Dispute Prevention Strategies To Halt Strife Before It Starts
This article was published by Law360 on March 27, 2023.
By Ellen Waldman and Allen Waxman
Turbulence in world affairs presents unique challenges to commercial partnerships.
Russia's invasion of Ukraine and resultant sanctions have impeded the flow of goods, sparked product shortages and cost increases, and sent shudders through existing distribution networks.
Escalations in the U.S.-China trade war, tariffs and the great powers' move toward economic decoupling have similarly shaken established supply chains. Climate change and pandemic-related events create additional disruptions and uncertainty.
Instability in the business environment has led to increased disputes, clogging courts still coping with pre-pandemic backlogs. Although court closures initially dampened claims, the pace of civil filing has steadily increased over the last year. Indeed, 44% of in-house counsel surveyed in Norton Rose's 2023 Litigation Trends reported that they expected the tide of litigation to continue to rise over the next 12 months.[1]
And, of course, this adversarial battling takes place in an environment of ballooning costs. In 2022, it was estimated that for every $1 billion in revenue, corporations spent $1.7 million on legal fees and costs.[2]
In sum, there are too many disputes inflicting too much disruption to corporate purpose. Litigation is notoriously slow, costly and relationally ruinous. Even alternatives like arbitration and mediation impose costs, direct and indirect.
Wouldn't it be better if mechanisms existed to prevent disputes in the first place?
Well, they do.
For at least three decades, sophisticated parties in the construction and labor-management arenas have understood the wisdom of taking precautions to prevent conflict in business and worker relationships from escalating into disputes.
The construction arena has been particularly attuned to the destructive effects that delays caused by disputes can have on their projects. They have instituted various procedures, like dispute resolution boards, to expedite resolution and get the parties back to work.
Similarly, leading companies have demonstrated that preventative measures, such as open-door policies or ombuds programs, can be effective in reducing strife and discontent in their workforces.
These relatively small investments at the beginning of relationships can and should be expanded beyond those arenas. Increased focus should be brought to reducing misalignments and creating an environment where conflict, if it does arise, is dealt with expeditiously before intensifying and ossifying into a costly dispute.
Hard-Wired for Conflict: Cognitive Bias That Stokes Strife
Like any relationship involving human beings, business relationships can get messy.
The conditions under which joint ventures and other commercial enterprises are formed change. Personnel come and go, and the original spirit of the alliance is frequently challenged by events unforeseen and unforeseeable at the time the contract is signed. Change requires quick, sometimes instinctive response, and there is no guarantee that business partners will view each other's improvised maneuvers as optimal, or even trustworthy.
Indeed, our cognitive structures are such that we are prone to viewing our partners' actions through a skeptical lens.
Take three of the most common cognitive biases that social scientists have documented in countless observational studies: the self-serving bias, or the tendency to "conflate what is fair with what benefits oneself," as defined by economists Linda Babcock and George Loewenstein;[3] the planning fallacy, or the tendency for people to consistently underestimate both the time and costs for completing projects;[4] and the fundamental attribution error, or the tendency to attribute others' behavior to character traits while ignoring situational factors.[5]
Each one undoubtedly kept our early ancestors alive and assertive; but, as the impetus for an overly sharp email or misinterpretation of a counterparty's commercial efforts, they collectively have the potential to send a promising business deal fatally off-course.
Given the array and power of the cognitive biases that transform our everyday experience into grist for an adversarial mill, it is perhaps no surprise that over 50% of joint ventures end in failure and that business relationships are so frequently marred by strife.
Taking Dispute Prevention Seriously: Begin at the Beginning
Given the enormous damage and distraction disputing entails, it might seem odd that more attention is not paid to prevention at the very beginning of commercial relationships. But, the fact remains, we in the legal field are more accustomed to speeding to the scene of a car crash with high-tech medical equipment and surgeons in tow than working in advance to erect speed bumps and warning signs where the road winds precariously.
The first step in adopting a dispute prevention mindset is to begin focusing on the potential for conflict before tensions or misalignments have emerged. That is, counsel should view their role as surveyors, mapping the deal landscape with an eye for danger zones.
Where do falling rock or quicksand make passage hazardous? What internal or external conditions put the deal at risk? Where are each deal partner's capabilities strained?
