A very important type of miscellaneous clauses is about dispute resolution. Once it comes to a dispute or to a (major) claim, it may well be helpful to provide for a method that prevents a hard-way solution being adopted. If parties go into court or arbitration, the relationship is about to be finished for a long period of time. What can you do about it? This post addresses mediation, dispute boards and escalation clauses.
Mediation. Once it comes to litigation, the termination of the contract is almost inevitable. Therefore, in complex or relational contracts in which unwinding the contract may give rise to another source of dispute, providing for mediation may be desirable.
It is a matter of best practice to link the mediation and arbitration provisions to each other. Normally, you would probably want to have the mediations coordinated and administered by the same institute as a subsequent arbitration (if any). Each arbitration institute mentioned above also provides for ADR (‘alternative dispute resolution’) procedures (see their respective websites for text model clauses). Many people believe that mediation has no reasonable chance of success if one of the parties does not sincerely wish to settle the dispute. Therefore, a mediation clause is primarily a voluntary procedure, albeit that the admissibility of an obligatory mediation clause before arbitration may vary. This subtlety depends on the actual wording of the provision.
Dispute boards. Recent developments have led the ICC to establish a standard dispute board procedure for preventing major disputes under medium- and long-term contracts or under project-related agreements. The idea is that dispute boards are set up at the outset of a contract term and remain in place and are remunerated throughout its duration. The dispute board is a kind of ‘supervisory board of the contract’. Comprising one or three members thoroughly acquainted with the contract and each party’s performance, the dispute board informally assists the parties, if they so desire, in resolving disagreements arising in the course of the contract. Depending on the setup, the dispute board may make recommendations or even decisions regarding disputes referred to it by any of the parties. Needless to say, the ICC provides support where necessary or helpful. Examples for contract provisions can be found on their website.
Escalation clauses. In contractual relationships between major parties that regularly do business with each other, an ‘escalation clause’ providing for the escalation of a dispute to the principal executive officers would be another means of dispute settlement. The idea behind an escalation clause is that the party who threatens the relationship between the parties should subsequently face internal discussions as to whether and how the senior executives must be involved (i.e. including the career-limiting effects of such involvement). In other words, both parties will go up the hierarchical ladder of their organisation upon the occurrence of the contractual triggering event. The senior executives selected should not have been directly involved in the dispute, but need to have the authority to bind the party they represent.
The escalation clause contains several incentives; the persons directly involved in the dispute may be reluctant to escalate given the ‘shameful’ aspect that they were not able to settle the matter themselves, whereas the senior executives may spend only such time on the matter as the (financial) interest justifies and they will settle as quickly and pragmatically as possible. Such escalation would be more effective if they must consider the higher desirability of all relationships between the parties or if they can compromise on other disputes or irregularities as well.