Techniques for Addressing and Preventing Disputes before They Arise

“Turbulence in world affairs presents unique challenges to commercial partnerships. Russia’s invasion of Ukraine and resultant sanctions have impeded the flow of goods, sparked product shortages and cost increases, and sent shudders through existing distribution networks. Escalations in the U.S.-China trade war, tariffs and the great powers’ move toward economic decoupling have similarly shaken established supply chains. Climate change and pandemic-related events create additional disruptions and uncertainty.”

Instability in the business environment has led to increased disputes, clogging courts still coping with pre-pandemic backlogs, which are further exacerbated by the additional court closures during the pandemic. Although these court closures initially stifled claim filings, the pace of civil filing has steadily increased over the last year and a half. And, of course, this adversarial battling takes place in an environment of ballooning costs. In 2022, it was estimated that for every $1 billion in revenue, corporations spent $1.7 million on legal fees and costs.

In sum, there are too many disputes inflicting too much disruption to corporate purpose. Litigation is notoriously slow, costly, and relationally ruinous, and even more streamlined alternatives like arbitration and mediation impose costs, direct and indirect. Wouldn’t it be better if mechanisms existed to prevent disputes in the first place?

Well, they do. Dispute prevention mechanisms have gained traction and adherents in the construction and labor-management sectors, and now, those mechanisms can even be deployed in the commercial sector, to great advantage.

Dispute prevention should not be confused with early dispute resolution (EDR). EDR programs, which are related to but distinct from dispute prevention, are designed to enable companies to evaluate disputes soon after they become evident. A thoughtful EDR program includes a strong early case assessment (ECA) protocol to review relevant facts and law in the dispute. ECAs help companies to assess the likelihood of liability and the range of potential damages. This review can be undertaken by in-house counsel, outside counsel, or both.

But before a company needs to turn to using mediation—and even before EDR and an honest ECA protocol come into play—a dispute prevention program can bring extraordinary value to companies. That is because, if it works, you don’t need to get to early assessment or resolution; the seeds of the conflict have been addressed.

Parties can incorporate prevention into their projects in many different ways. In any case, these efforts should mesh with the types of businesses and cultures involved.

Perhaps the most obvious approach is to introduce a “standing neutral” (or “relationship facilitator”) into the relationship. Parties should use a standing neutral in any relationship that involves a significant investment, or one of strategic importance. The neutral’s role is to ensure that the parties surface issues promptly, have a forum for addressing them, and resolve disputes efficiently.

A “standing” relationship facilitator can be designated in the contract to participate in regular, periodic reviews for the contract. The relationship facilitator has two jobs in regular periodic reviews: (1) observe and track the dynamics of the relationship and specific issues, and (2) identify topics of conflict and surface for party discussion. A party may be reluctant to highlight potential conflict, but the facilitator’s job is to make sure that folks do not turn their heads for too long.

Some arbitral institutions are further embracing and even formalizing these tools, to assist parties in developing dispute prevention mechanisms. For example, the International Institute for Conflict Prevention and Resolution (“CPR”) recently released Rules for Administered Dispute Prevention and Management Boards for Commercial Transactions. The rules are intended for parties that desire an accelerated, streamlined early dispute avoidance and mitigation process designed to result in consensual resolution of unanticipated issues and disputes, and, if unsuccessful, then the delivery of a decision within a short, specified period during the progress of a long-term commercial endeavor.

CPR also provides model clauses for parties wishing to draft dispute prevention mechanisms or to incorporate their Dispute Prevention and Management rules. Of course, parties may also draft their own agreements. Dispute prevention agreements should include several important elements. First, the parties should acknowledge the importance of maintaining a strong ongoing relationship and that open channels of communication are critical to success. Ongoing communication needs to focus on how the collaboration is working and what circumstances must be addressed to avoid serious problems. Second, parties need to designate empowered, appropriate representatives to monitor performance, oversee the business relationship, and identify any potential or current issue that could result in a disagreement—or worse.

After the early identification of a problem, if the parties are unable to resolve it following escalation to appropriately chosen senior executives and to the neutral, the parties can go through a more traditional mediation process utilizing the neutral. Often, the mere presence of the neutral dramatically increases the likelihood that the parties will avoid disagreements.

Many lawyers in various fields use dispute prevention as part of their ongoing practices, whether they call it that or not. It is fundamentally an approach to design and use processes for identifying and engaging with conflicts early to find solutions, rather than default to litigation or arbitration. Understanding the tools and opportunities for dispute prevention enables lawyers who are looking for better solutions, or some new methods, to add dispute prevention to their own tool kit in serving as a trusted advisor.