Wednesday, June 29, 2011

Alternative Dispute Resolution

In negotiating contracts one of the things that must be decided is how potential disputes between the parties will be resolved. Without defining anything else, the primary approach is to try to resolve the problem between the parties and if that fails one of the parties must then decide to pursue the matter in court

As legal fees have increased and the period for trials to be heard has lengthened, parties have looked for alternative ways to resolve disputes such as mediation or arbitration. Clearly mediation and arbitration may be faster, less expensive ways of resolving the disputes, but they also provide an easy way to take the matter to a third party rather than exhausting all efforts between the parties.  In arbitration, the mediators have certain rules of conduct that they must follow, but they are not subject to the rules of contract construction that courts will follow.

If you represent a large company and the other party to the arbitration is a smaller firm, they may expect some sympathy from the mediator or arbitrator who may be similarly situated. Mediators are expected to be experts in the subject matter being arbitrated.  This means that many times the mediator will have worked in the industry of the Supplier or will have had frequent involvement with Suppliers in that industry.  While they are expected to be totally impartial, it’s hard not to form certain opinions or prejudices when you work in or closely with the industry.  If the party that wants arbitration regularly practices in a business from which the arbitrator or mediator would most likely come, and you are only making a periodic buy, the arbitrator or mediator may favor them because they are in the business. In general the odds are usually against the Buyer. I consider a proposal to resolve disputes by arbitration or mediation in the same light as someone proposing that you “split the difference”. The party who proposes it is usually the one who would have the most to benefit.

I’ve also seen individuals recommend referring disputes to an impartial board for decision.  That can have the same problems as arbitration. The difference is instead of having to convince one individual you now have to convince the entire board.

An alternative to arbitration is to propose a formal escalation process for the dispute to be managed within both companies. A dispute may exist only because one party has dug in and refuses to move. It may have become a personal issue for them. There may be no rational or logical reason for their actions. When that occurs it is best to have the matter reviewed at higher levels where the matter is no longer personal. The review of the facts in the escalation becomes strictly of business. The fact that either party can request that the matter be reviewed by a higher level within the other’s organization adds a subtle pressure to come to agreement or have all their facts in order as subordinates don’t want to look bad in the eye of their management.

This escalation process is effectively the same approach you would use to getting past those people whose job it is to tell you no or to place roadblocks in the way of you getting what you want. In business everyone has metrics that they are measured on. If you can escalate the problem to someone who is not measured on the same metrics and can look at the matter from a broader perspective, you have a better chance of reaching agreement. The item will have less of an impact to what they are measured on and as such it is easier for them to reach agreement if agreement is warranted.

If they parties continue to disagree then the complaining parties still would have to decide if they wanted to invest the time and expense to proceed to court. If they feel that they have had their matter heard and have been treated reasonably, they are less likely to sue.

As a Buyer the escalation process may buy you critical time you need to complete the work, or to identify alternative sources and plans in the event that the dispute is not able to be settled in a reasonable manner. 

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