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From Reaction to Proactive Action:
Dispute Prevention Processes in Business Agreements
James P. Groton
1
and Helena Haapio
2
INTRODUCTION
Most experienced business leaders and contract and project professionals proudly possess
such core skills as defining scope and responsibility and articulating key business and
financial terms such as service levels and payment and delivery terms. They are also aware
of the standard alternative dispute resolution (“ADR”) procedures of mediation and
arbitration. Yet what they may not have thought about is that ADR “reactively” deals with
only the
symptoms of disputes that have already developed and need to be resolved. Few
business leaders and project professionals are aware of how to
prevent disputes and at the
same time enhance relationships through proactive/preventive contractual care.
The proactive/preventive approach to business relationships and contracts is a relatively
new concept in the business world. Only recently have businesses started to apply and
researchers started to pay attention to innovative contracting techniques and tools that not
only proactively prevent and control disputes, but also help to improve performance.
1
This paper will provide insights into the availability and use of proactive contracting
techniques and dispute prevention processes that will help to accomplish two purposes:
1. Prevent problems from occurring, and control problems and differences of opinion
so they don’t escalate into disputes, conflict and legal action.
2. At the same time, improve communications and create good relationships among
the contracting parties, thus enhancing performance.
The paper will first present the case for incorporating dispute prevention and control
principles and techniques into business relationships, emphasizing the essential importance
of having in place a process for controlling the impact of unanticipated events and problems.
It will also address the obstacles that discourage use of these principles and techniques, and
describe how those objections can be overcome.
1
James P. (Jim) Groton, LL.B, FCIArb, FCCA (Bachelor of Laws, Fellow of the Chartered Institute of
Arbitrators, Fellow of the College of Commercial Arbitrators), is an arbitrator of international
construction disputes and an advocate of adapting construction industry dispute prevention and
control principles and techniques to other industries and business relationships. He is active in the
work of the Dispute Resolution Board Foundation and dispute prevention work for the International
Institute for Conflict Prevention and Resolution. He is a retired partner of Sutherland, Asbill & Brennan
LLP, a law firm with offices in Atlanta, Georgia and many other U.S. cities. He can be contacted at
jim.groton@sablaw.com.
2
Helena Haapio, LL.M., MQ (Master of Laws, Master of Quality), works as International Contract
Counsel for Lexpert Ltd (www.lexpert.com) based in Helsinki, Finland. She supports corporate clients
in succeeding in cross-border contractual (ad)ventures, helping them use contracts to get better
business results and stay out of legal trouble. She is a member of the IACCM Advisory Council and
the founder and co-ordinator of IACCM Finland. She is actively involved in the development of the
ProActive ThinkTank and the Nordic School of Proactive Law. She also acts as arbitrator. She can be
contacted at Helena.Haapio@lexpert.com.
The paper then deals with specific ways in which contracts can be used to proactively
prevent and control problems. It begins by providing an overview of the continuum of dispute
prevention and resolution principles, and next describes individual techniques, presenting
illustrative contract language that will demonstrate how those techniques can be
incorporated into contracts.
The authors hope that this paper will increase interest and encourage empirical research into
the field of proactive dispute prevention which can lead to the development of a strong
theoretical foundation and more widespread implementation of these techniques – to the
benefit of businesses and society as a whole.
WHY INCLUDE PROCESSES FOR DISPUTE PREVENTION AND RESOLUTION IN
BUSINESS AGREEMENTS?
Every relationship carries with it the potential for disputes. Common experience has
demonstrated that problems, difficulties, differences of opinion, disagreements and disputes
can occur at any time, even in the best of families and businesses. Given this reality of the
business world, the parties to a business relationship, at the time they enter into that
relationship, should always address the subject of how they are going to handle any
problems or disputes that may arise between them. At this point they have a unique
opportunity to exercise rational control over any disagreements that may arise, by specifying
that any disagreements be processed in ways that are likely to avoid litigation, preferably by
agreeing on a dispute resolution “system” that will first seek to prevent problems and
disputes, and next establish a process for resolution of any disputes. There are many
excellent reasons for taking advantage of the opportunity:
Disadvantages of Litigation. Resolution of a business problem through litigation:
- Deprives business leaders of the opportunity to maintain control over their
disputes.
- Takes too long. It will take at least several months (and in some jurisdictions
several years) to get a civil case to trial; appeals can lengthen the process by a
year or more. This delay can create uncertainty in business planning, adversely
affect cash flow, and have other disruptive effects on the business.
- Is too expensive. It costs a lot to bring even the simplest business dispute to
trial, in lawyers’ fees, time and energy of business people, and costs of experts
and consultants.
- Lacks expertise. The resolution of business and technical disputes requires
expertise and sophistication. It is difficult to find judges with the qualifications to
resolve such issues.
- Is too public. Court filings and proceedings are matters of public record. They
are valuable sources of information for business competitors, and, if they are juicy
enough or it’s a slow news day, they can be reported in the media.
