Major projects and long-term relationships present special challenges to corporate counsel and external legal advisors charged with designing a dispute resolution process. They include:
- Some disputes will be about technical or scientific issues, some about legal rights and obligations, some about business issues, and some will be mixed
- Disputes may involve a wide range of amounts of money
- Resolution of disputes on the legal merits can be important, particularly when large amounts are involved
- Speed of decision-making can also be important, to keep the project or business going
- Disputes may involve more than two parties
- Disputes may arise under more than one contract
- Disputes may arise in more than one jurisdiction
- Maintaining a constructive business or working relationship may be important
The design should begin with a “visioning process” – a collaborative effort of the business’s operational, executive and legal personnel, in which they identify the range of possible disputes and the demands they will entail. Then the responsibility shifts to legal advisors to design a suitable dispute resolution process. There is a tool-box of available concepts. But there is seldom a “one-size-fits-all” solution. A healthy measure of creativity is needed to create an effective process.
The “Fork in the Road” Provision
When the dispute resolution process is to provide different procedures for different types of disputes, the threshold challenge is to define those types so there is no room for dispute about which procedure must be used. This “fork in the road” provision also has to be flexible enough to deal with “mixed” disputes and disputes whose character evolves. One good way of categorizing disputes is by referring to the contractual provisions under which they arise, for example: “disputes arising under articles 12.2 and14.3 (a)”. But this is difficult in multi-contract, multi-party settings, especially if some of the relevant contracts do not yet exist when the dispute resolution process is drafted. Care must also be taken to set out what is to be done where more than one contractual provision is relevant.
Disagreements About Issues of Business Judgment
Long term contracts often leave important business issues undecided, as future circumstances are difficult to predict. Business people also like to retain the flexibility to change their plans. This happens most often in relationships where decisions are made by something like a management committee.
Careful thought must be given to whether that may allow deadlocks to arise, where the parties simply cannot agree. If there is no deadlockbreaking mechanism, there is a risk that the undertaking may fail.
Business people often prefer to count on common sense and good business judgment prevailing in the end, rather than having disputes about business issues subjected to any dispute resolution process. In other cases, with creative drafting, identifying objective criteria to be applied, disagreements about business issues can be transformed into legal disputes. These kinds of dispute often are best handled through a “tiered” process, involving negotiation and mediation before arbitration or litigation.
Disagreements About Matters of Expert Opinion
Contracts also often leave non-business matters for future agreement. Often prices, rents or other elements of consideration are to be adjusted periodically by agreement. There may be disputes concerning technical or scientific matters, or about quantification of profits or losses, the value of property or the physical composition, functionality or attributes of something. Complicated accounting processes are sometimes called for, and disputes can arise about their results. In construction projects there may be a myriad detailed decisions to be made on a daily basis.
Often, disputes of this nature are best resolved by placing the matter in the hands of a qualified independent expert for decision, with the parties agreeing to be bound by their decision. “Expert determination” is conceptually different from arbitration. Arbitrators generally adjudicate the legal rights and obligations of parties, based on a record of evidence. Experts apply their own expertise and decide according to their own views. Their resolution of the dispute does not turn on legal rights. The parties agree that they will act in accordance with the expert’s determination. There is no requirement for procedural fairness. There is no right of appeal.
A major difficulty is that parties often want to present documents, information, the opinions of other experts, submissions or even evidence to the expert before a decision is made. There is grave danger in going too far in that direction, for the more the process resembles a legal adjudication of rights the greater the risk that a court will find it is an arbitration. And that may bring into play unexpected standards of conduct, procedural requirements and rights of appeal.
The International Chamber of Commerce has published “Rules for Expertise”, which set out a procedural framework for the appointment of experts and the conduct of ICC “expertise proceedings”. Even those rules, however, require the expert to give the parties the opportunity to be heard. If the result is said to be binding, the process could be characterized in some jurisdictions as arbitration.
Project Referees and Dispute Boards
Often, to keep a project or relationship moving forward, the parties will need speedy, informed decision-making. At the same time, they want to ensure that, especially for important legal issues, their ultimate rights are not irrevocably prejudiced by such a decision.
One common mechanism to balance these concerns is the use of a Project Referee. Project Referees should be appointed and named in the dispute resolution process. A process for alternates or replacements should be set out, ideally naming agreed individuals who are willing to serve, and giving one party the power to make the selection.
A decision must be made about whether the decision of a Project Referee is to be binding. Often the answer is “yes” with respect to some kinds of disputes but “no” with respect to others. Again, this raises the challenge of defining these situations in a way that is certain.
It is common for the dispute resolution process to provide that a decision of a Project Referee is “binding” unless one of the parties moves to another step in the process, typically by delivering a notice. Careful thought has to be given to the legal basis for a “binding” decision. If the process is not an arbitration, and if there is no other statute to give its decisions binding effect, that effect is a matter of contract. Recognizing this, a prudent drafter may include in the dispute resolution process an agreement to give effect to the Project Referee’s decisions. A failure to perform that covenant would then be a breach of contract. Tools such as liquidated damages might be considered to add teeth to the commitment.
Usually the parties will want a Project Referee’s decisions to be binding, at least in the first instance. However, if they relate to legal rights and obligations, they may want to have the dispute resolved according to law after a more through consideration of the evidence. A dispute resolution process may state that such disputes may be referred to arbitration, within a stipulated period of time, but until an arbitrator determines otherwise they are binding and must be put into effect. This allows the project to move forward, while preserving ultimate legal remedies. An issue the drafter must consider is whether there will be remedies to recover costs of carrying out a decision that is changed by an arbitrator.
