Business Disputes Part 1 Why do they happen and what are the main causes for them escalating?

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1 Business Disputes Part 1 Why do they happen and what are the main causes for them escalating? Disputes will happen. It is an inherent risk in any business. A business that is not battle ready to deal with disputes quickly, early, efficiently, fairly and without harming important and valuable relationships, is an accident just waiting to happen. Poorly managed disputes have the potential to hurt a business. This is Part 1 of a 3 Part Series covers: Part 1 - The chief causes of dispute escalation and how to remove them Part 2 -The key principles of effective dispute management Part 3 How to get the best out of your lawyer when you have a dispute Litigation may end up being unavoidable in some instances, but a well- constructed dispute management protocol is designed to minimise the risk of litigation happening. Litigation is not the same as Dispute Resolution. Litigation requires a dispute to be submitted to some judicial umpire who will ultimately decide the dispute, and the parties to the dispute will be expected to comply with that decision. Dispute Resolution implies the involvement of the parties to the dispute in some fashion to try and resolve their dispute themselves. The outcome of the dispute is something to which they each contributed. The resolution was the product of their joint endeavour. Alternative Dispute Resolution or ADR explained Alternative Dispute Resolution or ADR means a procedure or service (including strategies, techniques, approaches and options) to assist parties to resolve their dispute not involving the exercise of judicial power. I state this upfront as in my view the term ADR is often misunderstood and mistranslated in practice by many lawyers. For many lawyers ADR is confined to post-action ADR and is limited in its scope and function to simply fixing a date for mediation to take place before fixing a final trial/hearing date. Therefore, for many lawyers, ADR is something that is mainly done after litigation has been commenced, as part of standard litigation case management. This is an important observation, as it is a reflection of how many lawyers perceive their role in offering ADR to their clients who are engaged in a dispute. This is one of the chief causes of less pre-action ADR and more post-action ADR. Most disputes, and certainly most business disputes, can be, deserve to be and should be resolved before litigation is commenced. Everything points to this as being self- evident, and just a matter of common sense and good commercial sense; yet too many disputes end up in court and don t ever get a real chance to be satisfactorily resolved on sensible commercial terms in the early stage of the dispute. Pre-action ADR and Post-action ADR explained

2 ADR is and can be so much more than just pre-trial mediation. It is important to recognise that ADR exists in two spheres of operation the pre-action ADR and the post-action ADR. Post-action ADR is fully entrenched within Court Practice Rules in all jurisdictions. It is part and parcel of the litigation cycle and timeline for dealing with the dispute. Lawyers acting for each party are essentially engaged in litigation, and are making full use of the tools of litigation (pleadings, discovery, subpoenas, affidavits etc.) but fit ADR into that timeline to occur when they have substantially completed their pre-trial steps in the war of litigation, but before the court fixes the actual trial date. Interestingly, some internal research carried out by the NSW Supreme Court over a number of years in relation to court-referred and court-annexed mediation concludes that post-action mediation is now an integral component of the civil justice system in Australia. It also concluded from the data analysed that cases referred to mediation at an advanced stage of the litigation are more likely to settle than those referred at a preliminary or intermediate stage. Lawyers are required to consider when a dispute is ripe for ADR both pre-action and post-action. Many lawyers adopt the view that later is usually better. They are convinced that the time is not ripe for mediation until they have had a chance to properly investigate all the relevant facts, weigh the evidence of both parties and consider how this all fits in with the applicable law. This is of course a litigation lawyer s perspective. Litigation lawyers are primarily trained and skilled in the art of litigation, not in the science of early dispute resolution. That perspective affects the way they consider the timing and utility of mediation or other ADR processes. How most businesses want their dispute resolved Unless litigation is vital to protect some threatened interest, business people usually want their legal representatives to do all in their capacity to avoid litigation and to help them resolve their dispute using pre-action ADR. Most sensible business people don t have an agenda to litigate; rather their agenda and desire is to resolve disputes that occur, quickly, efficiently and with great care not to harm or damage important business relations and relationships. They want to maximise their time being devoted to their business and business interests. Litigation can be a major distraction and pressure on their cash flow. All lawyers have a clear duty of care to try and help their clients resolve disputes, if at all possible, without resorting to litigation. How do they do this? They do this by understanding the science of dispute resolution and implementing it in their legal practice. Commercial disputes are by and large business disputes. They include any dispute that can arise in the course of any kind of business transaction, including the sale of a business. Mostly, the people involved in a commercial/business dispute are business people. They are business owners and/or business managers. Their main focus is the success, growth and preservation of their business. This is an important point to note, because any lawyer working with business people to help them resolve a dispute must be able to combine legal knowledge and skills with an ability to see the dispute, not just through legal eyes, but through business eyes. Business people are looking to resolve their dispute on sound commercial terms. The bottom line for them is not just the strict legal position, but what makes good commercial sense to them. The bottom line is that the outcome achieved must be good for business; it must further or aid their core business objectives.