What measures can be put in place to manage the foreseeable risk, and what mechanisms can be adopted to help the parties deal constructively with those risks that cannot yet be anticipated?
Shifting Cultures
To effectively perform the work of dispute prevention, a culture shift is necessary.
The attorney must reframe the imperative of zealous advocacy to include counseling the client on mechanisms to maximize the value of relationships established. It is not enough to fight to protect the client against every risk; instead, she must be compelled to build a relationship that is meant to endure and maximize the expected value of the deal.
A single-minded focus on extracting maximum profit for her client often puts the relationship and the deal on fragile footing. The savvy dispute prevention lawyer knows that trade-offs are necessary and educates her client accordingly.
Dispute Prevention: The Mechanisms
So, what tools does the dispute-preventing lawyer have at her disposal?
They are several, which can be grouped into four different categories: contractual mechanisms, governance and relationships, incentives and metrics, and third-party neutrals.
1. Contractual Mechanisms
Attention to the potential for conflict and its skillful management should be an integral part of the contracting process, not an afterthought. As Danny Ertel wrote in a Harvard Business review article, "Getting Past Yes: Negotiating as if Implementation Mattered," the negotiation process should be oriented not toward getting a deal closed, but toward creating a relationship that will yield value for all participants.[6]
At all times, deal negotiators should be thinking about how the process of putting the deal together will affect the partners' ability to work together going forward and whether the deal terms and conditions are capable of being successfully implemented.
This focus suggests that traditional aggressive negotiating moves such as keeping critical information close to the vest, capitalizing on the element of surprise, and working to push all anticipated risk onto one's deal partner are unlikely to result in a successful partnership and will ultimately backfire.
Rather, deal partners should share information forthrightly, talk through internal vulnerabilities or changes in the business environment that might impair capacity to meet contractual obligations, and allocate risk to the party best able to manage or insure against it.
Rather than seeking to win the negotiation, with the end goal being a document that offers advantage to one's own side at the expense of the other, deal negotiators should view the end goal as a deal that is fair and optimizes value for both sides. As a senior vice president of Procter and Gamble notes in the Ertel article, "Leaving some money on the table is OK if you realize that the most expensive deal is one that fails."[7]
Deal partners should consider memorializing their intent to give one another the benefit of the doubt, communicate openly and invest in the relationship by adopting a formal covenant of good faith and fair dealing.
Relational contracts go one step further. They include all the standard features of a traditional contract, but contain language devoted to sketching out the type of relationship the parties envision, how they intend to communicate and share information, and their larger goals for the partnership.
In addition to key performance indicators, pricing and service requirements, a relational contract includes a formal statement of intent, a jointly developed shared vision, guiding principles and a model set of behaviors that will guide the parties' interactions. The key to these contractual mechanisms is to continue to reinforce the principles enshrined in paper through relationship building and other alliance mechanisms, discussed below.
An additional contractual mechanism effective in containing conflict is a step-negotiation or escalation clause. These clauses direct those individuals most directly involved in the emerging disagreement to sit down and try to work out a reasonable solution. If those closest to the issue cannot reach agreement, their superiors — hopefully a step removed from the emotions of the conflict — then put their heads together to resolve the problem.
These clauses have built-in time frames to avoid delay and the frustrations that occur when problems are allowed to fester. Embedded in this step-negotiation structure are incentives for front-line employees to work together productively so that they can preserve their reputations as effective problem-solvers and avoid calling their higher-ups into the fray.
2. Governance and Relationships
Beyond the contracting stage, various governance measures exist that can help parties create effective communication channels, and anticipate and untangle workflow knots before they create problematic delays, shortages or costs.
Partnering is a team-building effort in which the parties take steps to intentionally establish a cooperative working relationship. Typically, key personnel from both deal partners gather at the onset of the relationship at an off-site retreat where they identify common goals and work to understand each organization's expectations and values.
Participants may choose to develop a deal overview identifying the purpose of the deal, mutual objectives, key personnel, risks and potential challenges.
Additional formal governance mechanisms may include designating individuals in comparable roles at each organization to serve as alliance managers who initiate discussions, engage in joint governance committees, and ensure a regular cadence of information exchange, operations review and discussion of emergent issues.
3. Incentives and Metrics
The thoughtful use of incentives and metrics can be used to encourage behavior that prevents disputes.
