Business relationships: effective dispute resolution clauses

Rewarding relationships with customers, suppliers, staff, shareholders and other stakeholders take time, effort and resource investment to establish. Ask any marketing man or commercial director: it is more challenging and more expensive to win a new customer than to keep those you already have, making them contented purchasers who return to do business time and again.

Equally, in today’s stripped-out, just-in-time world of lean supply-chains, having a reliable and efficient supplier is a critical element in the company’s value chain. A cheerful, energetic and well-motivated workforce also helps. Behind each of these happy circumstances lies a business relationship; and behind each relationship will normally lurk a contract to spell out its structure, terms and purpose.

Together with risk to brand image and corporate reputation, those relationships are often placed under great stress – and thus risk – when a company enters, or falls into, a commercial dispute with a customer, another business party or an employee.

When serious problems occur and one of those relationships becomes really strained, the first reaction of many business managers is to call for the lawyers – whether in-house or outsourced. Naturally, the lawyers will then play their proper part by digging out the contract, analysing its terms and interpreting them to their client’s best advantage. They will also look at what the contract says about how disputes will be addressed, finding far too frequently that it says, effectively, ‘Go to court’.

However, it will not add ‘spend a lot of time and money to get there’ nor ‘there is not a one hundred per cent winning certainty once you are there’. Naturally, the lawyers will be there all the way to advise the company on how to obtain its rights and avoid the pitfalls.

Fortunately, there are other ways to resolve disputes and there are other dispute resolution clauses, some of which will help your business to limit the damage to the relationship. Indeed, there may even be an opportunity to strengthen the relationship.

These ‘wonder clauses’ will offer a graduated response to the problem, allowing the company and the other party to make effective choices about the techniques to be applied to resolving the dispute.

Luckily, your lawyers are also there to help you find the right ‘wonder clause’ to fit each relationship. They can also help the company gain the best effect from the various dispute resolution techniques available should it find itself in the unfortunate position of having a dispute that affects one of those key relationships.

So if you are an ordinary, straightforward manager keen to run your business profitably, keeping your customers and staff happy and your suppliers lean and efficient, what will your lawyers suggest that you put in your ‘wonder clause’?

First, they should encourage you to think about negotiating your way out of the problem just like you negotiated the start of the relationship. They should suggest also that, if that doesn’t do the trick, you should add power to the negotiating package by using a neutral third party to facilitate: a mediator. After all, in over 80% of commercial disputes, it will help you to generate a mutually satisfactory solution with the other party (based on those cases where mediation was used on a voluntary basis).

If you want or need someone else to decide the solution to your business problem, the ‘wonder clause’ should offer arbitration or some other determinative process such as adjudication. Of course, arbitrators are very popular for international disputes because their decisions are enforceable in around 140 countries, no matter where they were originally made. All of these, and others like them, operate in private (as a matter of law or agreement between the parties) so there is no risk of exposing the problems in the relationship to public gaze in the courts (and the media), thereby minimising brand and reputational risk.

Your lawyers should also help you to choose the provider of the private dispute resolution service, plus any rules or procedures to be followed, and to insert those details in your ‘wonder clause’. After all, there are some very expensive solutions out there that can take a long time to generate the answer to your problem. You should be allowed to make an informed choice about whether to buy a Mini or a Rolls which, of course, are both perfectly viable and acceptable forms of transport but are matched to different needs and expectations.

Many industries, particularly in the UK, will already have a standard set of rules or procedures and will be able to draw on specialists to help resolve the dispute, at affordable prices. For example, Johnson & Johnson has reported that, by using mediation, they save 20% of the cost of resolving disputes and 20%, on average, of the settlement cost and reach a dispute conclusion in 35% less time.

With the excellent advice of your lovely modern lawyer, you have now decided that it makes sense to avoid going to court just to resolve a plain and simple commercial dispute. You want, however, to be certain that you can trust your mediator, adjudicator, arbitrator (or whatever) just as much as you trust a judge. Naturally, your lawyer can help you there too but another helpful hint is to ask him or her to look for someone who has taken the trouble to train and qualify as a mediator, adjudicator, arbitrator (or whatever). You can distinguish them because they will have joined a professional organisation such as the Chartered Institute of Arbitrators and thus subscribe to our high standards of ethical practice (you just knew there would be an advert in here somewhere). Thankfully such individuals are not in short supply, with more than 10,500 in over 90 countries. And we are training more all the time – just to make the world a safer place to do business.

As an example, in Russia, we are working with the Anglo-Russian Law Association to provide skills in international arbitration for corporate lawyers in Moscow, although this remit is already widening to include other sectors. We are also widening the knowledge of best international practice among existing Russian arbitrators, meeting a request by such practitioners to introduce our ethical standards.

In China, we are providing similar programmes with CIETAC, the principle arbitration commission, and others in the major trading cities and ports. Our members on mainland Europe are providing training for practitioners and judges in a number of new EU member countries, to spread best practice as arbitrators and to maximise the efficiency of arbitration and the enforcement regime.

Continuing our theme of creating effective relationships and partnership working, we are beginning to develop a programme with the International Trade Centre in Geneva to see how international dispute resolution might be simplified for small and medium enterprises who are now increasingly involved in cross-border operations, international trading and international manufacturing.

So, for businesses everywhere: enjoy and preserve effective relationships; get a good lawyer and some ‘wonder clauses’.