Arbitration vs. Litigation: resolving supply chain disputes



Between the global coronavirus disease (COVID-19) pandemic, the Suez Canal traffic jam, solar wind cybersecurity attacks and cyber breaches, supply chains have been repeatedly hit by events disruptive in recent months. Many businesses face ongoing supply chain disruptions resulting from labor shortages combined with increased consumer demand. These disruptions not only impact a company’s inventory and profits, but also damage reputation, goodwill, and create fertile ground for legal disputes that only exacerbate the damage. It is not surprising that many international arbitration institutions have reported a record number of new cases filed in the past year.

Years of supply chain management research indicates that resilience is the key to surviving supply chain disruptions. To be resilient, a business must be forward-looking, adapt, and be ready to respond quickly to unforeseen events. Technology, layoffs and planned contingencies are important tools. A robust and flexible dispute resolution process that takes advantage of all available dispute resolution mechanisms, including mediation and arbitration, is also integral to protecting supply chains.

Dispute resolution is not something that can be relegated to a single arbitration or choice of law provision in a contract. With communication at its heart, a functional framework offers multiple opportunities to identify conflicts, respond and collaborate at all levels.

There is a wide range of dispute resolution options that businesses can choose from, including negotiation, ombudsperson, mediation, conciliation, mediation-arbitration, dispute resolution advisers, commissions dispute review, neutral assessment, expert determination, arbitration and more. These techniques involve the use of a competent and neutral third party and can lead to quick, economical and efficient results and improved business relationships compared to traditional litigation.

Negotiation takes place when the parties communicate to find a solution or develop a common course of action. When a conflict is identified, the parties should have a detailed mechanism to manage and negotiate the conflict before it escalates into a legal dispute. The appropriate protocol may differ depending on the individual business relationship and cultural norms in what is likely a multi-tiered global supply chain. Company size can also dictate whether a company employs or hires a single ombudsperson rather than having an entire dispute resolution department.

If a dispute survives preliminary conflict management and informal negotiations, conciliation or mediation is the next logical step. The two techniques are similar with neutrals to facilitate communication; however, conciliators generally go further by injecting their expert opinion and proposing solutions. Both methods create an additional opportunity to communicate and help avoid the time, expense, and risk associated with becoming adversaries.

Globally negotiated settlements are more attractive than ever. More than 50 countries have signed the 2018 Singapore Mediation Convention, which creates a streamlined enforcement framework for cross-border negotiated settlement agreements. Under the convention, parties can go directly to the courts of the signatory countries according to specified standards instead of applying the agreement as a contract in accordance with each country’s internal legal process. The streamlined mechanism preserves time, costs and assurance for companies that their agreements are enforceable.

When all collaborative efforts do not result in a resolution, arbitration is the preferred endpoint. Arbitration provisions allow parties to avoid the time, costs and uncertainty associated with litigation in court, the longest and most expensive resolution option. Arbitration has many advantages over litigation for resolving supply chain disputes. For example:

1. The parties may choose the place of arbitration and the laws and procedures that will apply. In international contracts, it is essential to isolate the parties from the uncertainty of litigating in a foreign court, under foreign law.

2. The parties can choose who will determine the outcome of their dispute: panel members with a specific skill set or background rather than a jury or judge who may not appreciate or understand their industry and business interests.

3. Parties can adopt more flexibility instead of rigid court procedures. They can limit permitted discoveries and relax evidentiary requirements, which vary widely from one global jurisdiction to another. Parties can also set tighter deadlines that are not subject to judicial standards.

4. Since arbitrations are confidential, parties can maintain the confidentiality of their dispute, details of their business transactions and operations rather than making them part of a public record.

5. Since most countries have acceded to the New York Convention, an arbitration award is easily enforceable in almost any country and without years of extensive appeals.

Arbitration clauses are not universal. While standard clauses are a great place to start, custom clauses require special attention to the specific circumstances and interests of the parties, the business relationship, and the transaction (s). Careful attention to the drafting of arbitration clauses in contracts is an important factor in tailoring the process to meet the unique needs of each business.

If the parties are part of a complex supply chain, they should consider allowing consolidation of related disputes arising from multiple agreements. The London Court of International Arbitration and the International Chamber of Commerce recently amended their rules to provide for such consolidations and composite claims. The parties may also agree to allow the arbitrators to provide interim relief that may maintain the ongoing relationship while the dispute is resolved. The rules of various international arbitration institutions allow such interim measures.

Parties may also wish to provide for multi-level arbitrations, depending on the amount at stake. They may agree that a smaller dispute be resolved on an expedited basis by a single arbitrator with only document exchanges, while a larger dispute may require a three-member panel and allow some limited depositions. The American Arbitration Association and the International Chamber of Commerce have different rules that provide for such distinctions.

When deciding what arbitration will look like, parties should be careful not to imitate traditional court systems or blindly adopt court rules. Otherwise, they risk ending up with an arbitration as complex, cumbersome and more expensive than litigation before the courts.

Legal disputes take time and add to the cost of any transaction. A well-planned, multi-faceted dispute resolution framework, tailored to each party’s business needs, speeds resolutions, lowers costs, and increases a company’s resilience to supply chain disruptions.



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