3 Business people in a dispute don t necessarily want a lawyer, barrister, solicitor, mediator or arbitrator. These are just names to signify certain qualifications and status in the legal profession. What they want and need is someone who is skilled in the art of commercial dispute management and dispute resolution. What to do/ What not to do Disputes can arise from any number of causes, but the chief ones will be allegations of breach of contract, breach of some promise or representation, a false representation, or other types of conduct said to be misleading or deceptive. As we don t live in a perfect world, we will never be able to eliminate disputes. Disputes will always happen. The causes will often be unintentional or due to some element of negligence, misunderstanding or oversight. The key to early dispute resolution is effective early dispute management. An effective early dispute management protocol will need to address CONTRACTS - Ensuring contracts contain effective dispute management and dispute resolution clauses; COMMUNICATIONS - Effective Inter party communication management; TRIAGE A triage process to identify the best dispute resolution pathway. This includes choice of ADR options, strategies, choice of ADR expert to assist parties, need for other expert assistance, choice of expert and so on; BLUEPRINT OR ROADMAP The blueprint clearly sets out the dispute management and resolution methods and strategies to be implemented together with a timeline to complete the process. Each of these can be seen as a key factor in dispute escalation that increases the risk of eventual litigation. The last three, Communications, Triage and Blueprint will be more fully discussed when I am discussing the Principles of Dispute Management. The essential equation to be mindful of is this Disputes are bound to happen, and will, but if you have an effective dispute management protocol in place most disputes can be contained, de-escalated, effectively managed and resolved early. This can save any business a great deal of valuable time and money; save business deals from being lost; save business relationships from being destroyed and keep businesses in business rather than in court. CAUSE OF DISPUTE/DISPUTE ESCALATION #1: CONTRACTS ABSENCE OF STRONG DISPUTE MANAGEMENT AND RESOLUTION CLAUSES In business contracts the parties usually have the freedom to determine precisely how they will deal with their own disputes. This is inherent in their freedom to contract as they please. This includes the freedom to draft and include dispute management and dispute resolution clauses that either limit or exclude access to the courts to decide their disputes. Most contracts include a set of dispute resolution clauses, but in my experience most of them don t stop an aggrieved party dragging the other one into court if a demand is not met by the specified deadline. Contracts drafted in this way open the door to what I call Litigation Hijack. If the contract fails to adequately control how a dispute will be managed towards final resolution, then litigation hijack may occur at any time when one party decides to stop talking and start litigating. It is a hijack if only one party wants to litigate and forces the other party into litigation. Now the party doing the hijacking may feel quite justified in doing so if the other party is dragging the chain or acting in a way that demonstrates a lack of commitment and integrity in trying to resolve the dispute via non-litigious

4 processes. That s why the courts are there and we have a constitutional right to access the courts unless we agree to contract out of that right. But hijacks also occur as part of a calculated agenda to drive a hard bargain and pressure the other party into submission. This can favour a party that is financially strong against a financially weaker party. This can lead to what is called an unlevel and unfair playing field. Equality before the law is then a matter of conjecture and speculation. It is definitely not guaranteed. The only answer to this is well drafted contracts that insert a set of dispute management and dispute resolution clauses that produce as fair and level a playing field to manage and resolve disputes as is possible to achieve. A well drafted set of clauses would include and cover Stage 1 A process and a timeline for getting each party to clearly outline and communicate his/her perspective on the dispute, on its issues and on ways to resolve it. Stage 2 A process and timeline for inter-party negotiations to take place (assisted or unassisted). Stage 3 A process and timeline to gain external assistance from a skilled dispute manager/resolver for Stage 2 if the first attempt at this was without such assistance. Stage 4 A process and timeline for engaging the services of a commercial disputes mediator with the right skill set for the dispute. Stage 5 A process and timeline for commercial arbitration if the mediation failed to totally wrap up the dispute or wholly failed. When making and negotiating the terms of a business contract the parties should be properly advised about their choice to limit access to the courts or totally exclude it by making commercial arbitration the last step in the dispute management and resolution protocol. If the contract makes it clear that the parties have elected to have any unresolved disputes determined and finally determined at arbitration under the Commercial Arbitration Act, then recent court decisions make it clear that the courts will uphold that contractual provision and will bar entry by either party to the courts, except where permitted by their contract or where a party wishes to challenge the efficacy or validity of the arbitration clause. Many business contracts contain clauses that cover Stages 1-4, in some fashion or another, but don t include Stage 5. So if mediation fails, either party may file a claim in court. Some contracts contain mediation and arbitration clauses, but make it clear that no party is barred from initiating court action to seek some urgent injunctive or declaratory relief. The weaker the set of dispute management/dispute resolution clauses are in a business contract, the greater the risk of the parties' dispute being mismanaged and ending up in court. Where you have the combination of well drafted dispute management and resolution clauses and the disputants being assisted by a person or persons who is/are well trained and skilled in the science and art of dispute management and dispute resolution, then in my opinion based on my own direct experience, the majority of commercial disputes can be fully resolved without any need to resort to litigation. Indeed, many of them can be fully resolved without any need to progress to Stage 4 or 5. CAUSE OF DISPUTE/DISPUTE ESCALATION #2: POOR MANAGEMENT OF INTER-PARTY COMMUNICATIONS

