30/09/2010

Our client was considering entering a joint venture arrangement with an English company.  Each party was to have three representatives on the “Board” of the venture. The Chairman would not have a casting vote.  The client sought our advice on what could be done to resolve impasses where the respective “Board” members could not resolve a matter due to the equal representation.

DISPUTE RESOLUTION GENERALLY

Dispute resolution generally takes two forms – negotiation and third party determination.

The first form includes mechanisms like mediation and conciliation which effectively try to assist the parties through various techniques to reach a negotiated settlement.  No decision is imposed on the parties and they must reach an acceptable agreement if the process is to succeed.

The second form includes mechanisms whereby a third party is asked to consider the dispute and reach a determination on how it should be resolved.  These techniques include arbitration, expert determination and of course litigation where the third party is the court of a jurisdiction.

SELECTION OF APPROPRIATE MECHANISM

Dispute resolution provisions in contracts are designed to enable parties to resolve disputes quicker and therefore more cheaply than through the court system.  Far from being jealous of their turf, judges approve of these sorts of clauses as it limits the number of cases coming to the courts and provides an opportunity for the court system to thereby be more efficient.

The selection of the appropriate dispute resolution mechanism is dependant on a number of issues including the relative importance of the matter in dispute and the type of dispute.

Where the matter in dispute is fundamental to the arrangement a party may not be prepared to allow a determination by any third party other than a court.  In such a case the parties can agree to negotiate and mediate but if no successful outcome is achieved then they agree to terminate their relationship and access the courts if they are unhappy.

Where the matter in dispute is less significant the parties may agree to go through the steps of 1. negotiation, 2. mediation and then 3. arbitration, in the knowledge that they may be required to accept the determination of a third party.

If the dispute is of, say, a technical issue, such disputes better lend themselves to resolution by an independent third party who brings the appropriate technical expertise and experience to the issue. Clauses can make allowance for the particular type of dispute resolution mechanism to be selected by the organisation that might be facilitating the dispute resolution process.

Note that large companies often reject dispute resolution clauses in contracts with smaller companies because they know that they have the resources to make it difficult for small companies to access the court system.

WHAT HAPPENS IF THE RELATIONSHIP IS TO BE TERMINATED

We also advised that the constituent documents of the JV should state what is to happen if the parties reach an insoluble impasse on a fundamental issue.  So-called ‘deadlock provisions’ provide for one party to buy out the other using a process that ensures fairness.

For more information on this topic please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.