Multi-tiered dispute resolution clauses

Multi-tiered dispute resolution clauses are controversial, with in-house counsel tending to favour them and external disputes lawyers feeling frustrated by them. When a dispute reaches external counsel, generally they and the client simply wish to commence proceedings. Admittedly, this is a generalisation, with the nature of the industry and the type of dispute provoking different reactions at times. Banks, for example, usually do not welcome obstacles being placed in the way of realising their security.
 
Those clauses, requiring or permitting negotiation, mediation and perhaps other procedures before formal proceedings are commenced, provide valuable opportunity for exploring and settling disputes in many industries. They are particularly useful in long term contracts where the parties need each other but presently disagree.
 
Quite apart from the usual benefits cited of confidentiality, control, self-determination, cost and actually settling disputes, multi-tiered clauses have the commercial utility of:
 
·         communicating displeasure;
·         dealing with the disputes iceberg;
·         resolving failures to agree;
·         providing a method when there is no realistic alternative;
·         addressing emotions in commercial disputes;
·         enabling disputants to speak directly to each other;
·         enabling inadmissible and irrelevant legal issues to be explored; and
·         promptly resolving disputes in continuing relationships.
 
Communicating displeasure
 
Intermediate dispute resolution methods serve the useful purpose of letting a counterparty know their behaviour is not acceptable without having to cross the Rubicon and commence proceedings. They can convey to another party increasing levels of annoyance or frustration without committing to the charge. They reinforce strident letters which may be written, or remove the necessity for them, applying Roosevelt’s theory of speaking softly but carrying a big stick. If there is no intermediate dispute method, parties can be driven reluctantly to formal proceedings.
 
The disputes iceberg
 
Icebergs are 90% below the water, unseen. Disputes in companies are similar, with a large proportion of them going unseen by external counsel, being resolved in-house legally or commercially. Intermediate dispute resolution mechanisms assist that resolution, both by their actual and by their threatened application. Most businesses take very seriously the giving or receiving of a dispute notice, particularly if it is followed by a notice of mediation.
 
Specific attention needs to be drawn to this iceberg, partly because of the very fact it is mostly unseen by the courts dealing with disputes. Companies deal with far more disputes than ever reach external counsel or the courts. Time wastes, disputes fester and relationships sour while companies argue. A relatively innocuous disagreement can threaten the relationship if not resolved informally.
 
Failures to agree
 
To avoid unenforceable agreements to agree, mediation is used to resolve the failure to agree, which is different from a dispute. Such a failure to agree is not amenable to adjudication by an arbitrator or court since there are no objective criteria against which the failure is to be measured.
 
When mediation is used in this fashion, occasionally the mediator is granted power to decide the dispute as amiable compositeur if the parties do not agree after a specified time. This often has the effect of encouraging parties to agree. Sometimes that power is granted unconditionally in the mediation clause and other times it is subject to the parties’ consent at the time of the failure of the mediation.
 
Mediation has been used to resolve failures to agree on:
·         price in successive periods;
·         key performance indicators after the contract is partly performed;
·         how to deal with a buyer not taking a minimum quantity;
·         adjustments to the contract after a prolonged period of force majeure; and
·         commercial terms after a permitted unilateral change in site access terms.
 
Purists may scoff at mediation being used in this way but it emphasises the importance to business of contractual consistency and continuation. Commercial people generally want the contract to work, and to work in a way that both parties feel is fair. Mediation is therefore very useful in dealing with failures to agree by keeping the parties engaged and exploring possibilities.
 
“No-alternative” dispute resolution
 
If there is no intermediate dispute resolution process between a dispute and proceedings, an aggrieved party can be forced into commencing proceedings to get the other’s attention and prove it is serious. Worse, the aggrieved party might not be able to do more than write increasingly strident letters, not being prepared to deploy what is often seen as the nuclear option of commencing proceedings.
 
