Written by David Messerschmitt
Disagreements over the course of a commercial relationship are inevitable. A pitfall of many commercial contracts is that the parties often incorporate “boilerplate” dispute resolution clauses that simply state that all disputes will be resolved in a court of law and do not include a process for resolving disagreements prior to taking formal legal action. In the absence of such informal dispute resolution process, customers and vendors tend to engage in whatever tactics they deem appropriate in order to grab the other party’s attention and resolve the dispute prior to litigation. For example, a vendor may withhold providing certain services or a customer may withhold an entire payment when only a portion of the payment is at issue. These tactics may be counterproductive to resolving the disagreement and could cause a minor disagreement to escalate into a costly, relationship-damaging dispute. To avoid this, customers should consider including the following tools in their commercial contracts:
1. Tailored Process – Avoid “boilerplate” or “off-the-shelf” dispute resolution clauses and instead include a tailored dispute resolution process that encourages structured informal dispute resolution in alignment with the customer’s governance organization.
2. Regular Meetings – Require regular governance committee meetings of the customer and vendor for purposes of discussing any issues in the relationship. Regular meetings may prevent minor disagreements from escalating into major disputes merely due to a lack of communication between the parties.
3. Assign Individuals to Address Disagreements –Name individuals who are responsible for addressing disagreements and who have the authority to change contract if conflict resolution so requires. Naming the decision-makers brings structure and clarity to the process and ensures that only individuals with an understanding of the broader customer-vendor relationship have the authority to make decisions.
4. Informal Dispute Resolution Process – Include an informal dispute resolution process that requires both parties to attempt to resolve disputes among several tiers of management prior to pursuing litigation/arbitration.
5. Time Parameters –Include the maximum number of days that may lapse between provision of a notice to invoke the informal dispute resolution process and the occurrence meeting between the parties’ management (and how many days may lapse between each subsequent meeting) in order to avoid disagreements becoming stale or bubbling up over time merely because the parties are not communicating with each other.
6. Encourage Clear Communication – Require each party to submit a written statement to the other party describing its position on the disagreement to avoid misunderstandings about what caused the disagreement and the issues at hand.
7. Intermediary Step Between Informal and Formal Dispute Resolution – Include an intermediary step prior to engaging in litigation or arbitration if the informal dispute resolution process does not resolve the disagreement. For example, include an option for the customer to submit disputes involving financial (e.g., invoicing disputes) or technical (e.g., disagreements over specifications or deliverables) matters for expedited resolution by a panel of experts selected from a major arbitration association. This option could provide a cheaper, quicker alternative to litigation or arbitration. The contract should be clear about how the experts are selected, the time period for onboarding the experts, the set of rules the experts must follow, and the time period that each party receives to develop and deliver its position.