Arbitration

Autumn 2011

What happens if relations break down between procurement and suppliers? Alternative dispute resolution processes can be the key to solving problems without facing court.

By Rima Evans

 

The undertaking of any contract or relationship, either on a commercial or personal basis, is rarely without risk. Honeymoon period harmony can quickly deteriorate into suspicion and mistrust at the onset of a dispute
or problem.

While many contracts and relationships between procurement and suppliers run smoothly, when they falter the language of co-operation, mutual understanding and partnership can be replaced with a degree of dissent and argument that means “parties can hardly agree on which day Christmas falls,” according to one expert.

So what are the dispute resolution solutions available to procurement when drafting a contract? Litigation is the most traditional method and is most suitable for multi-party disputes. Yet involving lawyers and going to court can be time consuming, costly and – since it is in the public domain – cause considerable damage to reputation and irreparable harm to a business relationship. Further, once the litigation process is underway, the resolution is taken out of the hands of the parties and this loss of control is likely to make a bad situation worse.

Alternative dispute resolution (ADR) processes such as mediation, arbitration, or adjudication (see panel, p49) can provide effective alternatives to court (with other added benefits) and have been well established in many arenas. 

In the UK, for example, the Lord Chancellor published a formal pledge in 2001 committing government departments and agencies to settle disputes (including in procurement contracts ) by ADR techniques, saving the state around £360m. This pledge has been renewed and extended by the current government. ADR techniques have also been promoted in reforms across the civil justice system and are encouraged among businesses and local government.

Globally, ADR is very firmly rooted, with countries such as India having along history with processes such as mediation, and other nations such asAustralia and the US continuing to lead the way in its development. Yet awareness of ADR tools and their benefits among procurement professionals remains patchy.

“People don’t fully understand dispute resolution and it’s an area of the contract that tends to get neglected,” says Paul Carter Hemlin, founding director of Contract Management Direct, which provides commercial and contract management solutions. “Yet CPOs need to be thinking about this level of detail – it’s critical. A lot of contracts still don’t set out what form of dispute resolution there will be, which makes it harder for when problems do arise, since there is suspicion on both sides, to agree on what step to take next.”

Doug Jones, president of the Chartered Institute of Arbitrators and partner at  Clayton Utz in Australia agrees. “Dispute resolution clauses are omitted more often than they should be.” He also reasons why: “Parties to a commercial transaction that is being negotiated in a bespoke way often don’t want to test fate by referring to disputes. People like to think they are not going to have disputes – and, of course, if a transaction proceeds without dispute there is no problem.”

However, he warns: “When 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.”

The overriding advantage of using ADR is that it enables both parties to preserve the commercial relationship while maintaining control of resolving the dispute. “A CPO can simply terminate the contract and sue for damages, but what they won’t have is what they need – the supply,” Aisha Nadar, international procurement and contract management specialist, and dispute resolution specialist, says.

“In any procurement lifecycle, the CPO wants to end up on time and within budget. The supplier wants to get paid. But there can be a myriad of issues that are faced every day, expectations that are misaligned, technical requirements that aren’t met, or cash flow problems. The idea is to face them in a dynamic way and move forward in the best way for both entities. What ADR allows you to do is live in this dynamic world.”

In addition, features of each process carry their own benefits.

Arbitration is particularly valuable with international contracts where parties are based in different countries, since court judgments accepted in Europe, for example, are difficult to enforce internationally.

Jones, who is also an international arbitrator, says: “In international procurement, it is very important to be able to have a form of dispute resolution that is enforceable against the other party. Arbitration awards are easily enforced all over the world under the New York Convention.”

Arbitration is also determined by someone with technical knowledge of the field and subject matter, as well a legal understanding that can offer increased reassurance for the parties involved.

Fionnuala McCredie, a barrister specialising in procurement at Keating Chambers in London, says that for international arbitration, arbitrators can be drawn from anywhere in the world and be handpicked by the parties for their experience and expertise. “With a judge in court, you simply get what you are given.”

Arbitration can also offer more flexibility than court and in theory should be speedier, more efficient and cost effective – but admittedly isn’t always so. Neverthless, the finality of the decision can also be considered advantageous.

Edward Quigg, director of Quigg Golden and procurement lawyer specialising in ADR, says: “It is harder to appeal an arbitrator’s award than a judgment of the High Court.”

Adjudication, which is frequently used by the construction industry, is hugely popular because it provides a quick answer and the resolver is likely to be a subject matter expert from the industry, such as an architect, quantity surveyor or engineer.  The Construction Act of 1996 made the option of adjudication mandatory in construction contracts. Although it can be overturned by arbitration or litigation, McCredie says few cases get beyond it. “People might not like the answer, but they will live with it. The right answer is subjugated to the need for a quick answer. In other words, the commercial parties can deal with the problem and move on.”

Again it can also be a more economical solution and minimises disruption to a long-term construction or project dispute.

Meanwhile, mediation has grown tremendously in the past 15 to 20 years as a way of cutting through disputes. It’s a cheaper, quicker way of getting to a solution and has a greater than 80 per cent settlement rate.

It’s also a method that can allow parties to reach an amicable agreement and maintain on-going relations. The focus of the process can be in the interests of the parties rather than on their legal rights alone so other factors such as commercial pressures, even personal emotions, can be taken into account.

McCredie explains: “It’s a really good thing to do, but since it is a consensual process you have to have parties entering into it in good faith. You can’t make people do mediation.”

Most ADR tools, particularly arbitration, are also confidential, which is a hugely attractive feature for companies. “The real selling point is the fact of confidentiality and retaining a degree of control,” says Carter Hemlin. “After all, businesses have trading relations and reputation to think about. It’s not just about money – you also have to think about how relationships are preserved.”

ADR’s value in building long-term relationships is key for procurement. For individual contracts, what should effective dispute resolution clauses include? First, it’s vital to ensure they take into account the reality of what the business looks and feels like and how it operates, points out David Gollancz, barrister specialising in public procurement at Keating Chambers. “A contract is not an academic exercise,” he warns. 

Ultimately, a dispute resolution clause has to fit in with the needs of the contract, which will differ greatly for different organisations.

Advice: Dispute avoidance

Investment in dispute resolution doesn’t have to be on a massive scale, according to Aisha Nadar.
For smaller contracts, a focus on dispute avoidance (as opposed to dispute resolution) measures can be hugely beneficial.

These might include partnering, early escalation or training staff in negotiation techniques.

Nadar explains that partnering can range from being very formal and structured, forming part of an actual agreement that might include having a partnering coach as well as implementing teambuilding exercises, to merely agreeing to a positive early warning approach to managing the contract.

“Early escalation gives you a means by which to identify a problem, escalate it and have management look at it before it turns into a positional situation.

“These can be in the contract clauses and developed as part of the procurement process.
“Making a whole spectrum of ADR processes available for identification, investigation and resolution of problems before they turn into disputes and disputes turn into expensive litigation
is a powerful tool.”