- Is too uncertain. Litigation is a very blunt instrument. It is often very difficult to
predict how a judge or appellate court will ultimately resolve a case.
- Is too disruptive of business relationships. The hostility engendered by
litigation makes it difficult for business people to continue to carry on normal
business relationships and activities with each other.
Many of these reasons apply also to most modern-day arbitrations, which have become
more and more like court litigation.
Disadvantages of postponing a decision about how to deal with disagreements until
after a problem or dispute has arisen. Deferring consideration of how disputes will be
dealt with reduces a party’s options. Once a dispute has developed, it is often difficult to get
the participants to agree on the time of day, let alone discuss rationally the optimum method
for resolving the dispute. At this point the parties are likely to have different agendas and
preferences as to how they would prefer to resolve the dispute. One party may want to
emphasize the facts and equities, or sophisticated business realities; the other side may
prefer to be in a court of law. One party may want a quick resolution; the other party may
prefer delay. One party may want to avoid publicity; the other party might prefer public
exposure of the controversy. Whenever the parties are unable to agree on the method of
dispute resolution, the only remaining dispute resolution system, by default, will be litigation.
Advantages of proactively agreeing early on a dispute processing system. Agreeing at
the very beginning of a relationship on a method for quick processing and resolution of any
future problems or disputes that may arise has many advantages:
- Responsible business managers are accustomed to controlling costs, quality
and other aspects of their business relationships. Using private dispute
prevention and resolution techniques gives them an opportunity to control
disputes as well.
- The beginning of the relationship, when there is an atmosphere of business-
like cooperation, and before any disputes have arisen, is the time when the
parties can most rationally discuss the optimum method for dealing with any
disputes.
- Including the subject of dispute prevention and resolution as an element in
the negotiations leading to the establishment of the relationship helps to define an
important aspect of the relationship. For example, if you learn that the other party
does
not want to agree to have an efficient dispute prevention and resolution
system, this knowledge can affect how you negotiate other terms of the
agreement – or whether you want to enter into the relationship at all.
- Business people often have a real fear of a foreign legal system. Exhibiting a
willingness during the negotiations to set up a rational, fair and prompt dispute
resolution system should have special relevance in an international transaction.
- Agreeing early on a method for dealing with potential problems can lead to
creative business-oriented results, be a cooperative and satisfying experience,
and is likely to help to create and preserve continuing business relationships.
- The special value of having a dispute prevention “process” already in place is
often overlooked. An existing process will absorb the shock of unexpected events
and problems. It channels them constructively, so they can be dealt with
realistically and ultimately be solved. In the absence of a process, the parties are
left to founder without direction, which can lead to confusion and chaos.
- The ready availability of a fair, efficient, trusted and quick method for
processing disputes tends to discourage game-playing, posturing, and delaying
tactics; may well encourage the parties to cooperate and deal realistically with
each other; and may result in the parties resolving the problem by themselves,
without having to resort to the dispute resolution procedure at all.
HOW TO OVERCOME RESISTANCE TO THE USE OF DISPUTE PREVENTION
MECHANISMS
Despite the acceptance of mediation and arbitration as dispute resolution alternatives to
litigation in many areas of business, there is still considerable resistance to the techniques
for preventing and controlling disputes. However, knowledgeable business professionals
should recognize and overcome the kinds of obstacles and attitudes that can discourage
parties from agreeing in advance on a system for preventing and controlling disputes. Some
of these problems are:
Not Wanting to Spoil the Euphoria. Some people may fear that addressing the subject of
dispute resolution during the early stages of a relationship is akin to suggesting to a happy
engaged couple that they should enter into a pre-nuptial agreement. However, business
should not be an emotional relationship; and ignoring the fact that problems and disputes
can routinely occur even between the nicest people is simply a triumph of hope over reality.
Traditional Resistance to Change. Given the newness of dispute prevention, many
contract and legal professionals have never before included it as a subject in their
negotiation agendas and checklists. Accordingly, there is often a built-in resistance to any
new idea. One argument for overcoming this resistance might be that preventing disputes
can save money. Another argument might be that much of the impetus for preventing
disputes comes from business people, and that contract and legal professionals would be
well advised to keep up with their colleagues and clients.
A Perception that Multi-level Dispute Resolution Slows Down the Process. Some
people may feel that specifying more than one level of dispute prevention and resolution,
such as partnering or a standing neutral or mediation before resorting to arbitration, imposes
an unnecessary and delaying process that will retard the ultimate resolution of a dispute.
However, sophisticated business and legal practitioners know that the earlier in the life of a
problem or dispute the parties address the problem and deal with it realistically, the more
likely they are to resolve it amicably; and that every dispute prevention and resolution
system should contain a final and binding “backstop” resolution method of some kind, such
as arbitration.