For example, each organization could decide to allocate dispute charges to the budget of the subdivision that generated the dispute. This educates the organization and key personnel in departments where conflict tends to spiral about the true costs of such disputes.
Additionally, incentives can be instituted that align interests, encourage excellence and discourage disputes.
In a dual- or multiparty transaction, bonus pools can be established to reward achievement of specified benchmarks. Importantly, the bonus can be structured so it is payable only if the participants from all organizations meet the assigned goals; the bonus is paid either to everyone or to no one.
This incentivizes all individuals to work together as a group and discourages an overly individualized or atomistic approach; it moves project participants from "what's in it for me?" to "what's in it for we?"
4. Use of Third-Party Neutrals
A third-party neutral is an outsider selected prior to the parties signing a contract who is available to assist in resolving conflicts and misalignments before they become a dispute. This individual is formally embedded into the parties' ongoing governance and will meet with the parties in real time to keep a pulse on the dynamics of the relationship.
Should the parties choose to deploy a third-party neutral, they should consider together who the right person is for this role. They might consider factors such as identifying someone who understands their business and the kind of conflicts that might arise, has the skills and experience to facilitate the parties working through their conflicts, and will be respected by both parties in this role.
This exercise of sitting down and conducting a conflict audit — thinking through where tensions might arise and what skills and experience a third-party neutral would need to resolve them — can also sensitize the parties to the potential for relational turbulence and reinforce the commitment to communicate effectively and behave collaboratively wherever possible.
Once the neutral has been identified, the parties must define what kind of relationship they want with the neutral. Do they want the neutral only to be available when needed as a standby neutral, or should they be embedded in the ongoing relationship between the parties as a standing neutral?
In either event, the parties should jointly brief the neutral on the nature, scope and purpose of the business relationship or venture. They should also determine how the neutral will be used, what authority the parties wish to vest in the neutral — for example, the authority to issue a nonbinding or binding decision to resolve any disagreements — and be prepared to equally absorb the costs and expenses of the neutral.
Conclusion
The last three years have served up a cornucopia of disruption: plague, war, storm and political turmoil.
But, to twist Shakespeare's words just a bit, the course of human affairs never did run smooth. Change and uncertainty will always be with us — and the conflict that follows in their wake.
It is past time for companies, and their counsel, to turn their attention upstream and attend to conflict before it escalates to dispute. Such a shift will require a change in culture, a reordering of priorities and the adoption of the mechanisms detailed above.
The quote "an ounce of prevention is worth a pound of cure" is attributed to the American master of the epigram, Benjamin Franklin. But the wisdom of the phrase goes back further, to the Dutch humanist Desiderius Erasmus, speaking in the 16th century.
The wisdom of investing a little in the beginning to avert cost, delay and pain later is as true today as it was 500 years ago. Perhaps it is time we listened.
Ellen Waldman is vice president of advocacy and educational outreach at the International Institute for Conflict Prevention and Resolution.
Allen Waxman is president and CEO at the International Institute for Conflict Prevention and Resolution.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
This article was published by Law360 on March 27, 2023.
[1] Norton Rose, 2023 Annual Litigation Trends Survey, (January 18, 2023) at 5.[1] Norton Rose, 2023 Annual Litigation Trends Survey, (January 18, 2023) at 5.
[2] Ibid.
[3] Linda Babcock and George Loewenstein, "Explaining Bargaining Impasse: The Role of Self-Serving Bias," 11 Journal of Economic Perspectives 109, 110 (Winter 1997).
[4] Daniel Kahneman, Thinking Fast and Slow 255 (2011).
[5] Edward E. Jones & Richard E. Nisbett, The Actor and the Observer: Divergent Perceptions of the Causes of Behavior, in Attribution: Perceiving the Causes of Behavior 79 (Edward E. Jones, David E. Kanouse, Harold H. Kelley, Richard E. Nisbett, Stuart Valins, & Bernard Weiner eds., 1971).
[6] Danny Ertel, Getting Past Yes: Negotiating as if Implementation Mattered, Harvard Business Review (2004).
[7] Quoting Tom Finn, senior Vice President of Strategic Planning and Alliances in Ertel at https://hbr.org/2004/11/getting-past-yes-negotiating-as-if-implementation-mattered.