Arbitration vs. Litigation: Resolving Supply Chain Disputes

A well-planned, multi-faceted dispute resolution framework tailored to each party’s business needs expedites resolutions, reduces costs and increases a company’s resilience to supply chain disruptions.

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Between the global Coronavirus disease (COVID-19) pandemic, the Suez Canal gridlock, solar winds cybersecurity attacks and cyber breaches, supply chains have been repeatedly battered by disruptive events in recent months. Many companies face ongoing supply chain disruptions resulting from labor shortages combined with increased demand from consumers. 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. Not surprisingly, many international arbitration institutions have reported record highs in the number of new cases filed in the past year. 

Years of supply chain management research advises that resilience is the key to surviving supply chain disruptions. To be resilient, a company must be forward-looking, adaptive and prepared to promptly respond to unforeseen events. Technology, redundancies and planned contingencies are important tools. A robust and flexible conflict resolution process that takes advantage of all available dispute resolution devices, including mediation and arbitration, is also integral to safeguarding supply chains.

Conflict resolution is not something that can be relegated to a single, boilerplate arbitration or choice of law provision in a contract. With communication at its core, a functioning framework provides multiple opportunities to identify conflict, respond and collaborate at every level.

There is a broad spectrum of dispute resolution options for companies to choose from, including negotiation, use of ombudsman, mediation, conciliation, mediation-arbitration, dispute resolution advisors, dispute review boards, neutral evaluation, expert determination, arbitration and more. These techniques involve the use of a skilled, neutral third-party and can result in timely, economic and effective outcomes and improved business relationships compared to traditional litigation.

Negotiation occurs when parties communicate to find a solution or develop a plan for joint action. When a conflict is identified, parties should have a detailed mechanism for managing and negotiating the conflict before it escalates to a legal dispute. The appropriate protocol might differ depending on the individual business relationship and cultural norms in what is likely a multi-echelon, global supply chain. Company size might also dictate whether a company employs or contracts a single ombudsman as opposed to staffing an entire dispute resolution department.

If a dispute survives preliminary conflict management and informal negotiations, conciliation or mediation is the logical next step. The two techniques are similar with neutrals for facilitating communication; however, conciliators typically go one step 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.  

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

When all collaborative efforts fail to yield a resolution, arbitration is the preferred end point.  Arbitration provisions empower parties to avoid the time, cost and uncertainty associated with litigation in court—the most time-consuming and cost-prohibitive resolution option. Arbitration presents numerous benefits over litigation for resolving supply chain disputes. For example:

1.     Parties can select the location for the arbitration and what law and procedures will govern. In international contracts, it is paramount to insulate parties from the uncertainty of litigating in a foreign court, under foreign laws.  

2.      Parties can choose who will determine the outcome of their dispute—panel members with a specified skill set or background over a jury or judge who may not appreciate or understand their industry and business interests. 

3.      Parties can embrace greater flexibility in lieu of rigid judicial procedures. They can limit permitted discovery and relax evidentiary requirements, which vary wildly across global jurisdictions. Parties can also set tighter timeframes that are not beholden to judicial norms.

4.      Since arbitrations are confidential, parties can preserve the privacy of their dispute, details of their business transactions, and operations rather than having them become part of a public record. 

5.      Since most countries have joined the New York Convention, an arbitral award is readily enforceable in almost any country and without years of extensive appeals.

Arbitration clauses are not one-size-fits-all. While standard clauses are a great starting point, personalized clauses require 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 each business’ unique needs. 

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

Parties may also wish to provide for tiered arbitrations, depending on the dollar amount involved. They can agree to have a smaller dispute be decided 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 International Chamber of Commerce have different rules that provide for such distinctions. 

When deciding what the arbitration will look like, parties should be wary to mimic traditional court systems or blindly adopt court rules. Otherwise, they may end up with an arbitration that is as complex, cumbersome and more expensive than litigating in courts.

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