The benefits of drawn out disputes

The incorporation of more complex dispute resolution clauses in
long-term commercial contracts enables parties not only to avoid
unnecessary litigation, but also offers the chance to resolve
technical or trivial matters without adopting a fixed legal position,
says Félix J. Montero, at Pérez-Llorca

Companies engaged in long-term
service, supply and licensing
agreements are increasingly exploring
alternative and more drawn-out
dispute resolution mechanisms to resolve
technical and legal differences, says Félix
Montero, dispute resolution partner at Pérez-
Llorca in Madrid.

'Such an approach enables companies to
continue to fulfil their commercial obligations
while also enabling them to take the time to
determine and frame what may be any issues of
real significance,' he says.

The disputes that many companies are now
seeing emerge from these types of arrangements
largely derive from contracts drafted at the start
of the decade, says Montero, and which have
therefore incorporated the lessons learnt from
the last major Spanish economic downturn in
the early 1990s.

'Companies are justifiably no longer
content for disputes over, for example, the
communication or interpretation of technical
specifications, to be decided by managers or
engineers appointed by one side or the other.
They want someone with the relevant
expertise and experience to decide specific
issues but they also want that person to be
independent.'

Many service and supply agreements
therefore now purposely enable the parties to
balance the nature of the dispute resolution
mechanisms and forums involved, he says.
'Often these types of clauses will enable
parties to appoint an independent Dispute
Review Board (DRBs) to resolve technical
issues, and then if necessary to progress to
mediation and ultimately arbitration if strongly
held legal positions remain.'

One issue that may impact on such an
approach, notes Montero, may however be
disclosure, and the ability of parties to gain
access to information held by the other side to
help support their own case.

'The non-binding nature of DRBs and of
mediation means that there may, on the face of
it, be a lack of powers to order disclosure but
often there will be confidentiality agreements in
place which can provide the requisite comfort
for parties to produce information to the DRB
or mediator which ultimately can not be used
before State Courts or an Arbitral Tribunal.'

Once the dispute has reached the
arbitration level, dispute resolution clauses
may in any event refer to accepted codes of
practice to deal with such circumstances, he
adds, such as the International Bar Association
Rules on Evidence, currently being revised .
What no party will agree to are 'go-fishing
expeditions' and in any event,
communications between lawyers and clients
will always be privileged.

Montero acknowledges that while such an
approach to complex dispute resolution
clauses, and mechanisms such as mediation,
may be common in the Anglo-Saxon
commercial world, there can be a degree of
scepticism among Latin companies, particularly
those unused to operating internationally.

'There can be a perception that such
processes are too long or too bureaucratic, and
only intended to involve expensive lawyers.
But these types of agreements are purposely
drafted to ensure that the contracting parties do
not engage in legal processes such as litigation
as soon as the first issues emerge.'

The aim instead is to encourage parties to
resolve issues in an informal way and as
amicably as possible, in order to ensure the
continuation of commercial relations, says
Montero.

'Such arrangements imply that there is a
long-term benefit to the parties involved and
to try to ensure that this remains the case,
while applying a control and framework to
resolve any recurring technical or entrenched
legal issues. The ability to stagger a dispute
often enables parties to work out any trivial
issues along the way and to concentrate
resources only on the major sticking points.'

In any event the lessons now being learnt
from disputes as a result of the current
economic downturn, and those presented by
the mechanisms contained in existing contracts,
are already informing new clauses, he adds.

'We are now looking at a third or even forth
generation of dispute resolution clauses in
complex long-term contract, and where there is
an increased emphasis on alternative dispute
resolution mechanisms. With the emphasis on
making sure that the ability of any dispute to
'infect' a commercial arrangement are always
minimised.'