Whenever I share my philosophies about why you should use a contract to support business risk management, I like to talk about the 3 key pillars of every commercial contract. Today I want to focus on the last pillar, managing the relationship, and what goes in a dispute resolution clause. As a refresher, here’s all 3:
- Managing expectations: Who is doing what, by when and how much does it cost.
- Managing change: Settling a process for agreeing the implications of changes to the scope and the program.
- Managing the relationship: Knowing what will happen if the project or transaction has to end earlier than expected, or if a dispute or difference crops up between the parties.
The vast majority of commercial transactions and projects finish successfully, relatively on time and not too far off budget. That means there’s a great project outcome and hopefully the parties enjoy a great relationship and will go on to work together again in future.
But. The world is an imperfect place and (at the risk of showing my age) screws do fall out every day.
The world is an imperfect place
The best time to work out a good process for resolving a dispute is NOT when the project is already going off track. It’s at the start of the project, when everyone still loves each other and wants to work together.
So what should that process look like? It should be simple and staged, with a view to avoiding the cost, time and relationship and reputation risks associated with litigation.
Escalating dispute resolution process
If the parties are invoking the dispute resolution clause, the relationship has already deteriorated significantly. But, the construction and engineering industry works on relationships, and no one should burn their bridges if they don’t need to. When I draft or review contracts, I always want to force the parties to get in a room together before lawyering up.
Because of that, step one of the process should be some kind of conference, sometimes called “executive negotiation”. Party representatives must meet within a few days of a request, and genuinely attempt to resolve the dispute. For larger projects, I’d suggest two required conferences before the process can move on, and that the CEO or their delegate be compelled to attend the second conference.
Step two of the process should be mediation. A mediation is still a negotiation between the parties, with a third party mediator to facilitate discussions. The mediator might be able to determine the mediation rules, but cannot make any other determination.
Steps 1 and 2 should be requirements before commencing legal proceedings or arbitration.
What about arbitration?
For a long time, everyone preferred arbitration to litigation in the construction and engineering industry. There were some good reasons for this, including that the rules of evidence were more flexible, it was considered lower cost and more time effective. Plus, the arbitrator was potentially someone with industry experience rather than a crusty old judge.
Some of those advantages (particularly the cost and time) have been eroded over time. However, if there are reasons why arbitration is preferred (e.g., cross-border transaction or relationship), consider specifying the seat of arbitration and the rules.
What about expert determination?
Expert determination can be really useful in certain situations.
I recommend limiting binding determination to matters whose value is below an agreed threshold.
Have a process for agreeing on an alternative dispute resolution method
For more complex projects, keep some flexibility by including a process to agree on alternative dispute resolution methods.
What about commercial emergencies and crises?
Sometimes something very urgent happens that only a court order can stop. I recommend a clause confirming that either party can apply for an injunction or other “interlocutory” relief at any time. This just means an urgent court order where there is no wider legal proceeding in play).
Why is it important?
It’s important because your relationships are important. Invoking the dispute resolution clause is very rare. But you still want it to give you the best chance of preserving your relationship with the other party.
You want to build stronger relationships through your projects, and so do I. Get in touch if you have queries about the dispute resolution clauses in your contracts, I’d love to help you update them.