5 A key to success with early dispute resolution is the effective management of inter-party communications. A chief aim of an expert dispute resolver is to quickly and skilfully contain and de-escalate the dispute and then move it onto a smooth and seamless dispute management pathway that will lead to early resolution with the least stress and cost to the participants. This includes safeguarding important business relationships that are often fatally damaged during litigation. Deterioration in inter-party communications once a dispute arises is a primary cause of dispute escalation. This is often the trigger that causes one of the parties to launch legal proceedings in court. CAUSE OF DISPUTE ESCALATION #3: LACK OF SKILFULL DISPUTE TRIAGE AT THE FRONT END Triage is the process applied to a dispute, as early as possible, to understand the nature and complexities of the dispute and the commercial needs and wants of the disputants and to assess and evaluate the best options to manage and resolve the dispute. This is where lawyers must go beyond just seeing the dispute through legal eyes, and ensure that the approach taken fits the commercial realities and commercial needs of their client. There is not much point in pursuing a course that might be justified on a purely legal analysis if it does not produce an outcome that is commercially sensible and works to advance the parties commercial interests. CAUSE OF DISPUTE ESCALATION #4: NO BLUEPRINT OR ROADMAP PROVIDING THE PATHWAY TO EFFECTIVE MANAGEMENT AND EARLY RESOLUTION A dispute management and dispute resolution blueprint is the result of conducting an effective triage process. Naturally, the best blueprint is the one that is the product of both parties working with a skilled and experienced dispute resolver or resolvers. If each party has his or her own lawyer, then it will come down to how skilled each of those lawyers is in the art of early dispute management and dispute resolution. If they are both skilled in this area then they can work cooperatively to conduct the triage and come up with the best possible blueprint. But if they both lack the skills, or just one of them does, it is unlikely that any triage will take place and hence, unlikely that they will come up with any agreed blueprint. It is more likely that they will disagree on the steps to be taken and this disagreement will operate to escalate the dispute and head it towards litigation unless one party decides to capitulate or give way simply to avoid the threat of litigation. Effective triage is designed to contain and de-escalate the dispute and move it towards early resolution. The triage process comprises these steps Fully understanding the dispute and its causes Fully understanding the parties involved in the dispute, their personalities, their personal perspectives concerning the dispute, and what each wants to happen to resolve the dispute Designing a dispute management and dispute resolution process and pathway that fits the dispute and the people involved in it Allocating the dispute to the right person or persons to facilitate and guide the dispute management and dispute resolution process Source: Christopher J Whitelaw, Barrister, Mediator and Commercial Dispute Resolver, Commercial Disputes Management Centre

6 Related papers Business Disputes Part 2 Why do they happen and what are the main causes for them escalating? Business Disputes Part 3 The Role of Lawyers Commercial Disputes Management Centre Chris Whitelaw, Barrister, Mediator and Commercial Dispute Resolver, specialises in the use of early, dynamic, and versatile dispute and resolution methods and strategies. Chris specialises in helping businesses minimise the frequency of disputes, contain and de-escalate them quickly, manage them efficiently and strategically, in a way that avoids erosion of productive time, the incurring of substantial legal fees and the unnecessary loss and destruction of important commercial relationships. If you would like to gain further insight into early ADR and its inherent benefits as opposed to the litigious mindset and litigation model for resolving disputes, please visit This is a blog set up exclusively to explore and explain the considerable benefits of ADR. Commercial Disputes Management Centre 2nd Floor, Longueville Rd Lane Cove PO Box 80 Lane Cove 1595 DX Lane Cove Ph: Mobile: Skype: chris_whitelaw Blog: