Daily Archives: October 31, 2011

Should Your Contracts Be Based on Alternate Dispute Resolution?

The dispute resolution solution of choice in most large contracts is litigation — you reserve the right to tell the other party that I’ll Sue Ya if anything goes wrong. Given the large judgements that have been awarded in some of the more famous legal battles, it seems like it should be the dispute resolution of choice when millions of dollars are on the line. But should it really? The reality is that court is time consuming, costly, and, as all court cases are public domain, damaging to your reputation and irreparably harmful to your business relationship. All it does it take a bad situation and make it much, much worse.

There are other options, and, as described in this recent CPO agenda article on taking the alternate route, they include:

  • mediation,
  • arbitration, and
  • adjudication.

And your procurement organization should be acutely aware of them, because each and every contract signed needs a dispute resolution procedure — as it cannot be predicted when something will go (horribly) wrong and when the organization will have to deal with it quickly, and effectively. And as the article notes, if you do have a dispute and you don’t have adequate dispute resolution provision, it can make the resolution of the dispute significantly disadvantageous for one party or another, depending on the circumstances. And you don’t want to risk the resolution being disadvantageous to your organization, considering it is Supply Management’s job to be leaders in contract creation and negotiation.

So why consider ADR? As the author notes: the overriding advantage of using ADR is that it enables both parties to preserve the commercial relationship while maintaining control of resolving the dispute. So which ADR option do you choose? It depends on what you need.

  • Mediation
    is a method that may allow parties to reach an amicable agreement and maintain on-going relations. The focus of the process is on the interests of the parties, rather than on their legal rights alone, which allows other factors such as commercial pressures to be taken into account. If the goal is to reach a mutual settlement, this is often the best bet.
  • Arbitration
    is particularly valuable with international contracts where parties are based in different countries, since court judgments accepted in one country are difficult to enforce internationally. Arbitration awards are easily enforced all over the world under the New York Convention. If the goal is to reach an enforceable settlement, this is often the best bet.
  • Adjucation
    is hugely popular because it provides a quick answer and the resolver is likely to be a subject matter expert from the industry. And the answer, while not always the one sought, is usually one the parties can live with. This allows the parties to deal with the problem and move on. If the goal is to get a quick resolution, this is often the best bet.

And while the best option may not always be clear cut, chances are it won’t always be litigation. Keep this in mind when determining your dispute resolution methodology of choice.