Sunday, January 17, 2010

Dispute Prevention: It's a Good Idea, Right?

I was recently asked to join a panel at the annual meeting of CPR (the international institute for conflict prevention and resolution). ( This is an organization that has worked for more than 30 years to convince law firms and in-house corporate counsel to take dispute resolution seriously. They are the ones who came up with the idea of adding a "dispute resolution clause" to all kinds of contracts so that parties don't resort to litigation at the first sign of disagreement. Our assignment was simple enough -- make the case for dispute prevention, not just appropriate dispute resolution. We were motivated by a simple cartoon showing someone peering down from the top of a very high hill to a waiting ambulance below. The ambulance driver is dash off to the hospital with the latest victim injured in a fall because no one thought to build a fence around the edge of the precipice. We were talking about building a fence to avoid disaster, not just arranging to have an ambulance ready when the inevitable occurs.

It turns out, that in the construction industry, dispute prevention has been the norm for years. With CPR's help (decades ago), that industry learned to initiate "partnering agreements." Companies entering into construction contracts may have to work together for several years to complete a project. Delay at any point during the construction of a large building can kill a project -- time is money! So, at the beginning of a project, the financial sponsor, the architect, the builder and sometimes others (like the construction union) sign an agreement promising to meet regularly (whether there's trouble or not), keep lines of communication open, monitor progress jointly, and put a standing panel of neutrals (i.e. mediators or arbitrators) in place so that small disagreements are addressed and resolved quickly before they escalate. By putting a carefully designed dispute handling "system" in place, it turns out that most disagreements or misunderstandings can actually be avoided. There are unambiguous findings from numerous studies to support this.

Why, then, are dispute prevention measures so rare in other sectors? We speculated that it might be because industry leaders just don't know about the idea of partnering agreements or standing dispute resolution panels (with very quick timetables for airing and resolving disputes). But, that seems unlikely since the same law firms and in-house counsel, trained at the same law schools, work in these other sectors. So, we explored other obstacles or barriers to using these dispute prevention techniques. Our best guess is that law firms (or lawyers in general) might be the problem. What glory is there is being the person responsible for avoiding a dispute? And, how can a legal services provider make any money if they succeed in avoiding most litigation?

I suggested that we ought to add a provision calling for a "dispute prevention bonus" to all legal services contracts. So, in fashioning a business deal, for example, the law firm involved in writing or reviewing the contract would add a provision calling for a financial bonus (set, perhaps, as a percentage of the expected value of the deal or the transaction) to be paid to the lawyers involved IF there is no litigation throughout the life of the contract. Deductions from the total might be made to cover the cost of arbitration if the standing panel needs to use it (but not for rapid-fire mediation). Imagine, all the lawyers working like crazy throughout the life of a project or a contract to be sure that parties stay in close contact, communicate effectively, smooth out their misunderstandings quickly and take the pre-agreed steps to resolve minor disagreements! I have no doubt that lawyers would become skilled in dispute avoidance if they had sufficient incentives to do so.

At the conference, we talked about the four prerequisites for dispute prevention. The first is a written dispute avoidance/dispute handling agreement that spells out appropriate step-by-step procedures. The second is a requirement that the most senior managers on both (or all) sides of a contract or a working relationship must be called in at the first sign of trouble. [This seems to motivate everyone below them to do whatever is necessary to keep things under control.] The third is the inclusion of a standing neutral (or panel of neutrals) so that the parties don't have to scramble to find someone acceptable to everyone -- and who understands their business -- when small problems arise. Finally. an explicit financial disincentive or a dispute prevention bonus may be required to keep everyone motivated.

My own take on this is that "clients" of all kinds must demand that legal service providers emphasize dispute prevention before the idea will spread as rapidly as it should.