A Perception by One Party That It Will Benefit From an Inefficient Method of Resolving
Disputes. A party that thinks that it has – or is seeking – superior bargaining power may
think that it will benefit by denying the other party an opportunity to have a dispute resolved
promptly and efficiently. For example, a party that is obligated to pay money may, if the other
party has no ready recourse, think that it can obtain leverage simply by withholding payment.
Such a strategy ordinarily only works once, because once it is exercised, the other party
won’t be tricked again. And if such an intended strategy is revealed during contract
negotiations, the other party can increase its pricing to offset the risk that it may be deprived
of the use of its money for an extended period of time, or it may refuse to enter into the
business relationship.
Bottom Line: In short, there is no rational excuse for a responsible business not to include
in its agreements a system for processing disagreements as promptly and efficiently as
possible.
THE CONTINUUM OF DISPUTE PREVENTION, CONTROL AND RESOLUTION
TECHNIQUES
A generation ago, lawyers and some business people knew of only one basic method of
resolving disputes: court litigation. The only generally-acknowledged variation to this model
was a recognition that as a practical matter about 95% of all law suits are ultimately settled
sooner or later before trial – with “later” rather than “sooner” being the traditional norm. Only
a few industries (textiles, the diamond market, construction) have had a long tradition of
using expert industry arbitration panels to resolve disputes privately and expeditiously.
Today there are a variety of techniques which can be adapted to meet the needs of any
business relationship. New techniques are being developed every day. Most of the
techniques can readily be incorporated into contracts; other techniques can be employed in
special situations.
The next section of this paper will describe several well-developed dispute resolution tools.
These tools form a continuum or spectrum that can be illustrated by the “stair step”
sequential model (Figure 1) located on the next page, developed in the construction
industry, which lists techniques in the order in which they would normally be employed in
the life of the dispute, beginning first with the techniques that help most in preventing or
controlling disputes and offer the greatest potential for saving money and preserving
relationships. They are grouped on the step chart into four successive (and escalating)
stages of dispute resolution:
• Cooperation and Problem Prevention Stage. The highest and best form of
dispute resolution is prevention of problems and disputes. One of the best ways to
prevent disputes is to establish an atmosphere of cooperation. Establishing clear
communications, and techniques for encouraging alignment of interests and
teamwork, such as partnering and incentives for cooperation, can create such an
atmosphere, improve relationships, prevent some problems, and keep some disputes
from arising.
• Dispute Control Stage. Dealing promptly and realistically with problems,
differences of opinion and minor disagreements at the time they arise and before
they can develop into full-fledged disputes can do much to contain and control
disputes. Early negotiation, or obtaining “real time” dispute resolution assistance from
a pre-selected standing neutral, can resolve disputes at the source and can even
help in preventing disputes.
If the parties are unable to solve problems through the use of Cooperation and
Problem Prevention techniques, or Dispute Control techniques, then the process becomes
transformed from dispute “prevention” to dispute “resolution.” At this point the parties lose
some measure of control over the problem, because they will have to turn to “outsiders”
(people who have not been directly involved in the relationship) for assistance in the
resolution of the dispute. At this point the levels of hostility, cost, and time for achieving final
resolution of the dispute begin to rise significantly.
• Nonbinding Facilitated Resolution Stage. When disagreements develop
into real disputes, the parties should use structured, facilitated negotiations, assisted
by a skilled negotiator, mediator, fact-finder or evaluator, or some other method of
Alternative or Appropriate Dispute Resolution (ADR) to enable them to achieve a
mutually-acceptable resolution of most disputes, to avoid having to turn the dispute
over to an arbitrator or court for final resolution.
• Binding Resolution Stage. When all other efforts at resolution have failed, it
is necessary to have a “back stop” adjudication process in which the dispute will
ultimately be resolved by a third party – preferably in an expert, prompt, efficient and
private manner – such as arbitration.
Since the focus of this paper is on the field of proactive prevention and control of disputes, it
will not address in any detail the well-known traditional processes that are involved at the
Nonbinding Facilitated Resolution Stage or the Binding Resolution Stage. However, it is
prudent to note that any carefully-crafted dispute prevention and resolution process should
recognize that every dispute resolution system must ultimately include a binding dispute
resolution process. If the parties do not designate arbitration as their final and binding
method, then, by default, litigation becomes the final and binding dispute resolution method.
