The IMI/CCA/Strauss Institute Mixed Mode Taskforce have just published a series of articles on mixed mode dispute resolution in the New York Dispute Resolution Lawyer. These articles are reprinted with permission. The below article was produced by Working Group 1, and authored by Kathleen Paisley, Jane Player and Thomas Stipanowich.
Commercial and corporate relationships and transactions take a variety of forms and time horizons from oneoff small transactions to major long term relationships lasting decades and everything in between. This depends, among other things, on the industry, the parties and their relationship and the nature and structure of the transaction and its value.
Many companies have formal and informal mechanisms in place internally to avoid conflict in their commercial and corporate relationships and to recognize and resolve disputes when they arise without the use of a third party. This may include joint steering committees, trigger mechanisms that require the involvement of senior management and eventually in-house legal expertise when a potential dispute starts to brew, decision trees and other dispute avoidance techniques.
In many cases such mechanisms will be adequate and will make the use of a neutral unnecessary. However, in some circumstances, companies will decide that the nature of the transaction and its importance to the business, the parties’ past and future relationship, their competitive position and relationship in the supply chain, and myriad other factors make the use of a neutral of real additional value from an early stage in the process.
In looking at the role that a neutral can play in fostering commercial relationships and avoiding conflict, consideration should be given to the changing role that a neutral or neutrals can play during the lifecycle of a commercial relationship. For example, the role of a “mediator” or “facilitator” is different depending on the particular stage in the relationship life cycle and may involve, among other things:
- facilitating the making or renegotiating of a deal, with renegotiation of particular importance during the current pandemic;
- addressing issues that arise as a result of implementing a transaction;
- assisting the parties at the outset to create a structure to try to avoid conflict and effectively working to resolve disputes during the life of the commercial relationship;
- acting as an “in-life,” “real-time” or “standing” neutral during the course of the relationship to proactively identify a potential conflict and/or facilitate a resolution before an actual dispute arises—this can be used as either an alternative to or adjacent with dispute resolution boards or expert determination;
- if a dispute arises, assisting the parties in resolving the dispute amicably either before or adjacent to binding dispute resolution through arbitration; and
- creating a dispute resolution process suited to the issues at stake, separately or in conjunction with attempting to assist the parties to resolve the dispute.
Parties may decide that the same person could fulfill the mediation function from start to finish or that it would be preferable to have different people with different skill sets and perspectives at different stages of the life cycle. For example, in a highly complex contract, it might make sense to use a deal mediator to help create or re-negotiate the deal terms and that mediator may have to address conflict during the contracting or renegotiation phase in a way that does not make them the ideal choice to act as a standing/in-life mediator once the project is up and running. On the other hand, both the knowledge and trust built with the parties during the contracting process may make the deal mediator ideally suited to continue in that role. Furthermore, a standing/in-life mediator who has acted as a facilitator during the project life cycle may be inappropriate to act as a neutral mediator once a dispute arises and a formal mediation is initiated. Conversely, the
parties may feel that the standing/in-life mediator is just the person to fulfill that role. The flexibility of the options
and the choice available to the parties allows the process to be sculpted to suit the dispute and to be adapted as the nature of the dispute evolves.
At each stage in the life cycle, depending on the subject matter of the transaction and other factors, the parties may also decide to use different dispute resolution and avoidance mechanisms in addition to or instead of mediation, including for example, dispute resolution boards and expert determination or expedited arbitration of specific issues.
Depending on the nature of the dispute that is likely to arise, the parties may decide to include different dispute resolution techniques in the contract. There is no one-size-fits-all solution, and it is difficult to make generalizations because the requirements for a dispute resolution mechanism or neutral will vary significantly depending upon inter alia the length, size and the nature of the project, type and size of the organizations involved, and the nature of the dispute that is likely to arise.
