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Multi-Step Dispute Resolution Clauses: 7 Reasons They Work

From John DeGroote’s Settlement Perspectives

How Many Steps Until Litigation?

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.

A Definition for the Multi-Step Dispute Resolution Clause

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.

Why Does Tiered Dispute Resolution Work?

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:

  1. The Threat of the Process May Help: Managers may prefer to avoid the supervisor intervention required by an executive escalation process, and this threat motivates line managers to “persist until they find a solution themselves, rather than having to admit defeat and passing the problem up the line,” as described more fully in Dispute Resolution Provisions in Commercial Contracts from London’s Michael Evans
  2. New People Bring New Perspectives: New people bring new perspectives to a problem, and that’s rarely a bad thing. As law firm Smith Gambrell points out in a broad article about dispute resolution on its website, bringing in people who have no direct stake in the controversy is even more promising. And as the ABA reminds us, having people actually deal person to person outside the litigation context can’t hurt, either.
  3. Executives Can Put the Dispute in Context: Front-line managers are often focused on profit and loss metrics for their individual areas. Uninvolved executives can work to settle the dispute in the context of the overall relationship — applying a simple “cost – benefit analysis of continuing the dispute or resolving it,” according to Frederick R. Fucci in his well-written and helpful Getting Transactional Lawyers Thinking About Dispute Resolution.
  4. Preparing for the Process Is Beneficial: I am a longtime believer in early case assessments because you can’t know how to resolve a problem until you know how much it’s worth to everyone involved. The process required by a tiered dispute resolution clause can help accomplish just that.
  5. Acceptance Time Almost Always Helps: I have written about acceptance time before. Escalation clauses force the parties into a process that takes time — time in which they can become accustomed to a compromise.
  6. Deadlines Drive Action: Without a predefined schedule you never know when you’ll hear from the other side, or if you will at all. A multi-step dispute resolution provision — backed by a potential claim for breach if it’s not followed — provides clear deadlines that keep everyone focused and the process moving.
  7. More Early Opportunities Drive More Settlements: More early settlement opportunities can mean more early settlements — an important point Sydney area lawyer Dolone Chakravarti makes in Handling potentially complex disputes: Multi-tiered dispute resolution clauses.

While there may be more reasons that multi-step dispute resolution clauses work, the 7 listed above should give you a good start.

Executive Escalation Clauses: The Time Is Now

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.

                        author

John DeGroote

John serves as a mediator and arbitrator in complex business, technology, and intellectual property matters involving parties and interests around the country and beyond — often before litigation is filed. Prior to his service as a mediator and arbitrator, John served as the lead settlement negotiator in hundreds of cases,… MORE >

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