PREVENTION
• Realistic Risk
Allocation
• Incentives for
Cooperation
• Disputes Potential
Index
• Partnering
NEGOTIATION
• Direct
Negotiations
• Step
Negotiations
STANDING NEUTRAL
• Dispute Review
Board
• Standing Arbitrator
NONBINDING
RESOLUTION
• Mediation
• Minitral
• Advisory
Opinion
• Advisory
Arbitration
PRIVATE
BINDING
RESOLUTION
• Binding
Arbitration
• Private Judge
LITIGATION
• Judge / Jury /
Special Master
• Court-Annexed
Alternative
Dispute
Resolution
Prevention and
Cooperation
Stage
Dispute Control Stage
Facilitated
Resolution
Stage
Binding Resolution Stage
PREVENTION
• Realistic Risk
Allocation
• Incentives for
Cooperation
• Disputes Potential
Index
• Partnering
NEGOTIATION
• Direct
Negotiations
• Step
Negotiations
STANDING NEUTRAL
• Dispute Review
Board
• Standing Arbitrator
NONBINDING
RESOLUTION
• Mediation
• Minitral
• Advisory
Opinion
• Advisory
Arbitration
PRIVATE
BINDING
RESOLUTION
• Binding
Arbitration
• Private Judge
LITIGATION
• Judge / Jury /
Special Master
• Court-Annexed
Alternative
Dispute
Resolution
Prevention and
Cooperation
Stage
Dispute Control Stage
Facilitated
Resolution
Stage
Binding Resolution Stage
Figure 1 – Dispute Resolution Stages & Steps
2
None of these techniques is immutable, and they can all be adapted to fit the special needs
of any particular transaction. Individual techniques from two or more stages can be
combined into multi-level dispute resolution systems.
SPECIFIC TECHNIQUES AND ILLUSTRATIVE LANGUAGE
The contract planning and negotiation stage is the logical starting point for articulating
techniques that have been proactively selected by the parties to prevent, control, reduce and
resolve disputes. The existence in the contract of techniques for handling disputes, and the
parties’ knowledge that these techniques are readily available, will direct any disputes into
channels where they can be dealt with constructively; in many cases their mere availability
encourages the parties to act more forthrightly with each other and resolve their disputes
without the necessity of using the prescribed techniques.
These proactive techniques are not rigid; they can be adapted to meet the needs of the
parties, or the nature of the particular dispute. (It should be noted that the suggestions in this
paper regarding use of contract language are not intended and should not be taken as legal
advice.)
A. Proactively Promoting Good Cooperation and other Techniques to Prevent
Disputes
Realistic Allocation of Risks
One of the most powerful ways to prevent and control disputes between contracting parties
is to rationally allocate risks by assigning each potential risk of the business relationship to
the party who is best able to manage, control or insure against the particular risk.
Conversely, unrealistic shifting of risks to a party who is not equipped to handle the risk can
increase costs, sow the seeds of countless potential disputes, create distrust and
resentment, and establish adversarial relationships that can interfere with the success of the
business enterprise.
Unfortunately, this fundamental principle of good business management and dispute
prevention is not widely recognized or understood. In particular, lawyers involved in contract
negotiations for their clients who seek zealously to obtain the “best possible deal” by shifting
all possible risks to the other party can sometimes create problems of a far greater
magnitude than any temporary benefit or satisfaction gained by “winning” the “battle” of the
contract negotiations.
Realistic risk allocation promotes efficiency, lowers costs, and creates better relationships.
The result in nearly all cases will be fewer disputes and a greater chance for success of the
enterprise.
In many cases it will be obvious that certain risks logically should be assigned to a particular
party. Other risks can possibly be handled equally well by either party, and some risks may
be such that they cannot be effectively handled or even insured against by either party; the
assignment of those risks will have to be dealt with through bargaining, and the result of that
bargaining will likely be reflected in the economic terms of the deal.
In a one-time short-term transaction between two parties who never expect to do business
again with each other, it may not make a difference to anyone but the parties themselves if
the party with superior bargaining power shifts risks to the other party that the other party
can’t control. However, in any business relationship of long duration or where there are
repeated transactions, there are advantages to having a balanced relationship where neither
party is exposed to inordinate risk, and where both parties profit. In multiple-party
relationships, realistic assignments of risk are particularly important to the maintenance of
healthy relationships and control of costs. In the classic multi-party example of the
construction industry, an owner’s use of superior bargaining power to shift risks
unrealistically to another party typically creates a chain reaction of cost inflation, downstream
risk-shifting, resentment, defensive and retaliatory tactics, and misunderstandings caused by
different perceptions as to the enforceability of some risk-shifting provisions. The result is
usually adversarial relationships, disputes and claims, which could have been avoided by
intelligent sharing of risks.
Incentives to Encourage Cooperation
Where a business is contracting with a number of different organizations which have diverse
interests, and where the cooperation of all of these organizations with each other is
important to the success of a transaction or business objective, it is often helpful to structure
a system of incentives to encourage such cooperation. Well-conceived positive incentive
programs can be an effective means of aligning the goals of all of the participants, can
encourage superior performance, and discourage conflict. Such incentives can take many
forms. One example of such an incentive system is the establishment by the leader
organization in the enterprise of a bonus pool which, upon attainment of specific goals, will
be shared among all of the people with whom the leader organization contracts. Under such
a system the bonus is payable only if all of these participants as a group meet the assigned
goals; the bonus is paid either to everyone, or to no one. This device provides a powerful
incentive to the participants to work cooperatively with each other, and reduces conflicts
which can occur in a common enterprise when every participant might otherwise be
motivated solely by its limited perception of its own short-term interests, rather than the
success of the enterprise as a whole. It encourages participants to subordinate their
individual interests temporarily to the legitimate needs and success of the enterprise as a
whole, for the ultimate benefit of all project participants.