It is also important to keep in mind that deciding upon and drafting dispute avoidance and resolution mechanisms into an agreement depends upon the circumstances surrounding the contracting process itself including the relative bargaining positions of the parties, the nature of the industry and its experience with dispute resolution, the value given to an efficient dispute resolution clause in comparison with other contract and deal terms, and whether it is expected to benefit one party more than the other.
For example, in a major construction agreement, both parties will consider that disputes are likely to arise along the way and they are both likely to place a high value on putting systems in place in the contract to try and avoid conflict and allow the project to continue notwithstanding the fact that a dispute has arisen. The same is true in long-term energy, technology and life sciences agreements, outsourcing and joint ventures.
In practice, the construction industry has been an early adopter of the use of dispute resolution boards to allow quicker decision making during the project life cycle in a manner that allows the project to continue, whereas these techniques have not yet found their way into other industry contracts on the same scale. In-life/real-time surfacing of issues combined with potential mediation of those issues along the way, which leaves the decision making with the parties, can be used instead of or adjacent to dispute resolution boards, and expert determination can also be used depending on the context and whether the likely nature of a potential dispute would require specific expert assistance, or even early expedited arbitration.
Combinations in Practice
The most common combined dispute resolution mechanism that one sees in dispute resolution clauses across industries is a stepped clause whereby when a dispute arises, the parties agree that they will first engage in negotiation among senior management, followed by mediation, followed by arbitration (or the courts). Alternatively, a two-step process is provided whereby the negotiation step is omitted based on the view that parties will have engaged in negotiation in any case before this stage. Like many other forms of ADR clauses and processes, the use of stepped clauses can be traced back to the
construction industry; however, they are now widely used across industry sectors.
Viewed from a life-cycle management perspective, stepped clauses will be triggered after a dispute has crystalized and when any dispute avoidance procedures that may have been built into the dispute resolution procedure have been unsuccessful. Depending on what those dispute avoidance procedures consist of, it may be decided that adding a stepped clause is not needed and that going straight to arbitration or the courts is preferred.
For example, in a contract that includes a standing/in-life mediator to surface and address potential disputes in real time, if that process fails and a claim is then brought, it may seem unnecessary to have additional negotiation or mediation steps before proceeding to binding dispute resolution. Furthermore, starting an arbitration would not preclude the parties from agreeing in advance to hold a mediation during the course of an arbitration, and asking the arbitrators to set up a mediation window, for example, after the initial round of pleadings. Further, in contracts providing for a dispute resolution board, when a claim is nevertheless brought, a stepped clause requiring mediation may be appropriate because the process of a dispute resolution board and a mediation in a stepped clause is different.
Building Dispute Resolution Provisions
While there is no one-size-fits-all dispute resolution mechanism, a number of practical considerations should be taken into account when drafting a dispute resolution process into an agreement. Some processes can be limited to the parties (such as proactive contract management and steering committees) and others can include neutrals and experts, such as those discussed above.
Some considerations that may come into play in structuring a dispute settlement mechanism in advance and
including it in the contract are:
- What is the parties’ relationship status going into the transaction? Are they new to each other or have they worked together before? Are they culturally different in outlook such that disputes are more likely to arise?
- What type of relationship is contemplated by the agreement and what is the best way to manage it?
- Does the performance of the contract require significant interaction and co-dependence or is the performance primarily one way?
- When is a dispute most likely to arise and what type of disputes are likely in this relationship?
- Is one party more likely to have a dispute or potential dispute because of responsibilities under the agreement or its relative size or financial status?
- Are there specific pressure points within the contractual relationship that can be identified as potentially leading to a dispute?
- Are there means that can be put in place to identify a potential dispute quickly?
- What skill set is required to understand, help avoid and potentially mediate or decide a particular type of dispute?
- Is enforcement of an eventual amicable resolution a prerogative should a dispute crystalize into a claim?
