Contracts Basics Series #8: Planning for trouble!
Published 1 January 2016
Even with the best will in the world, there may still be scope for disputes to arise e.g. a party which, at first sight, may appear to be in breach of an obligation, may consider that the actions or omissions of the other party have caused or contributed to that breach, and therefore will be unwilling to accept any or all of the blame. In this briefing note we explore some of the mechanisms available to help resolve disputes.
The purpose of an effective management escalation clause is to ensure that disputes are dealt with by the right people at the right time. It is for that reason that they will typically provide for a first attempt at resolution to be made as part of any regular governance arrangement (e.g. at the next regular review meeting between the parties) in an effort to try to “nip the problem in the bud.”
That may, however, fail so the contract should then map out an appropriate escalation route through senior management levels within each party’s organisation, ensuring the individuals tasked with considering the issues have the decision-making powers to enable them to resolve the dispute and that each stage of the process is time limited to both focus the mind, and signify the point at which the dispute ought to be moved up to the next level.
Certain issues might be considered so important that lower levels of management might be skipped or the process may be speeded up, but bear in mind that, despite the widespread use of the phrase, “fast track” rarely ends up being all that fast!
The parties might agree that for certain types of dispute, typically those involving a technical or technological matter, they will abide by the findings of an expert in that particular field.
Resolving matters in this way has the advantage (unlike a court hearing) of keeping the dispute private (if the parties wish that to be the case), but, a note of caution, few disputes are as self-contained as this might suggest so. If the dispute also involves matters such as who should have done what by when, then that would usually go beyond the scope of the expert’s jurisdiction.
The parties should also agree on the appointment of the expert (or have an agreed mechanism for determining that) up front - you are highly unlikely to reach agreement on this when already in the throes of a dispute!
Mediation is a form of alternative dispute resolution. It is an option which is much favoured by the courts as it has been proven to be a very effective mechanism for resolving disputes. In fact a refusal to participate in mediation can, if the matter does later litigate, give rise to costs sanctions.
As its name indicates, the process involves the use of an independent third party appointed to help the parties reach their own agreement on how to settle the dispute. Most contracts will provide for mediation to take place in accordance with a model mediation procedure formulated by the Centre for Effective Dispute Resolution (CEDR) – an organisation launched in 1990 with the backing of the CBI, and one of the leading international bodies in the field of ADR.
As the costs of mediation are likely to be much less than the costs of litigation, it is worth considering whether you should make mediation a mandatory, rather than an optional step in your contract (other than in circumstances where injunctive relief is being sought) following any failed attempts at management resolution.
Arbitration is another form of alternative dispute resolution in which there is the advantage of hearings being held in private, but (unlike mediation and more like a court hearing) they result in a third party determining the outcome of a dispute. In order for an arbitration hearing to take place, the parties have to have agreed that the matter should be resolved by arbitration (whether up front by including appropriate clauses in the contract or by later agreement).
Note that there are strict rules relating to the process (the Arbitration Act 1996 regulates arbitration proceedings within England and Wales), and there are only limited grounds for challenging the findings of an arbitrator. The London Court of International Arbitration tends to be most commonly favoured arbitration entity for commercial dispute resolution.
The ultimate form of dispute resolution, but one which almost always ought to be considered your last - not first - resort!
Why? Because it can be slow, is always expensive and will definitely soak up far more management time and effort than you ever imagined.
Nonetheless, you must always ensure that every contract includes a very clear statement, both as to (i) which law the parties intend to be applied to the contract (as well as any non-contractual disputes), and (ii) which courts will have jurisdiction to hear and resolve any dispute. Avoid any possible ambiguity around your preferred choice of court by making all disputes subject to their exclusive jurisdiction.