June 6, 2014

Dispute Resolution Clauses

Dropbox recently changed its terms of service to direct customers through a dispute resolution process before they can litigate in court. The changes show how useful dispute resolution clauses can be, particularly where a company contracts with many people in a consumer facing business.

What is a Dispute Resolution Clause?

A dispute resolution clause sets out a process for how parties to a contract will resolve a dispute.

There are many different kinds of dispute resolution processes, but parties will often agree to:

  • not sue in court without fulfilling the dispute resolution process;
  • notify the other party of a dispute as the first step;
  • resolve the dispute by discussion; and
  • go through mediation and/or arbitration if discussion doesn’t resolve the dispute within a certain time.

Usually, the clause describes who will be the mediator or arbitrator, and where the proceedings will take place.

Advantages of Dispute Resolution Clauses

Dispute resolution clauses have many advantages:

  • they aim to resolve contractual disputes early, quickly, and cheaply;
  • they keep disputes out of the public eye;
  • they help maintain business relationships when contractual disputes arise; and
  • small businesses can use them to defend against large businesses with more legal resources.

Arbitration and mediation are usually confidential. In Australia, arbitration awards (the result of arbitration decisions) are final and binding. Parties can enforce them, as they would enforce a court order. Parties cannot challenge the content of an arbitral decision, although they can challenge its procedural fairness.

Dropbox’s Dispute Resolution Clause

A business with many customers can require its customers to agree to dispute resolution clauses in its Terms of Service document. This reduces the risk of litigation, especially class actions, where consumers use their numbers to gain leverage.

This is what Dropbox has done. The Dropbox dispute resolution clause:

  • explicitly requires customers not to take class actions;
  • requires customers to attempt to resolve any dispute informally; and
  • sets out a process for arbitration if the dispute is not resolved informally.

Dropbox customers can litigate in small claims courts, but the Dropbox clause incentivises consumers to choose arbitration.

Dispute Resolution and Consumer Guarantees

Although dispute resolution clauses can reduce the risk of litigation in the consumer context, they cannot be used to restrict or modify consumer guarantees that apply under the Australian Consumer Law (ACL).

The ACL provides guarantees about the quality of goods and services that businesses provide to consumers. Consumers cannot contract out of their consumer rights. To the extent that a dispute resolution clause is inconsistent with the ACL, it will be void. Businesses need to be careful about how they draft dispute resolution clauses.

Takeaways

  • Dispute resolution clauses minimize the risk of costly and lengthy litigation, including class actions;
  • They can help resolve disputes quickly, cheaply and confidentially;
  • They can include options for informal discussion, formal mediation and arbitration; and
  • If you are providing goods or services to consumers, be aware of ACL consumer guarantees when drafting dispute resolution clauses.