Escalation as a Process for Dispute Resolution

Anticipating disputes and providing a method to resolve them is one of the critical components of a well-drafted commercial contract.  Absent contractual provisions dealing with dispute resolution, disputes or claims that the parties cannot resolve between themselves usually end up in litigation, which is typically lengthly, disruptive and expensive.   As well, if all of the parties and the subject matter of the contract are not in the same legal jurisdiction, there can be another dispute concerning which court and which laws will be appropriate to hear and decide the case.

One commonly used model provides that dispute resolution is to take an escalator approach.  A typical escalation procedure involves first an exchange of correspondence ("claim - response") followed by a mandatory meeting of project managers or other representatives of the parties having some authority to resolve the dispute.  If the first level meeting does not result in a resolution, the dispute is escalated to more senior persons on behalf of both parties, which is often a steering committee or project sponsor, depending on the size of the project.  If that step proves unsuccessful, the parties can invoke a formal mediation process using the services of an independent mediator.  Finally, if mediation fails, the parties must refer the dispute either to an independent arbitrator or a court for a final decision, usually within a specified period of time.

Arbitrations and arbitration clauses are discussed more fully in our Legal Note "Arbitration Clauses in Commercial Contracts".  Suffice it to say that an arbitration clause is, at heart, simply an agreement to refrain from suing in court and to refer the matter to an arbitrator instead.  Such a clause removes any uncertainty surrounding the place and applicable law of any hearing of the dispute and brings into play the normally shorter and less expensive arbitration process to render a final and legally binding decision.

Whether the final step in escalation is an arbitrator or a court, the escalation process and the mandatory discussion of the parties' respective positions that take place before the final step is reached often leads to a mutually acceptable resolution that permits the commercial relationship to continue.  Keeping the project alive despite the dispute between the parties is often desirable and makes economic sense for both parties unless one party is, in fact, better off by terminating the contract and taking their chances in litigation. 

Even if there is no resolution prior to referring the case to a court or abitrator, going through the process tends to help define the matters in dispute so that the arbitration or legal proceedings can proceed promptly, be more efficient and less expensive.

The comments in this article are intended as general information only and are not to be relied on as legal advice or an opinion applicable to your particular situation.   For further information, please contact Bruce Farrend at Farrend Law.