By CAMERON FORD - Corporate Counsel, Rio Tinto
I am sometimes bemused when I read experts’ explanations of the reasons commercial parties choose a particular dispute resolution method. The reasons are eminently sensible and reflect the various merits and demerits of each method, but they rarely match my experience of the real reasons behind the method in the contract. As Mr Spock might say, "it’s life Jim, but not as we know it". They rehearse the issues we know well of enforcement, confidentiality, flexibility, time, cost and so on, but they make three assumptions which are not always correct in my experience. They assume that a choice is made for each individual contract, that the choice is made by the parties acting as one, and that the choice is fully informed. Experience suggests that rarely do these three facts coalesce in the one contract.
My points are that:
• there is a contracts iceberg, with the vast majority of contracts never being seen by external counsel;
• most contracts are based on templates designed for standardisation across considerably different situations, with the standard dispute resolution method usually not being adapted for each contract;
• parties do not always consciously, deliberately, willingly both prefer the dispute resolution method which materialises in the contract.
I do not wish to sound trenchant in expressing these views which are only my own observations having spent a handful of years on the transactional side after a few decades in dispute resolution. Others may have discerned entirely different reasons parties choose a particular way to resolve their disputes, and it would be interesting to hear other experiences.
The contracts iceberg
It would not be surprising to hear that most commercial contracts are never seen by external lawyers. Like icebergs, at least 90% of contracts are below the surface, being dealt with exclusively in-house. In fact, consensus from a small sample is that it is closer to 99% that go unseen. Some of these contract are finalised by lawyers; others by commercial people or contract managers. Many companies allow contracts up to a certain value or risk profile to be negotiated and finalised by non-lawyers. Contracts are made on the company’s or the counterparty’s template, with it rarely being necessary to draft a bespoke agreement. SMEs with no or very busy in-house counsel might rely more heavily on external counsel for drafting contracts or advice on dispute resolution clauses, but I doubt those numbers would raise the iceberg significantly higher in the water.
As a result, dispute resolution clauses in templates are frequently not changed. Lawyers or non-lawyers documenting the transaction can be wary of altering the boilerplate, particularly when their background is not in disputes. Naturally most transactional in-house lawyers have a transactional background.
The 10% or less of contracts drafted by external counsel might have more attention paid to the dispute resolution provisions, but even then those agreements will mostly be drafted from some existing agreement and the dispute resolution clauses may not be changed. As one transactional counsel said, the feeling can be that the contract is strong enough to deal with most likely eventualities, making the dispute resolution provision less relevant or worthy of much attention.
Choices not made for each contract
Contracts start out in one of two forms – as a template or as a bespoke agreement. Templates are designed and used for a multitude of situations. Standardisation is the goal. One set of general conditions is developed for insertion in different types of contracts. Even if a few versions of the general conditions are created for different products, countries or counterparties, very often the dispute resolution clause will be the same across all versions. Templates are usually drafted and refreshed in batches, with little differentiation in the dispute resolution process being made in the various versions.
The result is that the preferred dispute resolution method of the original drafter often remains unchanged through later iterations. And when a contract is being assembled and the standard general conditions are inserted, the dispute resolution clauses are often not changed for that particular contract. Sometimes they are, if one party is interested in disputes and is able to energise and educate the other on a different method. That task may encounter resistance from the disinterested party who can feel that the other is vying for some secret advantage or leading them into unknown and therefore dangerous territory.
It probably does not help that most dispute resolution and governing law clauses are towards the end of the contract among the eye-glazing “general” or “miscellaneous” provisions of amendment, waiver, notices and so on. This has the twofold effect of indicating that they are less important than other provisions and of ensuring that they arise for discussion at the end of the negotiation process, either at midnight or after a few days. Negotiators can suffer the “get home-itis” syndrome said to affect pilots, just wanting to get home and being prepared to take more than the usual risks.
Parties not acting as one
The assertion that parties “choose” a particular dispute resolution mechanism assumes that it is the joint choice, with both parties preferring the chosen mechanism. Often it is a compromise rather than a preference; frequently one party will be better informed than the other or both will be uninformed as to the appropriate dispute resolution method. The only time it can be truly said that the chosen method is the preferred choice of both parties is where the solution is obvious, such as the domestic courts for a purely domestic contract in a developed country, or arbitration for transnational contracts across developing countries and enforcement is an issue. For many of the contacts between those extremes, very often it will be a case of one party acquiescing in the choice of the other because it does not care or know better, or the parties compromising on the method and place of resolution, or neither party knowing which is best and simply following the template, others anecdotes or their own instinct.
Compromises can occur either within the dispute resolution provisions, with methods, institutes, seats and venues being traded off against each other, or between those provisions and other commercial provisions in the contract. It can happen that a party surrenders its preference for arbitration in exchange for some unrelated commercial advantage, simply as a quid pro quo.
War stories of other in-house counsel can play a large part in selection of dispute resolution method. A number of times I have had counterparts express a strong preference for either litigation or arbitration because of horror stories they have heard from colleagues about the other process. Or they themselves may have had one bad experience and have determined not to submit again to that method. One such instance was of a General Counsel enduring months of idleness while a chairman was found for a tribunal and then seeing the arbitrator appointed by the opponent give every indication he was favouring his appointing party. That General Counsel decided to remove arbitration from all contracts unless unavoidable and to negotiate away from it wherever possible. This one experience affected not only his choice of dispute resolution method but that all of those in the company and probably some to whom he relates the anecdote.
Various helpful surveys indicate companies employ a much more scientific approach to selection of arbitration or litigation but I wonder sometimes if this reflects the conscious decisions of parties at the time of contracting or the views of counsel undertaking the survey.
Summary
Templates, individual experience, anecdote and even instinct play a significant part in selection of arbitration or litigation as a contractual dispute resolution method. Even the word “selection” is something of a misnomer, implying a conscious, deliberate choice of a preferred method. Those negotiating contracts are often unfamiliar or uncomfortable with dispute resolution; commercial compromise infects the dispute resolution clauses as well as the more substantive provisions of the contract; and parties have unequal knowledge of suitable dispute resolution procedures.