By James Kosa, Deeth Williams Wall LLP
It is commonplace these days for parties to an IT contract to consider alternative dispute resolution (mediation or arbitration) as a means for resolving disputes. I have written on the topic of mediation in outsourcings, and concluded that it was useful in some outsourcings, but not all. At an engaging lunchtime seminar I attended the other day on ethics and professionalism issues arising in IT law, I had my thinking on this topic jolted by a turn in the discussion towards the use of subject matter experts by the court. One of the speakers, Don Johnston, pointed out that courts had long used independent experts in admiralty cases to understand the potentially complex fact scenarios arising at sea, and wondered what was so objectionable about courts using experts in IT cases, where the technology would be at least as murky. It got me thinking that the problem with cookie-cutter dispute resolution clauses that often appear in IT contracts is that they attempt to apply the same process to every dispute.
Disputes arising from IT contracts can be broken down in a number of different ways. One way to distinguish disputes is by the remedy sought by the parties. In my view, a dispute should be handled differently if the parties are looking for injunctive relief or specific performance than if the parties are merely seeking payment or some other remedy. A dispute resolution process should be flexible enough to allow the parties to select a method of dispute resolution that will provide them with the remedy they seek. To avoid additional friction when a dispute arises, I would suggest that the parties turn their minds to this issue when preparing the agreement, and carve out from a general dispute resolution clause and the convention escalation procedures any disputes that require a special remedy. Some agreements will carve out intellectual property related disputes from a mandatory ADR clause, allowing the parties to seek emergency injunctive relief. It would also be appropriate to provide such a carve-out for disputes involving a breach of confidence for the same reason. Another dispute that is often treated differently is a dispute regarding whether a payment is owed. Since the only issue is such a dispute is whether and how much money is owed from one party to the other, a payment dispute may be resolved while the relationship continues and work proceeds. This works best when the payment dispute resolution process is quick and binding, to avoid the possibility of abuse by the contract payor.
Another way to divide up disputes arising from IT contracts is by the nature of the dispute itself. Some disputes are at their core about contractual interpretation, some are about determining standards of care, and some are about interpreting technical specifications. Different expertise is required of an adjudicator to address the concerns of each type of dispute. Many of these disputes center around a critical finding of fact or law, and not with an assessment of damages or any requirement for a court order. Once this critical finding is made, the parties can sort out the rest by themselves.
Here is a crude breakdown of dispute type correlated with expertise required of a neutral or adjudicator. I have also proposed some alternative dispute mechanisms designed to bring objectivity to the process without limiting the parties’ ultimate rights and remedies at law.
|Nature of dispute:
||Expertise required in neutral adjudicator ||Potential implementation
||Limitations of process
||A legal background, which is useful to apply legal construction to contractual terms in a manner that would be similar to a court. The parties can take the interpretation under advisement when determining how to proceed. The third party assessment can give the parties an idea of the validity of their respective positions. It is a type of “reality check”, to determine what a contract actually says, instead of what the parties think it says.
||Injected into an escalation process or dispute resolution process before any formal proceedings are held. There is no need for hearings or oral submissions – the adjudicator would take limited written submissions and interpret the clause based on those submissions.
||The resolution provider cannot be asked to determine facts or apply the analysis to any facts if the process is to stay streamlined and quick. The parties could easily disagree with the determination of the adjudicator, but if the process is kept short and straightforward, the overall cost of any delay would be low, and would be worthwhile if it avoids escalation to a formal dispute process.
|Standards of care:
||Significant industry experience and expertise. The expert would advise on the industry standards to provide context for a dispute.
||Again, the expert is injected into an escalation process or dispute resolution process before any formal proceedings are held. The expert may not be provided with any details regarding the dispute, but instead is engaged to provide answers to questions that would inform the parties of how to interpret contractual clauses.
||The parties may disagree with the determination of the adjudicator, of course, or disagree on whether the standard of care was met or how it is to be applied in the context of the contractual clause. The report by the neutral can therefore be of limited use.
|Technical specifications and compliance:
||Significant technical experience and expertise. The expert would be quite knowledgeable in the specific technical areas at issue. A panel of experts may be called for, if the issue covers more than one technical area.
||The expert is hired to answer a limited question of fact, such as whether a party’s solution is in compliance with a particular part of a technical specification or industry standard specification. The expert would be placed in an inquisitorial role, and would generate a report identifying the deficiencies, if any.
||The process can easily be thwarted by an uncooperative party. It would find its place between parties that are genuinely trying to understand and resolve a technical dispute, and would not add value when trying to resolve a highly acrimonious dispute.
The ultimate goal is to introduce objectivity into the discussion between parties early in a dispute, before the parties’ positions are hardened. The parties can learn from the neutrals and inform their positions leading into a formal dispute process, and may discover that the positions taken are unreasonable or unsustainable, thereby diffusing the conflict. Rather than trying to make this process mandatory in contract, I feel that it would be most persuasive and effective if it was purely voluntary. In my examples above, by ensuring that the decision of the neutral is not binding, the parties can invoke the process without damaging the relationship by pushing it to a formal dispute process. This is of particular importance in IT contracts that create an ongoing relationship, where dispute is inevitable, and preserving the relationship is of paramount concern to both parties.
There is room within IT contracts for a flexible and voluntary dispute resolution process that separates out disputes that are amenable to early resolution, and which introduces a neutral having appropriate credentials to the process to provide objectivity to those disputes before they spin out of control.
First posted at http://www.slaw.ca/
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