Following is an example of language establishing an incentive plan, taken from a
construction contract, where the general contractor, using funds provided by the owner of
the project, seeks to encourage cooperative behavior among the subcontractors who are
collectively performing the bulk of the on-site construction work:
BONUS POOL PLAN
The General Contractor will establish a Bonus Pool program offering every
Subcontractor a cash incentive for achieving the Project Goals outlined below.
The Project Goals are:
a. The project is completed by the Completion Date;
b. There are no unresolved claims by any subcontractor for interference
or damage by any other subcontractor or contractor; and
c. There have been no accidents which have caused more than __ work
days to be lost.
If all of the Project Goals are achieved, the General Contractor will pay to each
Subcontractor, in addition to each Subcontractor’s normal compensation, a bonus of
__% of the Subcontractor’s adjusted contract sum.
Partnering
Partnering is a team-building effort in which the parties establish cooperative working
relationships through a mutually-developed, extra-contractual strategy of commitment and
communication. It can be used for long-term relationships, or on a project-specific basis. The
relationship is based upon trust, dedication to common goals, and understanding of each
other’s individual expectations and values. The expected benefits from such a relationship
include improved efficiencies and cost effectiveness, increased opportunity for innovation,
and continual improvement of quality products and services.
When used on a project-specific basis, partnering is usually instituted at the beginning of the
relationship by holding a retreat among all personnel involved in the project who have
leadership and management responsibilities, in which the participants, assisted by an
independent facilitator, become acquainted with each other’s objectives and expectations,
recognize common aims, develop a teamwork approach, initiate open communications, and
establish nonadversarial processes for resolving potential problems.
Partnering can be initiated on an
ad hoc basis, or by the contract. It is essentially a good
faith and non-contractual process. If initiated under the contract, care should be taken to
preserve the extra-contractual nature of the process, unless the parties consciously want
certain aspects of their partnering relationship to take on the status of contractual
obligations.
A typical provision for initiating the voluntary partnering process would be as follows:
VOLUNTARY PARTNERING
The parties intend to encourage the foundation of a cohesive partnering relationship
which will be structured to draw on the strengths of each organization to identify and
achieve reciprocal goals, to accomplish the objectives of the contract for the mutual
benefit of both parties.
This partnering relationship will be bilateral, and participation will be totally voluntary.
Any cost associated with effectuating this partnering relationship will be agreed to by
both parties and will be shared equally.
To implement this partnering initiative, at the beginning of the relationship
representatives of the parties will initiate a partnering development seminar and
team-building workshop. These individuals will make arrangements to determine
attendees at the workshop, agenda of the workshop, duration, and location, and
engage an independent facilitator. Persons required to be in attendance at the
workshop will be key personnel from both organizations who are involved in
operations under the contract. Representatives of organizations not parties to the
contract may also be invited to attend as necessary or appropriate. Follow-up
workshops may be held periodically throughout the duration of the contract as agreed
by the parties.
The establishment of a partnering charter will not change the legal relationship of the
parties to the contract nor relieve any party of any of the terms of the contract.
Contractual terms that can enhance the partnering relationship
Some people, particularly in the construction industry, believe that the best partnering
relationships are founded on an explicit contractual commitment of good faith and
reasonable (or fair) dealing. The laws of many countries impose an implied obligation of
good faith and fair dealing in every contract. If the parties want to contractually confirm this
kind of relationship, they can include an explicit contractual covenant of good faith and fair
dealing, along the following lines:
The parties, with a positive commitment to honesty and integrity, agree to the
following mutual duties:
a. Each will assist in the other’s performance;
b. Each will avoid hindering the other’s performance;
c. Each will proceed to fulfill its obligations diligently;
d. Each will cooperate in the common endeavor of the contract.
B. Dispute Control Techniques
Negotiation
Negotiation is the time-honored method by which parties try to resolve disputes through
discussions and mutual agreement. Negotiation is not only a free-standing dispute resolution
technique, but it also can be a useful adjunct to every other dispute control and resolution
technique.
A variant of negotiation is the “step negotiation” procedure, a multi-tiered process that can
often be used to break a deadlock. If the individuals from each organization who are involved
in the dispute are not able to resolve a problem at their level promptly, their immediate
superiors, who are not as closely identified with the problem, are asked to confer and try to
resolve the problem; if they fail the problem is then to be passed on to higher management
in both organizations. Because of an intermediate manager’s interest in keeping messy
problems from bothering higher management, and in demonstrating to higher management
the manager’s ability to solve problems, there is a built-in incentive to resolve disputes
before they ever have to go to the highest management level.
