Can you pour oil on troubled waters?

It’s no secret that business disputes can be disruptive and costly

Can you pour oil on troubled waters

When it comes to costs, the primary concern will often (and naturally) be legal fees, but those can often be matched in terms of impact by the inevitable internal time costs and diversion from the parties’ staffs’ ‘day jobs’.  Losing a case will only make things worse if the loser has to pay a significant slice of the winner’s costs, either because they’ve been ordered to or couldn’t negotiate anything better in a settlement.

The wider commercial fallout from a business not achieving its goals can be equally costly on both sides as relationships are tested and potentially fractured if a dispute goes any distance.  

So, can these risks ever be managed?

In short, yes – and it’s a key consideration when negotiating any contact, especially long-term deals, where dispute resolution clauses should never be viewed as ‘just boilerplate’ that can be skipped over.  Getting these provisions right can save an awful lot of time, cost and commercial heartache down the line.

Dispute resolution clauses (DRC) are designed to give parties a mechanism that either replaces litigation or imposes a process that’s designed to try to avoid litigation which must be followed before a claim can be issued.

DRCs come in many shapes and sizes and can be freely negotiated like any other contract term.  English law recognises, and will enforce, properly drafted DRCs provided that:

  • The clause makes it clear that it must be followed before either side can start court (or arbitration) proceedings.  It can’t be an optional extra so, avoid wording like “the parties may refer any issues to…….”.
  • The process is sufficiently certain and clear enough to enable it to be understood and followed without the need for any additional agreements at any point.  In particular, the process must cover steps for appointing, and paying, a mediator or any other third party who will be appointed as part of the process.

DRCs give parties control over how they will deal with disputes.  They will typically provide for issues to be escalated up through various levels of the management chain and may also go on to provide for mediation, or some other form of alternative dispute resolution (ADR), where management cannot get to a resolution.   

If an ADR option is included it needs to specify whether the form chosen is non-binding, like mediation, or binding, like an expert determination where a party appointed expert can impose a result.   

The reference on to an external ADR process isn’t obligatory and some clauses will limit themselves to the parties’ own internal processes before a claim can be started.

Whatever structure is chosen, the internal process(es) must fit the deal and thought needs to be given to the types of issues that might arise over a contract’s life.  

For example, a mechanism to refer billing issues up to a set ceiling to account managers and then on to finance directors in a long-term supply agreement for large quantities of low unit price items where there are complex invoicing provisions items may make a lot more sense than leaping straight to CEO level or a mediation.  The same process would not be appropriate if the contract was for bespoke, high value items, where CEOs may be the better starting point.

Projects are another area where escalating internal referrals can work provided that the DRC is clear on what can be referred and allows for it to be done early enough for the issues to be manageable.  As another example, bundling up all of the disputed points in a major testing phase that runs over many months may simply be too much, whereas discreet points could be addressed by project sponsors within defined timescales as the phase progressed.

International agreements also lend themselves to proper DRCs that are backed by jurisdiction and applicable law provisions.  The latter spell out what court (or other body) will adjudicate on any disputes and what law it will apply, which should stop additional arguments arising over those issues as part of any wider dispute.

Whatever internal procedures a DRC contains, care must be taken to ensure that it nominates the roles of those who those who will be involved rather than individual names in case a specified person leaves an organisation.  The roles should also be tailored to each organisation as there’s no point in saying that an issue will be referred to the parties’ respective chairpersons if one or other of them doesn’t have a chairperson.

If a DRC includes external processes, they can cover the whole range of ADR options, from non-binding mediation through to binding arbitration and expert determination.  There are pros and cons to each, and specialist advice should be taken to make sure an appropriate choice is made.

Simon Walsh
Simon Walsh

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