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The Case for Well-Designed Dispute Resolution Clauses

During my final year with Mediate BC, I had the opportunity to study the use of “dispute resolution clauses” (“DR Clauses”) within the BC business community. By “DR Clause” I mean a clause in a contract that sets out how the parties will deal with any disputes arising out of the contract, including the interpretation of the terms of the contract itself (Note 1). As part of the research, I interviewed several inhouse counsel as well as outside counsel/solicitors who acted for prominent BC businesses. I was surprised to find that (Note 2):

  1. Most had not given much thought to planning for disputes or detailed drafting of a tailored DR Clause. Instead, if any DR clause was used it was usually a short boilerplate clause referring only to arbitration.
  2. Few had considered including mechanisms other than litigation and arbitration such as mediation, med/arb, arb/med, or expert panels.

When acting for business clients negotiating a contract, no one wants to think about the potential of the agreement falling apart. However, avoiding discussion of this important issue altogether raises ethical issues for the lawyers.

Professor John Lande has long advocated that lawyers should work with their business clients using what he calls “Planned Early Dispute Resolution” (PEDR) – a form of dispute resolution systems design (Note 3). At its highest level, PEDR is a system which ensures that the client and lawyer work together early in the negotiation process to tailor dispute resolution processes which strategically meet the needs of the client (and the other party). A DR clause should not be inserted into a contract as an after-thought; it needs to be carefully thought out.

Why is this important? The alternative is to leave litigation as the default (reactive) mechanism of choice. For most business clients (particularly small and medium-sized businesses) litigation is not aligned with their interests as it will divert significant financial resources from their business goals, take substantial time of key business personnel, potentially affect negatively the reputation of the business and create unnecessary risk for the enterprise. This is an access to justice issue. Clients need a roadmap to follow when disputes arise.

To use PEDR:

  • the lawyer must understand the client’s business environment and the client’s interests, goals and values.
  • the lawyer works with the client to:
    • map out scenarios of what could go wrong in the contractual arrangement, the likelihood of each scenario and the impact of each on the client’s interests, goals and values.
    • Consider and match different resolution approaches for each category of problem.
    • Build the appropriate processes into the contract.
  • lawyer and client monitor implementation and use feedback on the outcomes to create more effective provisions for future contracts.

This approach seems so obvious. And yet my research indicated that it was not used in most non-construction cases (Note 4). Barriers to PEDR might include:

  • The prevailing legal culture which still manifests a deeply ingrained default to litigation
  • Lawyer fears about appearing “weak” or “incompetent” when suggesting non-litigation methods
  • Reluctance to be “black hat” when forging a new exciting contractual relationship
  • Over-reliance on contract precedents and “boilerplate” language
  • Lawyer and client unfamiliarity with non-litigation options (and there are many)
  • Executives who delegate these key decisions to their legal departments
  • Control over contract provisions in the client’s procurement or human resources departments

These barriers can be overcome with early candid discussions between lawyer and client. There are many creative options already available for DR clauses and the key is to understand the unique characteristics of each option and how to match them to the problem.

Arbitration may indeed be the best tool for a situation. But it is a blunt a tool and subject to becoming as expensive and complex as litigation. Other processes on the “dispute resolution continuum” (Note 5) should be considered either on their own or, more creatively, in a tiered DR clause that combines a series of mechanisms.

Drafting effective and enforceable DR clauses takes considerable skill. We do not yet have a well-developed set of judicial decisions on this topic but recent decisions in the UK highlight the risks of clauses without enough specificity (Note 6).

The business community and the lawyers who serve them have an opportunity to show leadership by modelling the PEDR approach to achieve more effective, timely and less expensive DR approaches. Who knows, a PEDR “movement” could result in larger system change improving access to justice for many businesses.

Some suggested resources include:

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Note 1: For this article I am referring to contracts between one or more business entities (B2B) and not contracts involving individuals or “consumer contracts” (B2C). B2C contracts are notorious for including complex and onerous DR clauses, often requiring application of a foreign law and litigation in a foreign court. For example, the Apple Media Services Terms of Use Agreement requires application of the laws of California and use of litigation in the courts of Santa Clara California to resolve any dispute or claim arising from the agreement.

Note 2: I tackled the topic of PEDR in a Slaw post in 2016. However, it is time to revisit this important topic in a more detailed way.

Note 3: The exception appears to be construction law. Few construction disputes use the court system; most are resolved using some form of ADR guided by thoughtful and specific DR clauses.

Note 4: This was the same result noted by Professor Lande in his research in 2015. He stated: “Indeed, despite strong interests in using some form of PEDR, many (perhaps most) businesses seem like proverbial lemmings, unable to change their litigation-as-usual (LAU) approach.”

Note 5: a simplified example of the continuum is included below:

Click the graphic to see a larger version of this image.

Note 6: UK decisions include: Ohpen Operations UK Ltd vs Invesco Fund Managers Ltd [2019] EWHC 2246 (TCC); JT Mackley & Co Ltd vs Gosport Marina Ltd BLR [2002] 367.

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