Supply chain insights: arbitration and alternative dispute resolution

Following on from our first article in the series focussed on supply chains, Supply chain insights: Risk management and financial disputes, this next article examines the role played by Alternative Dispute Resolution (“ADR”) in supply chain disputes. Our first article considered how to manage risk in the supply chain and liability in financial disputes.

What is ADR?

As its name implies, ADR refers to alternative means of resolving a dispute as opposed to going to Court. Common forms of ADR include mediation, expert determination and arbitration. ADR typically involves an independent third party in the process whose role varies depending on the form of ADR. Outcomes reached in ADR are often not binding on either party, unlike Court judgments. A party is therefore under no obligation to comply with the outcome of ADR. The exception to this is arbitration, where it is either mandatory or voluntarily agreed to. Whilst compliance with the outcome of ADR is often not obligatory, participation in ADR is increasingly being mandated by the Courts which we discussed in an earlier article: Settle or else! The court’s approach to mandatory ADR post-Churchill.

ADR and Supply Chain Agreements

It is common for supply chain agreements to provide for ADR as a mechanism for resolving disputes. This can be a pragmatic option to resolving disputes in Court. A supply chain agreement may also provide for multiple forms of ADR in escalating stages. For example, mediation may be attempted before arbitration. The focus of this article will be on arbitration, given its binding and final nature.

Arbitration

Arbitration can offer parties a more flexible and cost-effective alternative to Court proceedings while still obtaining a binding and final result, known as an arbitral award. An arbitration is held at a neutral forum which is presided over by an appointed arbitration tribunal instead of a judge. The tribunal usually consists of one or three arbitrators depending on the agreement between the parties. Much like supply chains, the forum for arbitration can be global and take place in most jurisdictions around the world. Arbitral awards are enforceable in the same.

Arbitration is flexible, in that parties have greater control over the process and can agree many of the details. This can include in which jurisdiction the arbitration is held, the number of arbitrators and which arbitration rules to apply. This flexibility often means that arbitration is usually more cost-effective and may be more expedient than court proceedings. Nonetheless, complex disputes can still take several years to resolve.

Preliminary considerations

To ensure that ADR is effective, it is important that it is properly provided for in the supply chain agreement. Businesses should be alive to the risk of disputes in a supply chain before entering into any supply chain agreements. Taking early action in the negotiation stage and ensuring adequate ADR provisions are provided for can greatly reduce the cost, time and complexity in resolving disputes.

How can Ellis Jones help?

We provide a full-service legal offering for businesses and can advise on all aspects of a supply chain or any disputes arising from a supply chain agreement.

Our expert Banking and Finance litigation team has substantial experience in advising on insurance, complex financial and commercial disputes.

If you like to seek advice or discuss the contents of this article, please contact William Fox Bregman or Wai Chan in our Banking and Finance Litigation Department on 01202 525333 or via email at supplychains@ellisjones.co.uk or by clicking on the “Make an Enquiry” button on our website.