Following is a contract clause committing the parties to good faith negotiation:
GOOD FAITH NEGOTIATION
The parties will attempt in good faith to resolve promptly any controversy or claim
arising out of or relating to this agreement by negotiation between representatives of
the parties who have authority to settle the controversy.
The following paragraphs will implement a step negotiation process:
STEP NEGOTIATIONS
If a controversy or claim should arise, the parties will attempt in good faith to resolve
any controversy or claim arising out of or relating to this agreement promptly by step
negotiations between managers and executives of the parties who have authority to
settle the controversy.
If the controversy or claim cannot be resolved promptly by the representatives of the
parties at the operational level, then the middle level managers for each party will
meet at least once and will attempt to resolve the matter. Either manager may request
the other to meet within seven days, at a mutually agreed time and place.
If the matter has not been resolved within ten days of their first meeting, the
managers shall promptly prepare and exchange memoranda stating the issues in
dispute and their position, summarizing the negotiations which have taken place and
attaching relevant documents, and shall refer the matter to senior executives, who
shall have authority to settle the dispute. The senior executives will promptly meet for
negotiations to attempt to settle the dispute.
If the matter has not been resolved within ten days from the referral of the dispute to
senior executives, either party may refer the dispute to another dispute resolution
procedure.
Standing Neutral, Standing Mediator or Standing Arbitrator
One of the most innovative and promising developments in controlling disputes between
parties who are involved in any type of long-term relationship (such as a joint venture or
construction project) is the concept of the pre-selected or standing neutral to serve the
parties as a “real time” dispute resolver throughout the course of the relationship. This
neutral, or a board of three neutrals (designated variously as a “standing neutral,” “mutual
friend,” “referee,” “dispute resolver,” or “dispute review board”) is selected mutually by the
parties early in the relationship; is briefed on the nature of the relationship; is furnished with
the basic documents describing the relationship; routinely receives periodic progress reports
as the relationship progresses; and is occasionally invited to meet with the parties simply to
get a feel for the dynamics and progress of the relationship. The standing neutral is expected
to be available on relatively short notice to make an expert recommendation to the parties to
assist them in resolving any disputes that the parties are not able to resolve themselves. It is
important to the effective working of this process that the parties be mutually involved in the
selection of the neutral, and that they have confidence in the integrity and expertise of the
neutral. Typically the neutral’s role, if called in to help resolve a dispute, is to render an
impartial nonbinding decision concerning the subject matter of the dispute. (In some
instances the role of the neutral is changed to act simply as a standing mediator to act as an
informed facilitator in negotiations between the parties.)
Although the standing neutral’s decisions are typically not binding, experience has shown
that neutrals’ decisions have generally been accepted by both parties, without any attempt to
seek relief from any other tribunal. This result is enhanced where there is a contract
requirement that in the event of any subsequent arbitration or litigation, the decisions of the
standing neutral will be admissible in evidence.
Three critical elements are essential to the success of the standing neutral technique:
1. Early mutual selection and confidence in the neutral.
2. Continuous involvement by the neutral.
3. Prompt action on any submitted disputes.
The existence of a pre-selected neutral, already familiar with the business relationship
between the parties and its progress, avoids many of the initial problems and delays that are
involved in selecting and appointing neutrals after a controversy has arisen. The ready
availability of the neutral, the speed with which he or she can render decisions, and
particularly the fact that this neutral will hear every dispute which occurs during the history of
the relationship, all provide powerful incentives to the parties to deal with each other and the
neutral in a timely and frank manner, by discouraging game-playing, dilatory tactics, and the
taking of extreme and insupportable positions. In practice, the nature of this process is such
that the mere existence of the neutral always results in minimizing – and often totally
eliminating – the number of disputes that have to be presented to the neutral. Even though
some expense is involved in the process of selecting, appointing, initially orienting, and
periodically reporting to the neutral, the costs are relatively minimal, even when the neutral is
called on to resolve disputes.
The standing neutral concept was first used in the construction industry, which has
developed standard detailed specifications for the establishment and operation of such a
process, using either a group of three neutrals called variously a “Dispute Review Board” or
a “Dispute Resolution Board,” or a single “Dispute Resolver.” This process is readily
transferable to other industries. Parties who wish to set up a standing neutral process can
refer to such sources as the International Chamber of Commerce (for ICC Dispute
Resolution R
ules and clauses, see www.iccwbo.org/court/dispute_boards/id4424/index.html;
for ICC Dispute Board Rules on Dispute Review Boards (DRBs); Dispute Adjudication
Boards (DABs); and Combined Dispute Boards (CDBs), see
www.iccwbo.org/court/dispute_boards/id4352/index.html), the Dispute Resolution Board
Foundation (www.drb.org), the American Arbitration Association (
www.adr.org), or the
standard documents of the Federation Internationale Des Ingenieurs Conseils (FIDIC)
(
www.fidic.org), and adapt the language to the specifics of the particular business
relationship or transaction.