One practical barrier to including such provisions in agreements is that even in cases where both parties would benefit from having an agreed procedure in the agreement, the persons who are actually negotiating the agreement are sometimes not well versed in such issues. Either they do not understand the legal significance and advantages of a clause or they are not the people who are putting the contract into effect so do not appreciate the practical considerations of when a dispute might arise and what they could do to minimize those risks. Even when they may be aware of the risks, putting such mechanisms in place is often a low priority and such clauses become the “midnight” clauses and are not given the consideration they deserve. This is changing, however, as companies are increasingly aware of the burden that disputes place on the success of contractual relationships and the considerable delays caused to projects. The result is that companies are becoming more educated as to the means of avoiding disputes and the value proposition in doing so and are placing increased importance on designing and implementing more robust dispute prevention measures into their agreements.
Importance of Careful Drafting
When including combined dispute resolution processes in agreements it is important to focus on the basic functionality of the dispute resolution clause and to tailor a process that effectively serves the goals and intent of the parties and does not lead to pathological results. It is important that the contractual provisions are drafted carefully and offer parties a clear and cohesive administrative platform for dispute resolution. Terminology should be used consistently and the potential impact of one process on another should be considered.
However, trying to envisage all types of disputes that might arise can lead to contractual provisions that do not work and can lead to unintended consequences. For example, contracts may require that certain forms of technical disputes be referred to expert determination, when the issues that actually arise will often involve both technical and commercial elements. The contract language should anticipate this and be drafted with appropriate flexibility. Further, parties to licensing and other IP exploitation agreements sometimes provide for different types of dispute resolution for pure patent issues versus commercial issues, which could also raise unforeseen complications. The old adage that less is more is never more relevant than when drafting dispute resolution clauses.
Any series of processes should have clear steps and avoid invalidating or delaying the ultimate arbitration or court process if one party is recalcitrant. This means that the beginning and end of each stage should be clearly defined (regardless of compliance) to avoid male fide parties using such clauses to cause delay and ensuring a clear path through the process once one provision proves unsuccessful. If a mediation step is provided before arbitration or another binding dispute resolution process can commence, a time frame should always be included after which an arbitration or court claim can be initiated. Further, it is generally wise to avoid concepts such as to mediate in “good faith” as that in itself can lead to disputes.
Parties should also ensure that they clearly comply with their planned process, such as formally requesting mediation, or taking other necessary steps to implement the plan. Consideration should be given to whether a waiver clause may be appropriate to ensure all efforts to resolve disputes amicably are not lost or the arbitration or court process put at risk if the process isn’t instigated correctly and in accordance with the contractual clause.
Although the future is notoriously unpredictable, putting contractual provisions in place that try to foresee potential disputes and devise means to address them at the contracting stage when the parties are still friends has many benefits. Requiring the parties to robustly consider the parameters of the disputes that could arise and how best to address them, gives the parties control over process design and will lead to more thoughtful contract drafting. When potential disputes do arise, or even earlier when issues threaten a dispute, those carefully crafted provisions that have been put in place with a view to avoiding conflict will hopefully provide for a smoother and more expeditious resolution.
WG1 is co-chaired by Kathleen Paisley, Jane Player and Thomas Stipanowich. For a full list of WG1 members, go to https://imimediation.org/mmtf. kathleen Paisley is a recognized international arbitrator (and mediator) based in the U.S. and Europe. She has acted in commercial arbitration cases under all the major international arbitration rules and in investor-state cases before ICSID and under the UNCITRAL rules and is triple qualified in law (Yale), finance (MBA) and accounting (CPA Exam). Jane Player is a leading mediator based in London. She is a member of the IMI Users Council and honorary member of the International Academy of Mediators and focuses on general corporate and contractual claims, fraud and project disputes, IP/IT claims and media disputes and has particular experience in managing cross-cultural aspects of international disputes. Professor Thomas Stipanowich holds the William H. Webster Chair in Dispute Resolution as a professor of law at Pepperdine Caruso School of Law in Los Angeles and is a neutral with JAMS.
This article is reprinted with permission from: New York Dispute Resolution Lawyer, 2021, Vol. 14, No. 1, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.