Drafting Dispute Management Clauses for Commercial Contracts

Article by F. Peter Phillips

In his article published in The Practical Lawyer, F. Peter Phillips starts with the observation that there exists widespread corporate dissatisfaction with alternative dispute management procedures. He states that mediation is viewed as little more than “treading water” and arbitration as “prejudiced” and “out of control.” Phillips contends, however, that rather than indicative of problems endemic in the system, corporate gripes about ADR are rooted in the failure of the corporations themselves to adequately address the processes that will control dispute management in commercial contracts. He observes that arbitration and mediation are always (or almost always with regard to mediation) created by contract and thus controlled and directed by the contracting parties. As such, he argues, that parties complaining of a failed process have only themselves to blame. With this basic principle in mind, Phillips seeks to provide useful guidance for the drafting of alternative dispute resolution provisions in contracts.

Phillips begins by laying out two basic premises upon which his advice rests: The first, he writes, is that there are no perfect contracts; unforeseen contingencies will inevitably arise that will affect substantive aspects of an agreement. This being the case, he suggests that “it is incumbent upon the drafters to devise processes for the management and resolution of unknown and unknowable contingencies.”

Phillips’ second premise flows from the first: dispute resolution provisions integrated into the contract must be capable of protecting the value of the deal. The methodology Phillips recommends to achieve this end is simple, “[i]dentify the value that the client seeks from the venture, assume a risk of nonperformance from some unidentified cause, and devise methods to manage that eventuality designed to preserve, to the extent possible, that value.” Phillips goes on to suggest a myriad of questions a party should be mindful of when drafting a dispute resolution clause of a contract, including references to rights of performance, payment and judicial access. Ultimately, he states that meticulous attention to detail – with the presumption that contract disputes will occur – is the first in creating dispute management processes that protect the client and the deal as a whole. The next step, Phillips argues, is for the drafter to negotiate and write the clauses with care and competency.

Prior to undertaking that step, however, Phillips emphasizes the importance of two threshold strategic principles. The first is the importance of determining if the contract is cross-border. He states a “cross-border” contract is one where the counterparties are residents of different countries (or, alternatively, performance is to take place outside the host country, payment is to be received in a different currency and other similar distinctions). Phillips argues the cross-border distinction is an important one, stating that questions concerning “[t]he selection of neutrals, the rules chosen for the ADR process, the reliability and integrity of the enforcing courts, the cultural predispositions of the parties and their legal representatives, the restrictions on civil courts’ powers compared with those in common law countries, [and] the practicality of enforcing a judicial judgment…” arise distinctly under such agreements. He goes on to caution that, while he will place no particular emphasis on international dispute resolution, the contract drafter must be aware that it is an entirely different subject with unique challenges.

The other threshold strategic principle is front-loading dispute resolution resources. “Front-loading,” according to Phillips, is a process by which consensual ADR processes (such as negotiation or mediation) are exhausted before referring the dispute to adjudication (like an arbitration or trial). This because, as Phillips argues, the consensual processes remain in control of the parties, tend to produce more commercially rational results and carry lower costs.

With these principles established, Phillips goes on to offer a list of fundamental questions that each party should consider while drafting a dispute resolution provision to ensure it is up to the task. These include questions pertaining to notice, scope, time periods, location, governing rules, confidentiality and continuing performance among others.

Phillips also suggests referencing third party resources on ADR contract drafting such as the book Drafting Dispute Resolution Clauses, by Kathleen M. Scanlon (Helena Tavares Erickson, ed.) or the online publication produced by the American Arbitration Association of the same title available here. Though, in Phillips’ opinion, a sophisticated drafter may still seek to enhance these example dispute settlement clauses using the methodology he outlines, he recognizes that these model agreements address a number of essential aspects of such provisions.

In his concluding remarks, Phillips states that contract disputes can and should be anticipated, managed and controlled through thoughtful drafting. With proper foresight and attention paid at inception, a competently negotiated and drafted dispute management procedure will almost certainly improve an otherwise imperfect commercial relationship.

F. Peter Phillips, Drafting Dispute Management Clauses for Commercial Contracts, can be found here.