Each party will enter a commercial contract with the best of intentions. However, it is more or less inevitable that disputes will arise, so prudent business partners will include contractual provisions to deal with such conflict as and when it arises. Dispute resolution can be neatly divided into three types, which are usually included in ascending order: (a) contractual escalation; (b) alternative dispute resolution; and (b) litigation.
This is a simple clause that encourages and formalises what the parties should be doing anyway – talking it out. The discussion should start at the most appropriate junior level. If there is no resolution within a set period of time, the matter is escalated to the next level. This process continues until the problem is resolved, or it reaches senior management (i.e. members of the board or their equivalent). If there is still no solution, the parties can move on to an alternative form of dispute resolution. The idea is to concentrate the minds of the parties on the problem, in the hope that it can be dealt with before more expensive, external options are used.
Alternative dispute resolution (or ADR)
The next stage parties often resort to is either mediation or arbitration. In mediation, the parties agree a mediator, who then tries to facilitate a deal between them. A mediator can make proposals, but cannot impose them on the parties. Mediation imposes a timetable and process on negotiations that the parties may otherwise lack. If mediation fails, the parties can generally resort to litigation instead.
In arbitration, the parties will agree an arbitrator who has the power to act as a private judge, imposing a ruling on the parties after hearing both sides of the story, that is final and binding. The perceived advantages of both kinds of ADR are that: (a) they are quicker and cheaper than litigation; and (b) they are private and confidential, keeping the issue out of the public spotlight.
If mediation fails (arbitration is normally binding and decisive) then the parties will have no option but to continue the argument in court. However, there are certain types of disagreements that will bypass any other dispute resolution process for immediate determination by a judge.
When one party breaches confidentiality or intellectual property rights obligations in a contract, and the breach is disputed, the party whose information is at risk will often apply for an injunction to stop the information from being used. Injunctions are not decisions, they simply stop the parties from doing any more damage until the underlying argument is resolved.
Use and interaction
Parties will often use some, or even all three forms of dispute resolution in a contract – especially if it’s a complex, multi-layered deal that requires technical expertise – to resolve their differences. The key is to have some form of mutually agreed and binding process to facilitate the resolution of disagreements. It’s prudent, saves costs and can even encourage dialogue and discussion.