It may not be the most likely place to look for business advice, but the 2010 reboot of Karate Kid contains some wise words (courtesy of Jackie Chan’s enigmatic Mr Han) for those grappling with disruption in their supply chain: “The best fights are the ones we avoid.” If a little commercial flexibility can head off a potentially costly and time-consuming conflict, this will usually be the most prudent course of action, bearing in mind that most cases that proceed to litigation ultimately end in a settlement that involves compromise by each side. However, sometimes participation in some form of dispute resolution process is the only way to unlock what appears to be an intractable situation. The choice of forum is one of the most important factors that influences how, when and at what cost the parties reach an agreement. It is important to consider the full range of options ahead of time.
Litigation or arbitration?
One of the most fundamental decisions will be whether any dispute should ultimately be decided by the courts or by an arbitral tribunal. The right choice for a given contract will depend on a number of factors, including the locations of the parties, the nature of the contract and the relative experience of conducting each type of dispute.
Litigation through the courts has the advantage for many of familiarity, particularly when it comes to domestic contracts. In England and Wales, the Civil Procedure Rules set out a prescriptive framework covering the lifecycle of a dispute. The availability of extensive case law and commentary gives litigants a high degree of confidence in how the rules will be applied. While litigation in England has a reputation for being expensive, judges are able to deploy a wide range of rules and powers aimed at controlling costs and ensuring cases are dealt with expeditiously. Litigation can also be highly flexible, allowing claims involving multiple parties or under different bases (such as tort or equity), supported by interim remedies where necessary, such as non-party disclosure orders, injunctions or orders requiring a party to provide security for adverse costs awards.
Arbitration is a process that can take many forms, from an ad hoc agreement under which the parties set their own procedural rules to a more formal arrangement governed by an institution such as the International Chamber of Commerce or the London Court of International Arbitration and decided by a panel of eminent arbitrators. Arbitration can be particularly well suited to large, cross-border contracts. This is in part because international counterparties may prefer a process that tends to be more streamlined than English litigation, involving less onerous requirements for document discovery and a reduced likelihood of satellite litigation around procedural rules. International arbitration is also popular due to the ability to rely on the New York Convention, which has 169 state parties, to enforce arbitral awards in any of those jurisdictions. The confidential nature of arbitration can also be attractive in industries and for contracts that involve a high degree of commercial sensitivity.
Choice of law and jurisdiction
In fast-paced commercial negotiations, “boilerplate” terms such as choice of law and jurisdiction do not always get the careful consideration they deserve. The danger of this is that, if the contract is governed by a law other than that with which you are most familiar, the terms you think you agreed to may differ from those you have actually agreed to. For example, under English law, there are few restrictions in how a party can exercise contractual termination rights, whereas in many EU jurisdictions the courts would expect the parties to cooperate first before looking to terminate the contract. For a party looking to switch from a supplier that is failing to deliver as promised, this can cause real difficulties.
The choice of law will often determine the appropriate jurisdiction for litigation, since it is generally preferable for the courts of that country to apply their own law, but there are other important considerations to bear in mind. Judicial processes, automatic rights of appeal and enforcement procedures can vary greatly. You may well have a good claim for damages where the goods received differ from the contract specification, but if you would not be able to recover any funds in a reasonable timescale, you might be forced to accept an unsatisfactory commercial alternative.
It is also worth considering where the other party’s assets are located, as any judgment may need to be enforced in the courts of that jurisdiction. The ease with which this can be done varies dependent on local laws, whether the dispute is subject to litigation or arbitration, and the existence of any international regime covering the relevant states, such as the Brussels Regulation with the EU or the Hague Convention between contracting parties including the UK and the EU.
Mandatory mediation
Returning to the mantra of dispute avoidance, businesses are increasingly building in the proviso that the parties must try to resolve a dispute through a (specified) form of negotiation before they are able to bring a dispute. Mediation is a popular choice: the involvement of a neutral party can take the heat out of the situation, and an experienced mediator will often be able to talk parties out of the intransigent positions they have dug themselves into. There is growing familiarity with mediation within the business community and by courts. The recent Singapore Mediation Convention is set to develop this further, through an international treaty to facilitate the enforcement of mediated settlement agreements, without the need to first commence litigation. The UK and the EU are among the territories that have indicated a willingness to sign up to the Singapore Convention.
We are also seeing a rise in more sophisticated, tiered dispute resolution clauses. Originally developed for long-term, relational contracts such as design-build-operate arrangements for hospitals, clauses of this type provide an escalation process. For example, a potential dispute may first need to be discussed between commercial managers; if no agreement can be reached, it will be referred to senior management or director-level, then mediation, and only if that fails can mediation or litigation be commenced.
Provided each step is expressed as being mandatory, the English courts will hold the parties to this process unless both agree otherwise. Having some form of contractually agreed pre-litigation step can reduce the likelihood of costly litigation. The danger of this approach is that, if the process becomes too unwieldy, it can simply add time and expense to a dispute that, at least in one party’s view, is ultimately going to need to proceed to court in any case.
Finding the right fit
There are any number of different ways to resolve a dispute. For some, building in a negotiation step may be essential for all contracts. Others may look to a more technical approach that aligns with their sector: in the construction industry, valuation experts are often asked to rule on questions of quantum, while blockchain-based solutions are being developed to go alongside smart contracts in some tech contracts.
Where time and process allow, consider the full range of options for each contract, bearing in mind the preferred choice of law, the locations of the parties (and their assets) and the desirability of any contractual dispute resolution procedure. If this is not always practicable, can you develop a “house position” on litigation/arbitration, choice of law and jurisdiction, and any contractual procedures? Embed this into your standard terms and provide guidance for commercial teams. If you cannot avoid the conflict, you may at least be able to choose the least painful way in which to resolve it.
