The Multi-Step Dispute Resolution Clause: A Few Reasons Why Clients Like Them

From John DeGroote’s Settlement Perspectives

Last week we defined multi-step dispute resolution clauses and explored why a dispute resolution framework, negotiated before the contract is signed, can help businesses avoid litigation in many cases. This post will give you a few more reasons why your client might want a multi-step dispute resolution clause next time — even if a dispute seems unlikely.

To better understand why I spoke with my longtime transaction counsel Colleen Vossler last week, and she made her clients’ case clearly:

In my experience many clients with long-term contracts understand the intrinsic value of creating, at the outset of the relationship, a roadmap to follow when disputes arise. Importantly, the client shares the same roadmap with the other party – rather than creating separate roadmaps when the dispute is upon them. Clients who have experienced conflicts in long-term contracts, where the preservation of the relationship may have more value than in a short-term contract, often view these clauses as an insurance policy for when a dispute arises.

The “roadmap” provided by a multi-step dispute resolution clause (also called a “multi-tiered dispute resolution clause” or an “executive escalation clause” or an “escalating levels of management clause”) can give clients comfort. In response to my last post on these clauses, a nonlawyer business executive reached out to remind me how valuable it can be to have a pre-negotiated way to stop “the letter writing and ask for a visit with all key parties involved.” When clients speak, it pays to listen.

Why Your Client May Want an Executive Escalation Clause

Here are a few reasons, in no particular order, why your client may want an executive escalation clause next time:

• They Eliminate an Appearance of Weakness. Why I don’t know, but clients (and their lawyers) are often afraid that proposing settlement talks is a sign of weakness. A contract that requires these talks when a dispute later arises eliminates this concern.
• They Can Require Confidentiality. Most disputes — and the discovery information your clients exchange — can remain confidential, if your contract provides for it. Even if trade secrets aren’t at issue, most commercial clients I know prefer the comfort of pre-negotiated confidentiality.
• They Confirm What Kind of Deal This Is. Inserting a tiered dispute resolution clause into the contract negotiations confirms that it’s a cooperative deal. You can’t think of every contingency in many contracts. The other side’s reaction to your tiered dispute resolution clause will give you insight into just how cooperative they really are.
• They Create a Safety Valve. As they negotiate, companies without the resources for a protracted legal fight know they’ll have one last clear chance to avoid litigation with a multi-tiered dispute resolution clause in the contract.
• They Allow for Creativity. Kathleen M. Scanlon and Harpreet K. Mann tell us in CPR’s September 2002 issue of Alternatives (membership required) that this kind of clause “provides the parties with an opportunity to develop creative, business-oriented solutions” to their commercial problems. The parties can use a tiered dispute resolution clause to require the involvement of neutral executives, arbitration in a mutually inconvenient town, or — as Anne Shuttee, a Dallas mediator and former Senior Litigation Counsel to HP and EDS advocates — cutting edge techniques like the use of collaborative law to resolve the dispute.
• They Can Preserve the Relationship. With a tiered dispute resolution clause, you know you’ll have a chance both to preserve the relationship and to avoid the dispute. You’ll get a chance to explain what happened, work through protocols to avoid a similar problem in the future, and move on with the relationship — a better result for all involved.
• They Promote Efficiency. Litigation or arbitration avoided means lower legal fees and an increased focus on the business — and clients always like that.
• They Work. We said it in our last post on tiered dispute resolution clauses, and it’s still true. Russ Bleemer and Erica Jaffe summarized it well in the January 2010 issue of Alternatives (CPR membership required) as they described a tiered dispute resolution program involving commercial insurance claims: “The mere presence of a stepped resolution facility . . . has policyholders and insurance adjusters talking more, talking earlier, and getting the claims settled.”

With these perspectives on why clients like them and last week’s 7 reasons they work, you have plenty of incentive to give a multi-step dispute resolution clause a try in your next commercial contract. You’ll be glad you did.

                       

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 >