Dispute Resolution Clauses - 2 Minute Drafting Tips: Bulletin #7 - The Pros And Cons Of Multi-Tiered/Escalating Dispute Resolution Clauses

The purpose of this bulletin, the seventh in our "Dispute Resolution Clauses - Two Minute Drafting Tips" series, is to provide parties involved in negotiating commercial agreements with quick, actionable tips for crafting effective dispute resolution clauses. This bulletin discusses the pros and cons of multi-tiered/escalating dispute resolution clauses.

Multi-tiered dispute resolution clauses are common in commercial agreements. A typical multi-tiered clause starts with direct negotiation, followed by non-binding mediation and then binding arbitration. These clauses have advantages and disadvantages and may not always be suitable for every agreement. Careful drafting, approached from the perspective of assuming an uncooperative party, can maximize their effectiveness.

Pros and Cons of Multi-Tiered Dispute Resolution Clauses

Potential Pros:

• Structured Process: Provides a clear, step-by-step pathway for resolving disputes.
• Can Be Cost-Effective: Encourages resolution through less costly methods like negotiation and mediation before resorting to arbitration.
• Relationship Preservation: Less adversarial methods like negotiation and mediation can help maintain business relationships.

Potential Cons:

• Wasted cost and effort: There may be circumstances where, e.g., protracted negotiations or a mediation are very unlikely to succeed. In such cases, requiring extended negotiations or a mediation involves wasted cost and effort.
• Potential Delays: Each stage can add time to the resolution process, potentially delaying final resolution. These delays could be very detrimental in the middle of a project or business deal, for instance.
• Intentional Delay: A party may attempt to frustrate the process, causing delays and additional costs. It is often the case in a dispute that one party benefits from delay, and these clauses can be used as commercial leverage.
• Enforcement Issues: Ensuring compliance with each stage can be challenging, especially if one party is uncooperative.

Drafting Tips to Maximize Chances of Effective and Timely Dispute Resolution

There are ways to draft such clauses so as to maximize the potential for the pros to outweigh the cons when a dispute arises. The five tips below are best understood as a menu of options rather than a drafting checklist. These tips have one thing in common: they all consider the potential for uncooperative behavior from one party, which is a realistic assumption when a dispute arises.

1. Clear Timelines: Establish specific deadlines for each stage of the dispute resolution process. For example, set a 15-day limit for negotiation, followed by a 30-day period for mediation. This helps prevent unnecessary delays.
2. Make It Clear a Step Is Completed When the Time Limit Passes: One of the biggest pitfalls of multi-tiered clauses is if the clause is drafted in such a way that one step (e.g., good faith negotiation) is considered incomplete, an arbitrator may lack jurisdiction until it is finished. This risk can be reduced by making it clear that a step is completed when the time limit passes without the dispute being resolved for any reason.
3. Unilateral Progression: Include provisions that allow one party to move the dispute to the next stage if the other party fails to participate. This ensures the process can continue even if one party is uncooperative.
4. Defined Consequences: Outline the consequences of non-compliance, such as cost penalties or adverse inferences in arbitration. This may discourage parties from attempting to frustrate the process.
5. Flexibility for Exceptional Circumstances: Allow for some flexibility in the timelines to accommodate exceptional circumstances, but ensure this flexibility is not open to abuse. A note of caution: Defining the scope of these exceptions can be difficult, and may leave room for disputes about whether a party has complied with the clause.

Conclusion

Commercial parties should avoid the temptation to "cut and paste" multi-tiered dispute resolution clauses from other agreements, and instead turn their attention to the pros and cons before deciding whether one is appropriate in this context. For multi-tiered dispute resolution clauses to be effective, they must be drafted with the potential for uncooperative behavior in mind. Clear timetables, trigger points, and provisions for unilateral progression can help to ensure the dispute resolution process remains effective, even in the face of non-cooperation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.