Contract Disputes: Establish Ground Rules for Dissent
Effective Dispute Resolution in Business Contracts
In the realm of business, disputes are an inevitable part of long-term relationships. However, with the right measures in place, these disagreements can be managed efficiently and effectively, preserving relationships and business continuity.
One such measure is the inclusion of a dispute prevention clause in contracts. This clause requires both parties to continue meeting their obligations while a third party investigates an alleged contract violation. Lawrence Susskind, a professor at the Massachusetts Institute of Technology, has written about the effectiveness of dispute prevention in avoiding serious conflicts and delays in business relationships.
Another crucial aspect is the use of contingent agreements. These agreements address differences in beliefs about future events and often create incentives for compliance or penalties for noncompliance. They can be included in a contract to promise a financial bonus to the other side if they avoid litigation for the life of the contract.
Contingent agreements can also be combined with dispute prevention for a more harmonious business relationship.
In some cases, disputes may still arise. In such situations, a multi-tiered approach to dispute resolution can be beneficial. This approach starts with informal negotiation, progresses to mediation, and culminates in arbitration if necessary.
An Informal Negotiation Clause mandates parties to attempt good-faith direct negotiation first to resolve issues early, saving time and legal costs. If negotiation fails, a Mediation Clause provides for voluntary, confidential, non-binding mediation with a neutral third party. Mediation allows flexible, creative solutions and is appropriate for ongoing business relationships.
If disputes still persist, parties can turn to Arbitration. This process involves a neutral third party serving as a judge who is responsible for resolving the dispute. The arbitration clause should specify details such as governing rules, arbitration venue, choice of arbitrators, discovery limits, and enforcement mechanisms.
A Step-Down or Graduated Dispute Resolution Clause requires negotiation, then mediation, and finally arbitration, to exhaust all less adversarial options before arbitration. This gradual approach helps resolve disputes efficiently and cost-effectively.
Other key measures include the Choice of Law and Venue to avoid jurisdictional conflicts and reduce satellite litigation, Enforcement and Award Confirmation Provisions to ensure the enforceability of arbitration awards, and Timeline and Procedure Clauses to set clear timelines for dispute escalation steps and define the roles and responsibilities of parties and neutrals.
Lastly, Documentation and Communication Protocols should outline record-keeping and communication standards to maintain strong evidence trails and facilitate resolution.
In complex business relationships, these measures collectively provide a practical, enforceable, and efficient framework to manage disputes that may arise, balancing cost, speed, confidentiality, and the preservation of commercial ties. Litigation should generally be reserved for exceptional cases that cannot be resolved through these mechanisms due to its higher cost, duration, and adversarial nature.
References: [1] Subramanian, G. (2016). The Rules of the Game: Decision Making in the Economy. Harvard Business Review Press. [2] Susskind, L. (2006). Breaking the Impasse: Consensual Approaches to Resolving Business Disputes. Oxford University Press. [3] Susskind, L. (2011). The Efficient Lawyer: From Technician to Strategist. Harvard Business Review Press. [4] Susskind, L. (2014). The Future of the Law. Oxford University Press. [5] Susskind, L. (2015). The Future of the Professions: How Technology Will Transform the Work of Human Experts. Oxford University Press.
- In complex business relationships, it's crucial to include a dispute prevention clause in contracts to prevent serious conflicts and delays.
- Contingent agreements, which create incentives for compliance or penalties for noncompliance, can be beneficial in managing disputes and preserving business relationships.
- For persistent disputes, a multi-tiered approach to dispute resolution is advantageous, starting with informal negotiation, progressing to mediation, and culminating in arbitration if necessary.
- For a more harmonious business relationship, incorporating both dispute prevention and contingent agreements into contracts is highly effective in managing disputes efficiently and cost-effectively.
