Using Arbitration to Manage Supply Chain Risks

Supply chains are typically governed by numerous contracts, involving several parties and multiple jurisdictions. Where multiple contracts or parties within the supply chain are involved in a dispute, or where different supply chain disputes occur at different times, using arbitration can minimise the risk of parallel proceedings and, importantly, inconsistent decisions.

Arbitration affords a resolution procedure that is consistent across the supply chain with the possibility of consolidating disputes and joining third parties to the proceedings. Parties should consider agreeing a separate arbitration agreement which ensures consistency and equality at all stages of the supply chain. For our practical steps as to how to draft an arbitration agreement please see Drafting an Arbitration Agreement.

A fast resolution can be a priority in supply chain disputes, for example, where the dispute concerns an ongoing project or could hold up the manufacture of a product.

In an arbitration parties have three ways to achieve a fast outcome.

First, a party may apply to obtain urgent interim relief from an ’emergency’ arbitrator before the tribunal for the main arbitration has been formally constituted.

Second, parties can use formal expedited arbitration if offered by the rules that they have chosen.

Third, even without emergency arbitration or formal expedited arbitration, parties have influence over the procedure and the timetable. In terms of the procedure, parties can, for instance, agree to limited disclosure, dispense with disclosure entirely and/or request that a decision / award is made on the papers only thus avoiding the need to have a hearing. In terms of the timetable, parties can agree this and the procedural deadlines between themselves and can appoint a tribunal with appropriate availability.

Tiered dispute resolution clauses offer specific benefits for supply chain disputes because they provide opportunities for quick settlement of a claim before formal proceedings are commenced. Parties can require that certain steps are taken before any arbitration proceeds, such as informal negotiations at various levels of management and/or mediation.

Strategically, a tiered dispute resolution can:

• enable parties to tailor a dispute resolution mechanism to their individual business needs;
• provide an opportunity to de-escalate a dispute prior to commencing formal proceedings; and
• help to protect and maintain commercial relationships across the supply chain.

Such clauses are proving to be increasingly popular. However, they must be carefully drafted to avoid problems which may result from any inconsistency or a lack of clarity.

In addition, parties should be mindful of the following risks:

• Timings: introducing extra steps which need to be completed before the parties can commence formal dispute resolution may delay the resolution of a dispute. For example, parties may be contractually bound to mediate / negotiate in good faith for a certain period of time before commencing arbitration.
• Cost: introducing additional actors such as mediators will result in additional cost to the parties. However, if the parties are successful in resolving a dispute at an earlier stage, such costs will likely be far outweighed by the costs of running a full formal dispute resolution process and business disruption over a longer period.
• Jurisdiction: if a party engages in arbitration before the other stages have been exhausted, then it may face an objection by the other party to the jurisdiction of the tribunal. Parties should therefore ensure that they carefully document and seek to comply with any mandatory earlier stages of any tiered dispute resolution clause.