EiBCM - A Model For Success

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1 Conducting Conflict Aware Business Management A User s Perspective on Dispute Boards Northrop Grumman (Northrop) is a global aerospace security company with 65,000 employees worldwide. It is involved in the sale and servicing of highly sophisticated electronic platforms, cyber security and unmanned aircraft. Northrop like other players in its industry has a business model incorporating the following characteristics: - Multi-year product development and production phase programs; - infrastructure programs with multiple parties; - technically complex international supply chain; - consortium and Joint Venture Agreements; - cross border and multinational contracts; - liquidated damages and delay penalties are the norm; - local governing law clauses usually insisted on by host States. These characteristics lead to a high risk business profile in which conflicts leading to disputes are very likely. There has for some time been recognition by global businesses, such as Northrop, that disputes: - threaten business reputation; - dilute shareholder value; - weaken business relationships with customer, contractors and suppliers; - drain both financial and human resources; - are time consuming; - rarely end in a satisfactory result. This has led global businesses to consider tools dealing with Early Issue Business Conflict Management (EIBCM). The aim of EIBCM is to identify conflict at an early stage and to employ tools to deal with it, before it mushrooms into a dispute. The overall goal of EIBCM is to minimise risk, cost, time spent and resources expended on conflicts, while preserving important business relationships. To achieve this, companies have actively engaged in conflict avoidance programs, putting in place a framework that both helps prevent disputes from arising and that deals with disputes in their earliest stages as close as possible to the point of origin. There is now a general appreciation amongst my peers in global companies that being actively dispute avers, is one of the best contributions the in house lawyer can make to the bottom line. Putting in place an effective EIBCM programme leads to: - a stronger holistic relationship with customers, suppliers, employees and partners; 1

2 - processes being utilised to ensure conflicts are resolved early on while turning away from traditional litigation methods of dispute resolution; - lower legal budgets and management of legal costs with a higher degree of efficiency and accuracy; - a better utilisation of company resources; - a more effective business management role for the in house legal function. Our traditional approach to disputes deals with addressing the core issue of the dispute itself. This only deals with the legal issue, but not the factors that gave rise to the conflict in the first place. For example a disagreement as to what a specification requires, is not in itself a legal question, but often a matter of technical interpretation. It is the ensuing action taken by the parties, each advocating their contractual rights, which leads to a legal dispute. What is required is early neutral intervention which involves addressing the actual factors giving rise to the conflict itself. In the example above, a neutral with requisite technical expertise could review the specification and give the parties an objective view of what the specification means, permitting them to get on with the project. In that case the conflict is never permitted to develop into a dispute, because an effective conflict resolution process has been put in place. What an effective EIBCM programme requires is an innovative approach to conflict avoidance. The key ingredients of conflict avoidance are: - identifying potential conflict points in a company s contracts and programmes by looking at historical data and lessons learned; - building into contracts, mechanisms to deal with these historical conflict points, which includes the use of neutrals; - early engagement with neutrals when conflict arises to bring an objective view into the relationship; - permit for an exchange of views and a venting of steam when questions arise during contract performance before developing into a conflict; - seeing relationships holistically i.e. the bigger picture beyond the contract itself including future programs, expanding relationships, sharing of economic opportunities; - provide the opportunity to explore realistic options to permit programme performance to continue. Dispute Boards (DBs) The key objective in any business venture is for the contract to continue to be performed by all parties (internal and external to the conflict), while the dispute is dealt with on the sidelines. This requires companies to move from traditional approaches of litigating disputes to an 2

