR)
Not all disputes need to escalate. An option to avoid court is including Alternative Dispute Resolution (ADR) methods in your clauses. The main benefits of using ADR are that they are simple, confidential, expedite and efficient procedures.
These non-judicial alternatives are well positioned globally because they have expert arbitrators who specialize in the industries of the parties involved, an expertise that a judge will not necessarily have. As a result, they have a greater capacity to resolve the problem satisfactorily. In the Rule of Law Index, Guatemala ranks 106th out of 142 countries in the indicator of accessibility, fairness and effectiveness of alternative dispute resolution methods.
It is important to mention that, in certain cases, one of the parties may resort to the judicial system if all agreed mechanisms have been exhausted.
To incorporate ADR in your contracts, you should consider the following aspects:
1. Define which ADRs to use
Some of the most effective ADRs are negotiation, mediation, conciliation or arbitration.
Negotiation happens when the parties attempt to resolve their dispute on their own before resorting to any other means.
Mediation requires the participation of a neutral third party. Their role is to guide the conversation so that the parties reach an agreement.
Conciliation also requires a third party, but they play a more decisive role: they must highlight common ground and propose solutions.
As in the judicial process, the types of disputes to be resolved through ADR can be delimited.
2. Arbitration
Arbitration consists of submitting the dispute to one or more arbitrators chosen by the parties involved. Unlike the previous mechanisms, the final decision made by the arbitrators is binding.
The contract must specify the type of arbitration to be used, as well as the arbitration institution or rules under which it will be conducted. In addition, the venue, the number of arbitrators who will resolve the dispute, the language and the applicable law must be agreed upon.
There are private arbitration centers in Guatemala that have their own model clauses for using their services. There is the Dispute Resolution Commission of the Chamber of Industry of Guatemala (Crecig), the Arbitration and Conciliation Center of the Chamber of Commerce of Guatemala (Cenac) and the IBT Arbitration Center, to name a few.
When choosing one, consider logistical criteria, costs, the ease with which the arbitral awards (the final decision) are enforced, among others.
It should always be considered that if one of the parties is not satisfied with the arbitral award, it can still file an appeal for review in the Appeals Court. Likewise, if one of the parties considers that its constitutional rights were violated by the decision of the chamber, it may file an amparo proceeding before the Supreme Court of Justice and subsequently, before the Constitutional Court.
The disadvantage of arbitration proceedings is that they have high costs that vary depending on the number of arbitrators, the arbitration center, the complexity of the case, among other factors. This is a fact that should be considered when determining which dispute resolution method to choose.
Every business and situation are different and, therefore, there is no perfect formula for all contracts. However, having a well-designed dispute resolution clause that is clear and adapted to the needs of the parties, is crucial to have effective and predictable dispute resolution processes.
If you have any questions or require more information, we are at your service.
