A business relationship is just that: a relationship.  It has phases like any other relationship, and takes effort and mutual interest from both parties to keep it functional.  While ideally every business relationship will run smoothly through to its expiration, it is almost inevitable that a few disputes arise – some minor and some major.  To help save money, time, frustration, and even the entire relationship down the road, parties should use the negotiation stage to develop a plan for how potential disputes will be handled in the future.  To address #5 in our list of technology contracting resolutionsBe Prepared for Conflict, we offer some dispute resolution techniques to consider during the negotiation stage of your next transaction:

Do I Need to Tell Your Mother? Escalation Clauses.  When disputes arise, having a clear process for managing resolution can be the difference between an easy solution and a disagreement spiraling out of control. Escalation clauses, which require parties escalate a dispute to senior management before filing suit or invoking arbitration, can be extremely helpful in resolving minor disputes.  Many times, the threat of an escalation to senior management is enough to pressure the operations people resolve more minor disputes amicably. However, in the event it does escalate, the provision ensures the problem lands in front of the individuals with fresh perspective and the power to resolve it quickly.

Diffuse the Bomb: Mediation. Useful when emotions are running high on both sides of the table, a mediator’s purpose is to help diffuse the tension and allow parties, who are vulnerable to rash decisions due to frustration or anger, to work through the problem.  Different from arbitration, a mediator does not decide the solution for a dispute; that remains in the hands of the parties involved. Nor does mediation result in the mediator issuing a binding ruling.  However, a mediator will point out the respective strengths and weaknesses of the parties’ positions, providing a more realistic view of what they are likely to recover in court or in arbitration.  When inserted an interim step between resolution by the parties on their own and bringing in a third party to decide the dispute, a contractual mandate to mediate can provide incentive for the parties to break through their points of conflict.

Bring in the Decider.  Court or Arbitration? Sometimes the dispute is beyond amicable resolution, and you need to have a third party decision maker make a call.  In that case, is arbitration the best option, or are you better off in court?  It is a complex question with many different viewpoints.

While not always the best route, arbitration can help the parties solve an issue quickly and expertly, and save cost and frustration in resolving a dispute in court. For a small company, a carefully crafted arbitration provision can provide assurance that it will not get buried in a lengthy and costly litigation. In addition, arbitration is especially important in cross-border transactions because of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which requires that a foreign court that is a signatory to the New York Convention enforce the arbitrator’s award.

Reaping the benefits of an arbitration clause, however, requires some careful drafting, so, if you choose arbitration, here are some tips to drafting an effective arbitration clause:

  • Dictate that a professional with expertise in a certain area relevant to the transaction be chosen as an arbitrator.  This guarantees that someone with appropriate knowledge will be deciding the dispute, which can be especially important in deals with complex technical or intellectual property aspects.
  • Include timelines and processes for selection of the arbitrator, submitting claims, conducting discovery and reaching the final decision.  Arbitration is not bound by the same rules as litigation, so putting restrictions on time-consuming elements such as discovery can help keep the process moving forward expeditiously.  Many national and international arbitration associations offer fast track procedures, which should also be considered when drafting.
  • Require that arbitration proceedings will be kept confidential.  It is often easier to resolve a dispute outside of the court of public opinion.
  • Remember that you can dictate that some proceedings go to court.  You may decide that there are many issues that will be well suited to arbitration, but are reluctant because you want to save complex issues for a court of law.  Arbitration does not have to be an all-or-nothing solution.  You can dictate that more routine matters (such as agreement on pricing and scope of work) be decided in arbitration, while more complex issues (such as intellectual property infringement) be decided in court.
  • Preserve interim injunctive relief.  For some breaches of an agreement (e.g., breaches of confidentiality), you need a fast injunction while the parties sort out the dispute.  This will almost always be faster in court, so be sure to preserve the right to seek injunctive relief.

Before giving the green light, however, remember that arbitration is not always the best solution.  Keep in mind that arbitration is typically binding, and the outcome depends on a single arbitrator (or, at most, a small panel), so identifying the appropriate arbitrator is key. Additionally, while the threat of a costly litigation may force the parties to agree to a resolution more quickly, simply requiring arbitration under a major association’s rules (e.g., AAACPR, the ICDR or the ICC International Court of Arbitration) can often be just as timely and expensive as litigation, so be sure to draft a provision designed to facilitate fast and efficient resolution.  Also remember that sometimes publicity can actually help your cause – bad press can put pressure on the other side to settle a case – so confidential treatment may not be a benefit. Lastly, unlike judges, arbitrators are not restricted by case law and statutes, and the proceedings are not governed by the same rules of litigation. While this flexibility can be a benefit, it also introduces a degree of uncertainty that the parties should consider carefully.