It costs trillions of dollars to settle commercial conflicts. It's time for Alternative Dispute Resolution

More commercial disputes happen in energy, mining, infrastructure and urban development than in other industries. Projects in these sectors demand long timeframes and the co-ordination of large numbers of organisations, both of which cause friction. Consequently, conflict management and dispute resolution techniques have advanced fast.

Commercial disputes are like toxins. They cause a range of pervasive negative effects, including:

• Missed deadlines, cost overruns and quality problems

• Increased operation and maintenance costs as a result of cutbacks and design changes

• Poor decision-making as a result of managers tied up in disputes

• Organizational stress and an unhealthy work environment

The direct costs of commercial claims resolved through litigation are estimated at approximately $870 billion globally, according to a US Chamber of Commerce study. (The US accounts for $306 billion.)

More importantly, litigation imposes significant indirect costs. It causes higher borrowing costs, wasted management time, the deterioration of business relationships and organizational stress.

These indirect costs are estimated to be at least several times the direct costs. This means the total burden of disputes costs trillions of dollars a year globally.

The key factors that drive project disputes are:

1. Project complexity

Most capital projects involve a number of relationships over an extended period of time. This gives plenty of opportunity for problems.

2. Contractual complications

If a contract fails to allocate responsibilities adequately, incentives to breach obligations and create disputes can arise. Increasingly, larger capital projects and a lack of trust between parties are leading to ever more complex contracts that are hard to understand.

3. Communication issues

The parties to international contracts do not always share the same contractual and technical culture or the same language.

4. Political and external factors

Optimism bias and strategic misrepresentation in planning capital projects lead to inaccurate projections of project costs and demand. Consultation with the public can lead to unrealistic expectations if the project is dependent on the election cycle.

Some effective mitigation strategies are illustrated in the framework below. These techniques help manage conflict on capital projects and identify disputes early to resolve or avoid them altogether.

1) Value-based - Embrace a new value-based approach

2) People-centred - Mobilize the right people

3) Lean & smart - Be conscious that less is more

4) Effective & fair - Implement effective project development and contracting frameworks

5) Preventive & value-adding - Implement dispute prevention mechanisms

6) Amicable & timely - Ensure amicable and timely settlement of any dispute

7) Transformational - Look on the bright side

“Alternative dispute resolution, a set of practices and techniques aimed at permitting the resolution of legal disputes outside the courts, can reduce transaction costs, since it is cheaper and faster than ordinary judicial proceedings", writes Robert H. Mnookin, Samuel Williston Professor of Law and Chair of the Program on Negotiation at Harvard Law School and Director of the Harvard Negotiation Research Project.

"It can create resolutions that are better suited to the parties' underlying interests and needs; and it can improve ex-post compliance with the terms of the resolution."

"I think that alternative dispute resolution techniques hold great promise for both the avoidance of disputes in the construction industry and for their prompt and fair resolution.”

We think that the future of alternative dispute resolution will transform how we interact and collaborate on complex capital projects. Even through the Fourth Industrial Revolution, human beings will still be central to disputes. This means the only effective way of preventing and resolving conflict is understanding.

As the Dalai Lama puts it: “Don’t let a little dispute injure a great relationship. When you think everything is someone else’s fault, you will suffer a lot. When you realize you have made a mistake, take immediate steps to correct it. When you realize that everything springs only from yourself, you will learn both peace and joy.”

Your opinion is important. The World Economic Forum would like to understand the future of dispute prevention and resolution. If you are involved in commercial contracts then please complete this survey, which should only take you 20 minutes to complete.

Read more on what it takes to mitigate disputes effectively here.