Dispute Resolution – Why Early Planning Makes Sense

When our family is planning a vacation we usually figure out our desires and needs, research the options, consider factors such as time, cost and availability and then map out our adventure. In case something goes wrong, we also make sure our travel and medical insurance are up to date and make sure our loved ones know our itinerary. Our recent trip to Mexico made me wonder why it isn’t more common for lawyers and business people to take the same approach to planning for business relationships and contracts.

Based on my informal discussions with lawyers and the business community over the past year, it appears that the deal-making phase, lawyers pay a lot of attention to the terms of the deal but give much less thought to what happens when conflicts or unexpected events occur during the course of the arrangement. I found that many business contracts include a “boilerplate” dispute resolution clause which usually dictates that disputes will be referred to arbitration. Although arbitration may indeed be the most appropriate process in a particular situation, given the wide variety of business arrangements and possible types of conflicts that could occur one has to wonder whether it is too blunt an instrument to fit all situations (if all you have is a hammer then everything looks like a nail?). Even worse, some contracts fail to include any dispute resolution mechanisms, which presumably means the parties have to resort to the courts.

I have been very inspired by Professor John Lande’s thoughtful research about “Planned Early Dispute Resolution” (PEDR). He wrote (with Kurt Dettman and Catherine Shanks) a helpful American Bar Association user guide which outlines the business case for PEDR and the problems with the “litigation as usual” (LAU) approach. Professor Lande suggests that strategic “pre-dispute planning” starts with each of the contracting parties conducting an analysis of their business’s unique dispute history (what kind of disputes does it commonly encounter, with whom, when etc.). Then, as part of the contract negotiation, they each consider the types of issues that could arise during the course of the contract and how each type should best be dealt with. A wide range of options can be considered including negotiation, mediation, neutral evaluation, arbitration, litigation – alone or in any combination. This approach is intended to lead to more tailored and appropriate dispute resolution clauses and away from the automatic response of negotiation followed by litigation.

This makes sense, so why does it seem so rare in business contracts today? Professor Lande and Peter Benner engaged in an interesting dialogue on this topic here and then published a paper detailing the results of his interviews with a number of U.S. senior business executives. They describe some of the reasons for the resistance to change from ‘litigation as usual’:

This study illustrates that key stakeholders have their own interests, which often are satisfied by continuing with the status quo of LAU rather than switching to a PEDR system. The C-Suite often does not want to “get into the weeds” of managing litigation. Inside counsel and middle-level employees may feel that they currently handle disputes effectively and they may resent efforts to reduce their autonomy. Outside counsel may worry about interference with their professional responsibility to produce the best legal results and their ability to generate substantial revenue that generally flows from LAU. Although general counsel have the formal authority to direct inside and outside counsel to use PEDR processes, they may not do so for various reasons such as their temperament, background, training, or reading of internal business priorities. Even if they implement a PEDR system, the system is unlikely to be as effective as possible if key stakeholders resist.

More generally, what may seem irrational to outside observers may seem quite rational to individual stakeholders. Although the status quo may not seem optimal to some stakeholders, doing something different may seem risky, possibly subjecting them to criticism if things do not work out well. Business people normally do not get involved in dispute resolution and they may not be interested in PEDR processes unless it “hits them personally.” One lawyer said that the biggest barrier to adopting a PEDR system was simply agreeing to change. “People get set in their ways. Teaching an old dog new tricks is very tough. Change is upsetting the apple cart and people don’t want to hear it.” So, although adopting a PEDR system may seem like a no-brainer at first blush, proponents of this approach often face significant barriers that make it difficult to adopt and sustain this innovation.

And yet, Professor Lande found some examples of organizations that are using PEDR successfully. He provides some useful recommendations including

…development of resources to help companies implement PEDR systems, use of dispute system design methods, designation of PEDR counsel to manage the process, and making PEDR a valued part in the corporate culture.

So, a PEDR approach is not just a new tool for the toolbox; it represents a pretty significant “cultural” shift for both the business and legal worlds. I am confident that some Canadian organizations are leading the way and I would love to know who you are and how you are making it work. I believe change will happen when inspired leaders of industry recognize that PEDR is consistent with their own business goals and “just do it”.