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In simple terms, manufacturing contracts generally involve one party supplying goods and/or services to another, the classic customer/supplier relationship. The contract can be a one-off sale or a longer-term project involving several businesses working together.
Parties to a manufacturing contract will usually enter into written terms of agreement, for example, a supply of goods/services contract. This document will (or ought to) set out what is required of each party in the performance of their respective obligations. There may also be implied contractual terms by statute, for example, the Sale of Goods Act 1979.
Many written agreements, particularly those in connection with complex, long-term projects, will include a clause that will set out what the parties must do if things go wrong in the performance of their contractual obligations. This is otherwise known as a dispute resolution clause.
A dispute resolution clause sets out the process the parties must follow when a dispute arises. These clauses can include provisions for settling any dispute by litigation, arbitration; mediation; expert determination, or a combination of these.
It can also set out which court would have jurisdiction to hear the dispute, i.e. the Courts of England and Wales, for example, might have exclusive jurisdiction to hear a civil claim. Alternatively, the parties might want to refer the matter to an arbitral body such as the International Chamber of Commerce (ICC).
There is no formal requirement for agreements to contain a dispute resolution clause. However, the commonality with most disputes is that they do need to be resolved in a fast and efficient manner. The parties will usually have invested significant time and resources into a project and will want to salvage it if at all possible.
A dispute resolution clause can help provide certainty on the procedures to be followed where there is a dispute. For example, a dispute resolution clause may refer the parties to independent mediation or provide that the parties jointly instruct an expert to provide an early neutral evaluation of a particular issue.
Dispute resolution clauses can also be structured to provide for combinations of steps such as:
This tiered system allows the parties to follow a set procedure designed to resolve any disputes that might arise.
If there is no dispute resolution clause, then practically speaking, the only recourse for a wronged party to take is to issue civil court proceedings. However, there is still an opportunity for the parties to explore other forms of alternative dispute resolution, such as mediation, which is often a much more cost-effective method of resolving disputes. Mediation can take place before or run parallel with court proceedings.
Some contracts expressly provide the customer a right to audit a supplier’s records to ensure the supplier is performing the contract correctly. It is important to note that the right to audit is not available under common law or statute. Therefore, that right must be written into the contract if the customer wants to undertake an audit. Whether or not an audit clause is necessary will depend upon the nature and complexity of the contract.
Specially drafted dispute resolution clauses can cut through much of the uncertainty that customers and suppliers may face when a dispute occurs. As touched upon above, these clauses can radically alter the complexion of any dispute, and they are among the first things that a litigation lawyer will consider when advising a client in connection with a manufacturing dispute.