From John DeGroote’s Settlement Perspectives
As we have discussed before, the best way to spend less on litigation is to have less litigation. Yes, sometimes it is better to litigate, and yes, settlement talks are hollow if you can’t walk away from the negotiation table, but most clients prefer to avoid litigation when they can. So how do you accomplish that? The multi-step dispute resolution clause is a good start.
Back in my days as outside counsel I handled a major dispute for a Fortune 500 IT services firm involving one of its larger clients, and I got plenty of time to think about how, and why, tiered dispute resolution clauses work. As soon as I moved in-house, I added these clauses to KPMG Consulting’s standard contracts, and the results were outstanding — we litigated with our clients less and got back to business sooner. This post will give you a few reasons why you might want to include a multi-step dispute resolution clause in your next major contract.
The multi-step dispute resolution clause, sometimes referred to as an “executive escalation clause,” an “escalating levels of management clause,” or a “tiered dispute resolution clause,” is often discussed but not often defined. I define it as:
A multi-step dispute resolution clause is a contractual provision that requires the parties to an agreement to escalate a dispute through varying levels of management or other processes, such as mediation, using agreed-upon procedures before litigation or arbitration may proceed.
D. Jason File’s helpful article on these clauses picks up from there:
These clauses typically prescribe tiered procedures in the event of a dispute. Such procedures often begin with the notification and description of a dispute by the aggrieved party followed by a period of consultation, negotiation and/or mediation. In the event that the parties cannot agree on a way to resolve the dispute, in whole or in part, multi-step dispute resolution clauses typically provide for litigation, or, more commonly, arbitration under specified rules.
There’s no doubt that executive escalation is an efficient way to resolve disputes. My longtime friend Colleen Vossler, managing partner at a Virginia technology, licensing and outsourcing boutique, says it best:
In order for the business partners in a deal to continue having a successful relationship, the parties must quickly, efficiently and amicably resolve disputes that arise, particularly in long-term or high-dollar value contracts. The parties can promote a successful relationship when negotiating the contract by including a tiered dispute resolution clause. This vehicle – which adds new people and applies a prenegotiated process to the problem – can help to get important disputes resolved in a cost effective (and hopefully less emotional) way.
And Colleen is right. There are more than a few reasons these clauses work:
While there may be more reasons that multi-step dispute resolution clauses work, the 7 listed above should give you a good start.
I’ll end where I began — the best way to spend less on litigation is to have less litigation. There’s no question that a multi-step dispute resolution clause may help you resolve your long-term outsourcing dispute. In fact, I’ll bet you can think about other places you can pre-negotiate a timetable for mediation, or at least an adult discussion, before someone files suit. You’ll be glad you did.
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