In the construction industry the decisions of a standing neutral are typically merely advisory.
However, in certain business contexts the parties may wish to treat the standing neutral’s
decisions as binding. In this case the standing neutral becomes a standing arbitrator, and
the operative contract language, in addition to providing for the continuing nature of the
standing neutral’s assignment, should also contain appropriate language that makes the
decisions binding under the applicable arbitration statute, and reference the arbitration rules
of an established arbitration agency.
CONCLUSION
Through the proactive and preventive approach to business relationships, business leaders
and contract and project professionals can, in their contracts, simultaneously prevent and
control disputes and encourage cooperation and teamwork, leading to improved
performance.
1
Aspects of proactive management of relationships, contracts, sources of disputes and risks are reflected in a
body of practice and literature created within the framework of the Nordic School of Proactive Law (NSPL)
(
www.proactivelaw.org), and the National Center for Preventive Law (www.preventivelawyer.com). The work
of the NSPL has chiefly been carried out through periodic international conferences. The 2005 Conference,
Fusing Best Business Practices with Legal Information Management and Technology, was organized in
Stockholm, Sweden. Conference papers were published in Volume 49 of the Scandinavian Studies of Law
Series, ‘A Proactive Approach’, sisl.juridicum.su.se. The most recent conference, Commercial Contracting for
Strategic Advantage was held in Turku, Finland in June 2007. IACCM Finland was one of the organizers, and
selected papers presented at the conference will be co-published by the IACCM and Turku University of
Applied Sciences in a forthcoming book. As an outgrowth of that conference, various leaders in proactive /
preventive law, together with a number of practitioners who seek to expand the field beyond legal concerns, met
to form the ProActive ThinkTank. The mission of the ThinkTank is to provide ‘a forum for business leaders,
lawyers, academics and educators to discuss, develop and promote the proactive management of relationships,
contracts and risks, and the prevention of legal uncertainties and disputes’. The ThinkTank website
(
www.proactivethinktank.com) will provide a venue for collecting and sharing such information as best practice
tools and techniques, case studies, articles, and reports on ongoing research. Additional information on the
ProActive ThinkTank can be obtained by contacting the authors.
2
Adapted from Groton 1997, p. 7; see also Groton 2007a.
REFERENCES
Groton, J. (2007a). The “Up Front” Prevention, Control and Early Resolution of Disputes:
Dispute Prevention and Management Lessons that Businesses Can Learn from the
Construction Industry. In the Proceedings of the Conference “Commercial Contracting for
Strategic Advantage–Potentials and Prospects”, Turku, Finland, 13–16 June 2007, p. 32–44.
Groton, J. (1997) The Progressive or “Stepped” Approach to ADR: Designing Systems to
Prevent, Control and Resolve Disputes. In Cushman, R.F., Fisher, L.N., Butler, S.D. &
Myers, J.J. (Eds.): Construction Dispute Resolution Formbook, New York: John Wiley &
Sons, p. 1–33.
RESOURCES / FURTHER READING
In addition to those mentioned above, the following resources will be of interest to
researchers, business leaders and their professional advisers who wish to explore in more
depth the origins and concepts leading to the development of the techniques discussed
above, and other useful dispute containment devices.
1. Proactive Contractual Care:
Haapio, H. (2007a). An Ounce of Prevention… Contracting for Project Success and Problem
Prevention. Paper presented at the Project Management Institute (PMI) Global Congress
2007 EMEA, Budapest, Hungary, 14–16 May 2007 and at the PMI Global Congress 2007
North America, Atlanta, GA, 6–9 October 2007.
Haapio, H. (2007b). Prevention beats cure — proactive contractual care for successful
supply chains. Contracting Excellence [Online] Issue 1, October. Available at:
http://www.iaccm.com/newsletters/fullstory.php?id=338 [accessed 17 October 2007].
Haapio, H. (2006a). Business Success and Problem Prevention through Proactive
Contracting. In Wahlgren, P. & Magnusson Sjöberg, C. (Eds.): A Proactive Approach.
Scandinavian Studies in Law, Volume 49. Stockholm: Stockholm Institute for Scandinavian
Law, p. 149–194.
Haapio, H. (2006b). Contracting for Project Success and Problem Prevention. Paper
presented at the International Project Management Association (IPMA) 20th World Congress
on Project Management, Shanghai, China, 14–16 October 2006.
Wahlgren, P. & Magnusson Sjöberg, C. (Eds.) (2006). A Proactive Approach. Scandinavian
Studies in Law, Volume 49. Stockholm: Stockholm Institute for Scandinavian Law.
2. General Information on Construction Industry Dispute Prevention and Resolution:
Burton, R. A. & Wittie, P. H. (Eds.) (2002). An Ounce of Prevention. Best Practices in
Dispute Avoidance for Government Contracting. American Bar Association (ABA), Section of
Public Contract Law.
