Monday, April 11, 2011

Claims - Dispute Resolution

In the event of a dispute between the parties, the parties can attempt to resolve the dispute first by negotiation.  If the parties are unable to come to agreement through negotiation, the dispute will need to be resolved either by litigation or by some alternative means that is agreed in the contract. Litigation can be expensive, but if the Contract includes a waiver of a jury trial provision the cost can be substantially reduced, as the Judge will determine the dispute based solely on the facts.

Alternative forms or dispute resolution such as arbitration can be less costly, but the decision needs to be made on whether the arbitration is binding or non-binding. Non-binding arbitrations may not save anything as the dispute could still wind up in litigation. Many companies also do not like to enter into binding arbitrations simply as their fate will be determined by a single arbitrator who in turn may be influenced by considerations other than the facts.  I’ve also seen situations where Suppliers are more willing to bring claims when there are arbitration clauses in place simply because they feel the arbitrator will award them something and it costs less to pursue than litigation.

Frequently disputes arise because of conflicts at the operating levels where neither party is prepared to change their position or be willing to consider the bigger picture.  So one of the best ways that I’ve found to try to help resolve disputes quickly and cheaply its to include provisions that require escalation of disputes up each level within the companies before taking other actions. In the end the President of the Buyer and Supplier could be discussion and seeking to resolve the dispute and only if they fail to come to agreement would the action be pursued by other means. Most of the time this type of process works well simply because they can look at the fact and the bigger picture and not be influenced by things like metrics that those individuals at the operating level try to manage to as part of their overall performance. My preference is also to avoid arbitration in favor of litigation with the waiver of jury trials as that both keeps the cost of litigation down and it takes the decision out of the hands of the jury where decisions can be made based on emotions and attitudes rather than just the facts. 

If there is no dispute resolution process that has been agreed the non-breaching party will need to determine their course of action. On review of the facts they could decide that an issue is not worth pursuing; it’s worth continuing to try to negotiate; or it’s worth fully litigating. The breaching party will need to determine their potential course of action. In both cases both parties will go through a similar process of legal reasoning to help determine the direction they will take.

A good example of that legal reasoning is shown in a flow chart that can be found at under the file name “Contracts_flow_chart_1.doc”. It represents the legal reasoning a lawyer would go through in reviewing the agreements and the facts to determine the answers to the following basic questions:
  • Is there a contract?
  • Is the contract enforceable?
  • Was there a material breach?
  • Is there anything that could void the contract?
  • Is there anything that changed the commitment such as a modification or waiver?
  • What are the remedies?
  • What damages would be available?
  • Types of damages.
  • Limitations or caps on damages.

In addition as part of the determination a number of business considerations will also be taken into account by both parties to determine the final direction.
  • What is the relationship we have with the other party?
  • Do we need or want to continue to do business with them?
  • How many resources and of what types will it require to pursue the claim?
  • What will it cost to pursue the claim?
  • Do we have the right to under contract to recover legal fees if successful?
  • What is the degree of confidence that we will be successful?

Sometimes there are lawsuits that are based on principle only where even after being advised of the chances of winning, the cost and the potential for recovery they will still proceed. Many times both parties may come to their own similar decision that its in their own best interest to try to settle things without litigation.

While I’m not a big fan of alternative dispute resolution such as having things be submitted to an independent arbitrator, one of the things I do think should be in every agreement is a formal management escalation process for problems. Many times the individuals that are “in the heat of the battle” may not be thinking clearly or may be taking things personally, so its best to have the ability to have the issue escalated up on both sides to people who can weigh the pros and cons from a simple business perspective.

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