In order to increase the chances of a long-term harmonious relationship, adding a dispute resolution and prevention clause in a contract is a necessity
US President Donald Trump’s negotiation strategies and implementation techniques leave many of us baffled and cringing. Take the example of the recent renegotiation of the NAFTA agreement between the US, Mexico, and Canada. The initial agreement was agreed to and signed in late 1993. It is believed by most businesses in all three countries that NAFTA has brought benefits to most industries. Some elements like agriculture have been contentious issues especially for dairy farmers in Canada.
In late spring of 2018, the three countries started to renegotiate the agreement, under threat from President Trump that his administration would negotiate ‘only on his terms’, and if no agreement was possible then the US would impose heavy tariff barriers on products coming into the United States. This is no way for any reasonable party to resolve conflicts. Any long-term contracts whether between countries or multilateral agreements like the WTO or for that matter contracts between two or more companies can have issues that come up during the long implementation phase. None of us is smart enough to predict every possible situation that may arise. One or both parties may have underestimated the problems of possibly a new design, or issues with subcontractors. In addition, there may be issues that crop up for no fault of the parties in the contract. These get deemed as ‘Acts of God’ in many agreements.
It is quite possible that in some medium to long-term contracts, a dispute may arise. Even a minor disagreement could lead to a lawsuit. As a protracted lawsuit, especially in Indian courts, is not the best route to an effective and pleasant resolution, there are many different ways that one can traverse to improve the odds of resolving disputes quickly and amicably.
There are five basic concepts that should be considered when initially drawing up a contract. These are: a) Dispute Resolution Clause; b) Liquidated Damages; c) Dispute Prevention Clause; d) Contingent Agreement, and; e) A combination of dispute prevention; and contingent agreements.
Dispute Resolution Clause: If there is a conflict, the two parties would agree to continue to meet their contractual obligations, as some form of mediation is sought. An independent third party who is not emotionally involved with the contract, and has the parties’ best interest in mind, is ideally suited to convince the two parties to renegotiate a portion of the initial contract, taking into account new conditions that may have come up, whether they be internal or external conditionality. A mediator would, in my opinion, be likely to bring about a quicker and possibly amicable solution to the issues that helped start the dispute. Mediators try to help parties hammer out a resolution that is sustainable, voluntary, and non-binding. In some instances, there may be a need to go for formal arbitration when there are serious contractual disputes. The arbitrator listens as each side argues its case and presents relevant evidence, and then renders a binding decision. Arbitrators hand down decisions that are usually confidential and cannot be appealed.
Liquidated Damages: This is one way to resolve a contract dispute. It is not something we prefer, as such a resolution provides compensation in monetary terms, rather than goods and supplies that the receiving party would expect to get. It is essential that the initial contract document specifies the amount of monetary compensation for any possible delay in supply, or in case the contract has to be cancelled. It is possible, in some instances, to compensate for the delay caused by the change of design specifications.
Dispute Prevention: Massachusetts Institute of Technology professor Lawrence Susskind in his book Good for You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation (Public Affairs, 2014) writes that a negotiation tool known as dispute prevention can also help business partners deal with their differences more productively. Though such clauses are not yet used widely in business contracts, the construction industry has relied on dispute prevention for decades, writes Susskind. Because companies entering into construction contracts are eager to avoid delays, the project’s developer, financiers, architects, and any other interested parties typically sign an agreement in which they vow to meet and communicate regularly, monitor progress jointly, and consult with mediators to quickly resolve minor disagreements. Such carefully designed dispute-prevention systems have proven highly effective at warding off serious conflicts and delays – and can be quite useful in any long-term business relationship.
Contingent Agreement: One may want to consider a contingent agreement clause as part of the negotiations. This is useful when the two parties have different views on what the future may bring as the contract moves forward. For example, a supplier may truly believe that their design engineers will have an exact part available to manufacture using a newer, lighter, and inexpensive material. Think about Boeing and airlines expecting to fly the ‘Dreamliners’ on particular routes starting a year agreed between the supplier and the recipient airline. Susskind of MIT writes: “To add a contingent agreement to your contract, begin by having both sides write out their own scenarios of how they expect the future to unfold. Then negotiate expectations and requirements that seem appropriate to each scenario. Finally, include both the scenarios and the negotiated repercussions and rewards in your contract.” We have seen many contracts that have penalty clauses for delays. May we suggest that it is useful to cover rewards for early delivery. Did you know that the contract for the reconstruction of the Bay Bridge connecting San Francisco to the East Bay in California, after the earthquake in 1989, had such a reward clause? The main section of the bridge was completed well before the agreed time, helping the cities on both sides of the bridge, and moving commuters at a pace they were used to – a win-win-win for all stakeholders. It would be amiss if we did not add that that the construction of the bridge was delayed several times due to many politicians bickering over the design. That raised the cost from around $2 billion to over $6.4 billion. We wonder if such a reward clause was inserted between the government and the builders of the bridges over the Mandovi and Zuari rivers.
Combination of Prevention and Contingent Clauses: In a country like the United States litigations are the norm, even for small infractions. In such countries, it would be helpful to insert a clause that says that there would be a financial bonus for not litigating unnecessarily. Include a dispute resolution and prevention clause in the original agreement, as it will greatly increase the chances of a long-term harmonious relationship
