05 Feb Workplace Conflicts and commercial disputes
[vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][vc_column_text]MANAGEMENT AND GOVERNANCE ISSUES THAT NEED A CEO’S OR BOARD’S ATTENTION.
Why do we fail to incorporate dispute resolution clauses in our commercial contracts? Why does legal counsel fall short of elaborating this most important aspect of a transaction in the contracts?
Business disputes can be managed, and their risk controlled, just as other business contingencies can be managed: through foresight, attention and sophisticated techniques of risk allocation.
Research shows that a well thought out Dispute Management Clause in Commercial Contracts minimizes the damages caused due to conflicts by more than half.
Parties negotiating a commercial deal must assess not just the value of the deal but also the risk of the deal’s falling through, and must decide how to preserve the value of the deal in the event of breach of the agreement.
Managing that risk through choice of law clauses, waivers, or bare arbitration provisions too often result in dispute resolution processes that are unresponsive to the commercial needs of the company or the demands and risks of the particular deal.
Effective prevention, management and resolution of dispute is built upon a well thought out, negotiated contract clauses. The contract incorporating dispute resolution provisions between the parties is the basis of an effective dispute resolution process which is designed, directed and controlled by the parties. Poor provisions of dispute resolution clauses or if you do not have a stepped hybrid dispute resolution agreement, you invariably end up in court when faced with disagreements. We all spend weeks or even months negotiating on commercial agreements stretching over many years, but we have a laid back tendency on addressing the consequences of disputes arising under the agreement.
We all know that there are no perfect contracts and there are no deals in which all parties’ interests and capabilities remain constant throughout the term, and in which all parties share an identical understanding of their rights and obligations. Opportunities arise (or fail to materialize), currencies fluctuate, contractors go out of business, government approvals are withdrawn, and public funding is not renewed, natural catastrophes and other social disasters happen. All sorts of contingencies occur that we can- not anticipate. Risks that were unclear at the time of the contract become real at some time down the road. This is for no fault of the contract drafters. No drafter can foresee every change on the ground, or every good-faith interpretive disagreement, that will occur over the term of the deal. Since that is so, it is very important for the parties to devise processes for the management and resolution of unknown and unknowable contingencies.
Why do we fail to incorporate these legally viable and so important dispute resolution clauses? Why do legal counsels fall short of elaborating on this most important aspect of a transaction?
Conflict resolution processes that are embedded in the initial agreement must be designed to protect the value of the deal. The analysis should be straightforward: Identify the value that we seek from the venture, assume a risk of non-performance from some unidentified cause, and devise methods to manage that eventuality designed to preserve that value to the extent possible.
In practice, this might involve such questions as: Should the counterparty be required to continue performance during a dispute? Should judicial access be agreed upon (or waived) for immediate preliminary relief? Should party have the right to cease payment upon certain conditions? Is the other area of our business critical to both, so that the overall relationship is more important than this particular deal? Should “buffers” be built in to make it difficult for any party to abruptly terminate performance? Does the party have assets in the home jurisdiction that may be subject to attachment? Conscious and rigorous analysis of the deal, on the assumption that disputes will inevitably occur, is the first step in drafting contract clauses that add value to the deal as a whole. The next step is to negotiate and draft such clauses with sophistication.
A threshold question is whether the contract is cross-border.
A “crossborder” deal may be one where the parties are residents of different countries. But it may also be where performance is to take place in a different country, or payment is to be made in a different currency, or where collateral is located outside the country of performance, or where governing law is different from the law of the residency of all of the parties to the deal. Cross-border dispute resolution is different from domestic. The selection of neutrals, the rules chosen for the process, the reliability and integrity of the enforcing courts, the cultural predispositions of the parties and their legal representatives, the restrictions on civil courts’ powers compared with those in common law countries, the practicality of enforcing a judicial judgment compared with enforcing an arbitral award under the New York Convention – all of these questions arise in cross border disputes. International dispute resolutions pose a different set of challenges, and needs a completely expanded approach for drafting.
Dispute resolution processes are divided into two categories – processes in which the parties retain control over the procedure and the outcome, processes in which they cede that control. The first category includes “consensual” processes, such as negotiation, facilitated negotiation, early neutral evaluation, joint expert evaluation; the second category includes “adjudicative” processes, both private (arbitration) and public (trial).
Most enterprises must prefer consensual processes. They yield more commercially rational results, remain in the control of the disputants, are confidential, and centre on business rather than legal concerns. The transaction costs for consensual processes tend to be lower than adjudicative processes. It is therefore almost always advisable to frame contractual dispute resolution clauses so as to exhaust consensual processes before incurring the costs and other disadvantages of adjudicative means of dispute resolution. This structure is called “stepped” clauses – negotiation leading to mediation (or other ADR methods) and only then leading to arbitration or litigation.
These are the fundamental questions that each drafter should be asking, to determine whether its dispute resolution agreement is fit for the task:
Notice: To whom should notice of a dispute be given? How soon after the event giving rise to the dispute must notice be given? What specificity should the notice contain?
Scope: Are all matters to be treated the same way or are certain matters (such as breaches of confidentiality or misuse of intellectual property) to be carved out of the scope of the clause and subject to immediate judicial relief?
Rules and Initiation: How are formal processes such as mediation or arbitration formally initiated, and what rules will be followed?
Administered or Unadministered: Shall the formal processes be administered by an ADR provider body (such as FICM-MCN) or will the parties choose rules that give them and the neutral that authority (such as UNCITRAL)?
Time Periods: To ensure efficiency and commercial good faith, shall the various steps of the process be limited?
Designated Representatives: Shall the parties designate the level and seniority of their negotiators, and the identification of an agreed-upon arbitrator or mediator?
Privilege and Confidentiality: Are the various ADR processes to remain confidential? Are statements and information exchange unsuccessful?
Location: Shall the mediation or arbitration occur at the location of one party, or in a third place?
Information Exchange: Shall initial notice of a dispute be accompanied by documents and information sufficient to advise the receiving party of the facts giving rise to the claim? In arbitration, shall costly discovery processes, such as electronic communications, interrogatories and deposition in the course of settlement discussions inadmissible in a subsequent proceeding?
Conditions Precedent: Must negotiations take place prior to mediation, and must mediation take place prior to arbitration or litigation? Any exceptions?
Provisional and Interim Relief: May the parties seek immediate provisional relief from a court or an arbitrator? If so, with respect to what relief, and to what end?
Continuing Performance and Right of Termination: Are the parties to continue to perform during the pendency of the dispute? Do the ADR provisions erode any party’s termination rights?
Selection of the Neutral: Shall the mediator or arbitrator be selected pursuant to institutional rules, or do the parties wish to delineate criteria to guide the selection? If the parties choose to control the selection of the neutral themselves, how shall that selection process be structured?
Awards, Costs and Fees: How shall the costs of the mediation be allocated? Is an arbitral tribunal free to make any award it wishes or shall its powers be bounded in some way? May consequential damages be awarded? May the tribunal award attorney fees to the prevailing party?
Form of Award: Shall the arbitral award be reasoned (written)? Shall the tribunal be required to issue its award within a specified period of time after close of the hearing?
Customized ADR Processes and Other Issues: Parties may wish to create an ADR process that suits their precise needs. For example, shall they jointly engage a neutral expert to opine on technological or other issues in dispute? Shall the arbitrator offer to mediate the matter after drafting the award but before issuing it? Shall the arbitration take place in a specified language and, if so, who pays for the translation? What law shall govern (a) the substance of the contract, (b) the arbitration process, and (c) the enforcement of the arbitration award?[/vc_column_text][/vc_column][/vc_row]