CPR Construction Disputes Committee (1991). Preventing and Resolving Construction
Disputes. New York: International Institute for Conflict Prevention and Resolution (CPR)
Gebken, R.J. (2006) Quantification of Transactional Dispute Resolution Costs for the U.S.
Construction Industry. [Online] Ph.D. Faculty of the Graduate School, University of Texas at
Austin. May 2006. Available at:
http://www.lib.utexas.edu/etd/d/2006/gebkenr19272/gebkenr19272.pdf [accessed 17
October 2007].
Gebken, R.J., Gibson, G.E. & Groton, J.P. (2005). Dispute Resolution Transactional Cost
Quantification: What Does Resolving a Dispute Really Cost? In Tommelein, I.D. (Ed):
Construction Research Congress 2005 – Broadening Perspectives. Proceedings of the
American Society of Civil Engineers (ASCE) Construction Research Congress 2005, San
Diego, CA, 5–7 April 2005. ASCE
Gibson G.E. & Gebken R.J. (2005). Decision Making, Transactional Costs and Dispute
Resolution: Is There A Better Way? Paper presented at Sloan Industry Studies Annual
Meeting, Boston, 15–16 December 2005. Available at:
http://web.mit.edu/ipc/sloan05/DisputeResolution.pdf [accessed 17 October 2007].
Groton, J. (2007b). Zero Disputes? Collaboration Lessons Learned From The Construction
Industry. Contracting Excellence [Online] Issue 2, November. (forthcoming)
Groton, J.P. (2006). Applying Dispute Prevention and Early Resolution Approaches to
Conducting Business out of China. Proceedings of the “Prevention” Workshop, Beijing,
China, 31 August 2006. Lexis Nexis, Dispute Avoidance and Resolution 2006.
3. Realistic Allocation of Risks:
Contractual Arrangements (1982, reprinted 1989). Business Roundtable Report A-7. New
York: The Business Roundtable.
Contract Risk Allocation and Cost Effectiveness (1988). Construction Industry Institute
Research Study 5-3. Austin, Texas: The Construction Industry Institute.
Impact of Various Construction Types and Clauses on Project Performance (1986).
Construction Industry Institute Research Study 5-1. Austin, Texas: The Construction Industry
Institute.
4. Predicting the Likelihood of Disputes:
Disputes Potential Index (1994). Construction Industry Institute Research Report SD-101.
Austin, Texas: The Construction Industry Institute.
Disputes Potential Index (1995). Construction Industry Institute Special Publication 23-3.
Austin, Texas: The Construction Industry Institute.
5. Incentives to Encourage Cooperation:
Incentive Plans: Design and Application Considerations (1988). Construction Industry
Institute Research Study 5-2. Austin, Texas: The Construction Industry Institute.
McGuinn, J.F. (1991). Incentive Clauses in the Construction Industry: Principles, Practices
and Pointers. Presented at American Bar Association Forum on the Construction Industry
seminar, Preventing and Solving Construction Disputes on the Job Effectively, Atlanta,
Georgia.
6. Partnering:
The Partnering Process – Its Benefits, Implementation and Measurement (1996).
Construction Industry Institute Research Report 102-11. Austin, Texas: The Construction
Industry Institute.
Partnering: A Concept for Success (1991). Washington, D.C: Associated General
Contractors of America.
7. Standing Neutrals:
Construction Dispute Review Board Manual (2004). Seattle, Washington: Dispute Resolution
Board Foundation.
Vorster, M.C. (1993). Dispute Prevention and Resolution: Alternative Dispute Resolution in
Construction with Emphasis on Dispute Review Boards. Construction Industry Institute
Source Document 95. Austin, Texas: The Construction Industry Institute.
Groton, J.P. (1993). Dispute Review Boards: "Backdoor Partnering". Proceedings of the
Construction Leadership Conference, 75 Constructor Magazine 22.
8. General Information on Design of Dispute Resolution Systems:
Brett, J.M., Goldberg, S.B. & Ury, W.L. (1994). Managing Conflict: The Strategy of Dispute
Systems Design. New York: Business Week Executive Briefing Service.
Costantino, C.A. & Merchant, C.S. (1996). Designing Conflict Management Systems. New
York: Jossey-Bass.
Standards Australia International (1999). AS 4608-1999 Guide to the prevention, handling
and resolution of disputes. Sydney: SAI. Obtainable at:
http://www.standards.com.au/catalogue/script/Details.asp?DocN=stds000024641.
Standards Australia International (2004). AS 4608-2004 Dispute management systems.
Sydney: SAI. Obtainable at:
http://www.standards.com.au/catalogue/script/Details.asp?DocN=AS0733759637AT.
UK Office of Government Commerce (2002). Dispute Resolution Guidance. March. Norwich:
Office of Government Commerce (OGC). Available at:
http://www.ogc.gov.uk/documents/cp0077.pdf [accessed 17 October 2007].