Dispute Boards are a variation on Project Referees. They consist of panels of decision-makers established at the beginning of a contract. The ICC has published “Dispute Board Rules”, which address some of the issues discussed above. The Rules identify three types of Dispute Boards: (a) a Dispute Review Board, which makes “recommendations” that become contractually binding if not challenged within a specified time but are not binding if a party takes the dispute to arbitration (b) a Dispute Adjudication Board, which makes decisions which are contractually binding unless the dispute is referred to arbitration and the arbitrator otherwise orders, and (c) a Combined Dispute Board, which may make recommendations or decisions. The difficult question remains whether any of these might be regarded in some jurisdictions as arbitrations.
Disagreements About Legal Rights and Obligations
Disagreements about legal rights and obligations generally should be resolved according to law, by an adjudicative process. That process generally should give each party an opportunity to present its case, after which an independent decision-maker should decide the dispute on its legal merits. Litigation and arbitration can provide such solutions. Which is preferable deserves fresh thought in the context of each new project or relationship. It is fair to say that generally arbitration is the more flexible, but there will still be instances where the litigation option should remain open.
The dispute resolution process becomes more complex if there are more than two parties or contracts involved in the relationship. Long term projects often entail extended chains of contractual relationships. Often there is more than one contract between the same parties. A single dispute can give rise to claims under several contracts, based on a myriad permutations of bi-lateral and multi-lateral relationships. The time and cost of determining rights and liabilities, and allocating and reallocating financial responsibility, can jeopardize the project and the financial well-being of its participants.
This is often said to make litigation the best dispute resolution process. The courts do have the capacity to manage multi-lateral, multi-party disputes. Conventional arbitration does not. What is required is a multiparty arbitration agreement, with procedural rules flexible enough to do what courts can do while still delivering the benefits of arbitration. These arrangements sometimes are called “project protocols”. They represent the supreme dispute resolution process drafting challenge, but can deliver huge benefits.
One of the first decisions to be made is how many potential players and relationships to bind to the process. Sometimes key participants in a project will not want to involve participants who play a minor role or who are several steps away from them in the contractual chain. Usually they will not want “remote” parties to be able to embroil them in disputes. However, they may want remote parties to commit to resolve disputes with others in a particular way. One benefit of a contractually implemented dispute resolution process is that the same rules do not have apply to everyone or in all cases.
A project protocol could include:
- A stand-alone protocol document, incorporated by reference into other contracts
- A provision that each party agrees to resolve all disputes among the parties relating to the project as set out in the protocol (possibly with specified exceptions)
- A provision defining any categories into which disputes are to be divided for different treatments under the protocol.
- Appointing named experts, Project Referees or Dispute Board members (and alternates or substitutes) or establishing a mechanism for their appointment
- A mechanism to resolve any disputes about which category of dispute applies
- Detailed procedural rules for each process or references to institutional rules
- Any criteria that the decision makers are to take into account in making decisions
- Provisions for consolidation of disputes, for adding parties and for third-party claims
- Covenants to give effect to any decisions, with remedies for breaches
- Covenants to continue contractual performance while the dispute remains unresolved
Some multi-lateral relationships involve parties or work in different jurisdictions. This adds another layer of potential complexity to the creation of a suitable dispute resolution process.
Although it might be desirable that all contracts be governed by the same law, that may not be achievable. In a dispute resolution process providing for arbitration, it is important to consider whether the arbitration will be domestic or international, what arbitral law will apply and which courts may be called upon to intervene in the process. What happens, for example, if a domestic arbitration is commenced, but foreign parties are then brought into the proceeding? This can affect the procedural rules and legislation that applies. It could also have implications for the enforcement of the award. This issue might be addressed by establishing different processes for domestic and international disputes, by prohibiting creating “mixed” situations, or by coming up with a “one-size fits all” approach that diminishes the significance of differences in domestic and international arbitration procedure.
Preserving the Working Relationship
For many business people, the first priority for any dispute resolution process in a long-term relationship is to preserve an effective working relationship. Often, it is not the fact of a dispute, but the way in which it is resolved, that creates undesired tension.
The most common way of addressing this need is to require negotiation as a precursor to formal adjudication. There are potential pitfalls to such “tiered regimes” – disputes about whether the necessary pre-conditions to arbitration and “good faith” obligations have been met, concerns about being unable to obtain immediate enforceable emergency relief, about information exchanged or concessions made during negotiations being used in an arbitration and about delaying tactics – but many of these can be overcome by good drafting. Often business people are willing to live with the residual risks.
There are, however, other approaches that can be considered, for example processes that allow relatively disinterested senior executives to break logjams at an operational level. Even in formal, adversarial proceedings, rules can be adopted to de-personalize the situation – limited oral discovery, unsworn evidence, expert witness conferencing and unreasoned awards may have a place. It may be possible to provide for interim resolution, deferring the resolution of contentious proceedings on their merits until later, when the underlying business objectives have been achieved and accumulated complaints and cross-complaints can all be considered together.
The creation of a dispute resolution process for a major project or long term relationship is not to be taken lightly. However, if done with care and vision, it can save vast amounts of money and time, and make a direct contribution to the success of the undertaking. There are many procedural permutations and combinations from which to choose, and there are experienced counsel ready to assist.