When you’re a hammer, everything looks like a nail. This dynamic very much applies to lawyers: we tend to assume that we are the natural vehicle through which disputes get resolved. If two parties can’t come to an agreement, lawyers step in and litigate, arbitrate, or negotiate a settlement. Contracts that get breached get litigated.
The honest truth, however, is that disputes can sometimes be resolved absent involvement of outside counsel. This does not mean it always works. But a well-crafted dispute resolution mechanism can avoid significant bad blood and attorneys’ fees—assuming the proper guardrails are in place.
This post breaks down escalation clauses and how they apply to dispute resolution:
1. Operational disputes vs. legal disputes.
In casual discourse, we often assume that any dispute is a legal dispute. “Litigate” is used as a synonym for “argue.” Threats to “take someone to court” are thrown out casually when people have a disagreement. While the dispute may be real, it is important to distinguish between legal disputes (whether a party fulfilled its obligations) and operational disputes (how a party fulfilled its obligations).
Many disputes are operational. When contract terms are unambiguous, courts generally apply a “four-corners” approach: they look solely inside the document itself. If a purchase order mentions a delivery date—but not method of delivery—meeting the date is enough to avoid a breach. If payment is due by a certain date, the method of payment is generally not relevant. Parties may be unsatisfied with the operational aspects, but this dissatisfaction often lacks a legal basis. When a dispute is not primarily legal, escalation clauses can be valuable.
2. Internal Escalation Structure
Many agreements now contain internal escalation protocols. A typical clause will require a meeting of senior members of both companies to discuss and resolve any dispute prior to the initiation of litigation or arbitration. There will often be a time period (e.g., 30 days) between the start of such discussions and the commencement of any legal action.
These escalation clauses serve a few purposes. First, although they “escalate” internally within each organization, they are designed to “deescalate”—and hopefully resolve—the underlying dispute. Second, they are designed to solve operational questions that are important, but not easily resolved through legal channels. A retailer may require certain product changes from a supplier, but find the legal system poorly-suited for adjudicating these requirements. Third, there is a major cost-saving component. Attorneys’ fees are expensive. Even involving in-house counsel has significant opportunity cost. Internal escalation can better utilize resources.
3. Reduced Litigation Risk
Escalation clauses can reduce litigation risk, but they are not a panacea. At best, these clauses encourage dialogue and amicable resolution. By talking, the parties can work out operational details to continue collaborating. By contrast, relationships are often irreparably damaged as soon as a demand letter is sent by an attorney. Even if parties have synergies, the dispute will often take on a life of its own and destroy any goodwill.
On the flip side, escalation clauses can be used as a delay tactic. A party refusing to cooperate in the process can use its own lack of cooperation as an excuse to ward off litigation. Even if they cooperate, the party can use the discussions to extend deadlines and kick the can down the road. Many common disputes—such as non-payment of invoices—are also poorly suited for dialogue. One solution is to explicitly carve out payment or other key obligations from the escalation clause.
Putting It All Together
Escalation clauses can be a valuable tool for salvaging commercial relationships and avoiding unnecessary costs. Their primary utility is in working out operational details, not in resolving legal disputes. Used indiscriminately, these clauses enable a breaching party to delay accountability for its breach. The key is to ensure discussions have a defined timeline and clear decision-making authority.
One thing is worth hammering home: an escalation clause is a tool for willing parties and a weapon for unwilling ones. Draft accordingly.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.