Settlement of disputes
There is no perfect contract. Rather, each imperfect contract has to be understood and implemented. The process of understanding and implementing the contract is undertaken, in the first instance, by the parties to the contract. However, the individuals who are implementing the contract may not necessarily be the same as those who wrote it.
Thus, especially if the contract is badly written, there are risks of misinterpretation by one’s own company as to what the obligations are. If the misinterpretation is important, there are risks of possible non-performance by the organisation leading to a risk of liability. The same concerns apply for the other contracting party.
Each party reads the contract from the point of view of its experience. As that experience may differ substantially from that of the other contracting party, particularly if each is from a different country, that ‘cultural baggage’ may influence the understanding of the contract.
Selecting a dispute resolution method
There are two basic types of dispute resolution methods: adjudicative and non-adjudicative. In the adjudicative methods, there are litigation and arbitration. In the non-adjudicative, there are three general methods: expertise, mediation/conciliation and negotiation. Finally, there is a group of mixed structures somewhere between these two.
1. Adjudicative resolution methods
a. Litigation — A dispute resolution method by which a party sues another party before a state court somewhere in the world to seek relief.
b. Arbitration — A dispute resolution method by which a private tribunal — selected in accordance with the will of the parties — makes an award with regard to the disputes that have arisen between the parties under a contract. This method is elected in the contract through an arbitration clause and, very occasionally, by parties agreeing to use the method after a dispute has arisen.
2. Non-adjudicative resolution methods
a. Expertise — A dispute resolution method by which a neutral expert examines a problem that has arisen between the parties and makes recommendations, which may or may not be binding, as to how to solve the difference between the parties. The expertise may be technical, financial, legal and so on, depending on the nature of the problem. The expertise may also form part of the procedure before arbitration or may be part of a court proceeding.
b. Mediation and conciliation — Both procedures are dispute resolution methods by which a person facilitates the resolution of a dispute that has arisen between the parties. The parties will engage a mediator or a conciliator to help them resolve the dispute by clarifying the issues, facilitating the negotiation of key points to reach an amicable settlement.
The mediator uses various techniques in meetings with the parties together or separately. The mediator provides each party with the opportunity to reveal confidential information as to its real interests and needs, which the mediator can use to help design a settlement. The outcome is decided by the parties with the assistance of the mediator. Conciliation differs from mediation in that, in conciliation, the conciliator will give non-binding advices as to the likely outcome of the dispute if the parties fail to reach a settlement.
Mediation and conciliation are less adversarial than in the adjudicative setting. They allow for the possibility of altering the options available to the parties in a manner that may make it more likely that the parties continue their relationship. The parties retain total control over the process, as there is no resulting judgment.
c. Negotiation — A dispute resolution method by which parties exchange views and reach an agreement to settle disputes that have arisen in the life of the contract. Depending on the approach adopted by the parties, there are two broad types of negotiation in dispute situation:
i. In positional bargaining, a party may seek to maintain a position and through persuasion or intimidation convince the other party to accept the position.
ii. In interest-based negotiation, the focus is on determining what are the parties’ BATNA to flesh out each party’s interests and find a solution that is advantageous to both sides (WIN-WIN).
In addition, the negotiation can be unfacilitated or facilitated.
i. Unfacilitated negotiations are when the parties directly resolve the dispute with or without their legal counsel.
ii. Facilitated negotiations are when a third party (neutral party) assists in the negotiation.
Advantages and disadvantages of the resolution methods
Although considered to be the most expensive form of dispute resolution discussed, the main advantage of litigation and arbitration is that these methods lead to a final decision in the form of a judgment or an award.
The main advantage of mediation/conciliation, expertise and negotiation is that these are more informal methods of dispute resolution that may avoid the hardening of positions that occurs in litigation and arbitration. However, all of these methods typically require implicitly some willingness of the parties to negotiate with each other, while litigation and arbitration are more compulsory.
It is important to keep in mind that — for each type of dispute — some or all of the methods described above may be appropriate. The timing of their use may vary. Their use in conjunction with each other may also vary over the life of the dispute. For example, sometimes a dispute resolution board is set up during the life of the contract. These experts are regularly informed about the performance of the contract and make decisions on the disputes that arise in the course of performance. If a party is dissatisfied with these decisions, arbitration may be started within a given period of time after the decision. Otherwise, the dispute resolution board decision becomes final.
Another example of mixed dispute resolution method is ‘settlement on the courthouse stairs’ of litigation through last minute negotiation.
Similarly, in arbitration, an expert may be called by each of the parties and/or an expertise put in place by the arbitral tribunal to evaluate a particular technical problem. The results of the expertise may lead to settlement of the dispute. In fact, a large number of arbitrations are settled in this manner rather than proceeding to an arbitral award.
|Question to activity 4.4
||Suggested answer to activity 4.4