3 approach requiring vision and innovation in managing the conflict itself. It requires parties to listen to needs and expectations, not merely contractual terms and conditions. Dispute Boards (DBs) are a mechanism for achieving this and an integral tool in any EIBMC programme. DBs have been used in the construction industry now for nearly 50 years. In effect there are two types of Boards that have traditionally been utilised: (a) A Dispute Review Board (DRB), which provides non-binding recommendations. (b) A Dispute Adjudication Board (DAB), which provides an interim decision, which the parties must comply with. Generally the DB is agreed to by the parties at the contracting stage and built into the contract itself. In the construction world the basic template construction contracts put out by organisations such as FIDIC, already provide for such boards. There is no reason however, why DBs should not be used in any complex project requiring a relationship to be maintained potentially over many years, for the project to be brought to fruition. One could picture much long term development, production or service support contracts falling into this category. Most collaboration and joint venture agreements have parties joining together for a common objective, but do not have an adequate fallback to litigation to deal with ongoing issues between the parties. Again a DB would be a wonderful tool for permitting the parties to deal with issues as they arise and to continue to achieve their common goals. DBs are effective because of their general simplicity and flexibility. In effect, the parties at the outset of their relationship, when they are at their most cooperative phase, build the DB into their agreement choosing the number of members, their qualification, the rules to be utilised and how to cover the cost. For smaller projects there may be a single member and for more complex projects 3 or even 5 members. Depending on the type of project the DB is required to cover, it might have as its members, an engineer, an accountant, a lawyer, an architect, a medical doctor. The choice is as varied as the projects themselves, but the objective is to have the right mixture of professionals to cover the types of issue that might arise during the project s lifetime. The strength of the DB lies in the fact that the parties have chosen to employ it, have chosen its members and are willing for it to accompany the performance of the contract through all of its stages to conclusion. Thereby the parties become intimate with the DB members, come to respect them and value the real time contribution that they make to help the project to be realised. In turn the DB members intimately understand the objectives of the project, come to know the personnel performing it, see the project along as it develops and can deal with any questions or issues as they arise through the receipt of frequent reports and attendance at site visits. 3

4 The trust and respect that is built up between the DB and the parties is fundamental to the success of such boards and has been proven over and over again. The reason is simple. Any issue that can be resolved at an early stage does not become a conflict, let alone a dispute. Both DRBs and DABs often give informal advice to the parties on a range of questions, when they arise on the project, without the need to invoke any formal procedure. This is where they have real time value as part of the project team. Where formality is needed, DRBs, that give non-binding recommendations, are usually sufficient to permit commercial parties to get on with the project, without the need for a decision. Parties accept that the recommendation of a trusted neutral is reasonable and should voluntarily be complied with. DABs of course go a step further. Where the parties are not able to agree, the DAB has the authority to issue an interim decision that the parties must comply with and permits the project to continue, leaving the actual determination of the dispute on the sidelines. In practice, few interim decisions of DABs are actually litigated, because at the end of the day once the project is completed, the will to continue fighting over an issue dissipates. The perceived advantages of DBs for virtually any kind of project are the following: - built into the contract terms; - permits parties to choose appropriate neutrals to sit on the board; - permits inclusion of subject matter experts; - allows flexibility as to how the Board is convened; - provides for a neutral mechanism to permit conflicts to be dealt with in an objective forum, while permitting performance to proceed; - cost can be anticipated and built into the project costs (unlike litigation); - overall cost of avoiding conflicts is small compared to the risk of the project failing to be delivered; - permits flexibility to consider social and cultural issues faced in the place of performance; - permits needs to be addressed rather than simply addressing legal issues; - stops minor disagreements become major conflicts. The CIArb DB Rules While there has been DB rules written for the construction industry in existence for many years, these are very much tailored for the needs of that particular group. As the use of DBs is expanding to various commercial ventures, the need for a more general set of rules was recognized by the Chartered Institute of Arbitrators (CIArb). This resulted in a set of general DB rules being promulgated for multi-industry purposes in November The CIArb Rules are extremely flexible and versatile and can be utilised by any commercial venture to provide for either a DRB or a DAB. They create an effective framework for the parties to meld to their needs and cost requirements. 4

5 In addition, CIArb is assembling a panel of neutrals with a variety of experience and professional backgrounds to serve on multi-industry DBs. A training program for those professionals who want to serve on DBs has also been instituted. This permits CIArb to provide a full range of DB services to users, which in turn will assist in its recognition and uptake. It is my belief that DBs will increasingly become part of a Company s EIBCM toolkit to help avoid and manage conflicts in many forms of commercial ventures. Where there are humans involved there will be conflict, DBs are yet another method to proactively diffuse them. Wolf von Kumberg FCIArb Assistant General Counsel Northrop Grumman Corporation 5