This is quite common, particularly in long term contracts where there is ample time and opportunity for disagreements to arise and become disputed. Where there is no contractual dispute architecture, parties are frequently reluctant to commence proceedings. More often than not, courts and tribunals – and even external counsel – never see these disputes. Costs of proceedings are too high, the outcome is too uncertain, the amount involved does not justify proceedings, the relationship or the product or the counterparty is needed commercially, or the company has an aversion to proceedings or does not want a reputation for suing its counterparties (or “partners” as they prefer to call them).
 
Having no intermediate dispute resolution might be thought to be desirable as it forces parties to come to some accommodation rather than resorting to dispute resolution provisions every time there is a disagreement. But the reality is accommodations are often uneasy. No true resolution acceptable to both sides is reached. Instead, one party will merely tolerate the other’s position while feeling aggrieved and perhaps seeking ways to turn the tables. The dispute festers and rancour grows, infecting the whole contract and the relationship. It can lead to other apparently unrelated disputes or breaches. As Charles Duhigg said in The Power of Habit, sometimes an unstable peace can be as destructive as any civil war. Truces are only durable when they create real justice.
 
Addressing emotions in commercial disputes
 
Every dispute is a family dispute. Hyperbole works to attract attention and illustrate the more prosaic truth, and that is the intention of thisparagraph. The less provocative point to be made is that commercial disputes have emotional dimensions and addressing these emotional issues can be of real assistance in resolving them. Disputes lawyers, internal and external, usually ignore or marginalise these emotions as they are seen as irrelevant to the legal elements of the dispute. We are not trained to incorporate management of emotions into legal dispute resolution or to formally recognise the role emotions play.
 
What can be forgotten is that activities in even the largest companies are conducted by ordinary people. An ordinary person in one company is buying something from an ordinary person in another company. Both of those people report to slightly more senior ordinary people who in turn report to more senior ordinary people. No-one in that scenario is an automaton. Anyone dealing with someone in a different company can be upset or offended when their counterpart fails to perform, not the least because it can put them in a difficult position with their superiors or others in their company. Those in the more senior positions can be similarly affronted when those with whom they do not have a personal relationship do not perform. Feelings can be strong even at the highest levels where the counterparty’s failure can be taken as a slight on the company.
 
 
Emotions are certainly irrelevant to the legal and evidential issues in litigation and arbitration. However, even lawyers themselves develop emotions about a dispute. Internal lawyers can be just as offended by the counterparty’s behaviour as their commercial instructors, particularly if they clash with their legal counterpart. External lawyers can also readily identify with and develop feelings for the client’s cause, again especially if the opposing lawyer annoys them.
 
Business and those attending it assume that commercial relationships are based purely on economic exchange, divorced entirely from social or relational exchange. The players feel obliged to act according to rational choice lest they be criticised or ostracised. They refuse to acknowledge the role of non-rational factors in managing contracts and disputes and attempt to sublimate those factors to constructed rational ones.
 
 
Promptly resolving disputes in continuing relationships
 
Different dynamics apply where the parties are in a continuing commercial relationship from one where the relationship has ended, either naturally or by breach and termination of the only contract between them. Where the relationship is continuing, the parties need the dispute dealt with as quickly as possible to avoid it becoming unmanageable in any way (e.g. emotionally, financially, operationally) or resulting in a (further) breach or in litigation or unwanted termination of the relationship.
 
Intermediate dispute resolution methods such as negotiation and mediation provide the possibility of this early resolution, or if not resolution at least recognition and potential dealing with some of the worse consequences. Justice Bergin Chief Judge in Equity of the New South Wales Supreme Court, said extracurially[1]:
 
“From a case management point of view commercial/financial disputes in which the parties remain in a commercial relationship require prompt resolution. The parties embrace this promptitude because they wish to resolve the dispute that is presently affecting their commercial dealings. Others who have terminated their relationships are not as interested in such promptitude. This attitude flows through to the mediation setting. Experience in Australia is that parties in complex commercial disputes who are still in a relationship are more amenable to urgent mediation than those who have terminated their relationship.”
 
If such disputes are left, they run the risk of becoming intractable and more difficult to resolve.