INTRODUCTION
The growth of the Application Service Provider (ASP) industry is predicated on a number of interrelated factors, technical and non-technical. Among the technical factors are sufficient bandwidth, connectivity and other factors affecting reliability, availability and security. Paramount among the non-technical factors (and very much dependent on the technical success of the ASP model) is end-user confidence.
The challenge of how to increase consumer or end-user confidence in the on-line world is by no means exclusive to the ASP industry. It is a challenge that also confronts retail businesses and other service providers seeking to exploit the economic potential of the Internet, consumer groups, trade associations and public sector regulators. Particularly in cross-border settings, where the contracting parties are unlikely to share commonalties of geography, culture and/or legal regimes, the challenges regarding raising on-line confidence are viewed as considerably greater than those faced within a single country.
Four areas, in particular, have been recognized as providing the foundation for creating a more confident consumer environment:
The promulgation by governments of laws and regulations concerning on-line commercial activities that reflect a proper balance between the rights of consumers and the concerns of service providers and on-line merchants.
The development, implementation and public dissemination by individual corporations and business associations of codes of conduct, guidelines and best practices regarding on-line commercial activities. Such instruments are seen as not only increasing consumer or end-user confidence by setting out the sponsor's obligations and commitment to doing good business, but also as achieving that objective by serving as an educational tool.
The use of some form of third party validation, as reflected through a "trustmark" or similar "seal of approval". Businesses displaying a trustmark represent that they are subject to external oversight and that they are operating in a manner consistent with the charter (whether their own or that of a third party) underlying the trustmark as determined by an independent and neutral certifying authority.
Balanced, impartial, expeditious and cost-effective problem and dispute resolution procedures. Notwithstanding the many "front-end" measures that businesses can try to implement, in large part, consumer confidence is based on the belief that any disputes will be settled quickly and fairly either by the business or service provider directly or through some other means. In both the traditional and on-line world, when disputes cannot be resolved directly between the consumer and the business, the merchant or service provider and consumer must resort to other means. These often include appeals to consumer protection agencies, recourse to the courts, or use of alternative dispute resolution systems.
Recognizing that growth in the provisioning of ASP services, both locally and across international borders, will depend on how confident end-users feel about their rights of redress if a service problem cannot be resolved expeditiously and fairly, the focus of this document is on the last of the above-mentioned "confidence-building" tools - dispute avoidance and resolution.(Footnote 1) Its aim is to provide:
All of the stakeholders in the ASP industry with an insight into the use and possible benefits of conflict management procedures.
ASPs and their partners with practical and applicable information that will enable them to introduce conflict management procedures within their organizations and into their contracts, and to take advantage of conflict management processes when disputes arise.
Lawyers, judges, arbitrators and other "alternative dispute resolution" experts not familiar with the ASP industry with an insight into the structure, relationships and likely areas of dispute in the ASP supply chain.
SECTION I:
AN ASP INDUSTRY PRIMER
The purpose of this section is to provide those new to the ASP industry with a basic understanding of the structure of and functions required to complete typical ASP business models.
ASP Supply Chain Stakeholders
| Stakeholder | Description |
| Customer | The customer is a business or domestic user that has subscribed to a service provided by an ASP across the public Internet, or across a managed business Internet Protocol (IP) network. Typically, the business customer's objective is to resolve a business problem requiring a service, tool or application which the business either does not own but is prepared to rent, or owns but does not wish to support with in-house IT staff. |
| Application Service Provider (ASP) | Broadly speaking, an ASP is a service provider that deploys, hosts, manages and rents access to one or more software applications via the Internet directly to an end-user. It is the provisioning and management of application services over the Internet as a core competency that distinguishes the ASP from other types of outsourcing services.(Footnote 2) An ASP's role can be wide-ranging, including:
Full Service ASPs offer the customer a single contract point with the entire value chain. They directly manage and deliver all of the ASP services required to support the application, including supplying bandwidth, providing hardware/software, hosting data, and offering 24 x 7 technical and application specific support. An ASP may also have particular subject matter expertise that it provides to its customers as a service - for example, managing human resource data, managing treasury functions for banks or delivering online training. |
| Independent Software Vendor (ISV) | The ISV is an owner, provider, publisher or rights holder in the software or content that an ASP customer/end-user wishes to access and use to be more efficient or effective or to reduce time to market. Typically, ISVs have written software applications that can be licensed through retail outlets, value-added resellers, original equipment manufacturers, electronic software delivery or direct sales. To make the ISV content, service or application available to a business user, the ISV's solution must be hosted at a data center and delivered to the end-user via a network using Internet Protocol. Although the ISV is the originator of the software, in the emerging ASP market models, it is possible for the software to be: owned by the ISV and hosted for customers' use; owned under license by the customer, but hosted by an ASP; or licensed and hosted by the ASP. |
| Application Infrastructure Provider (AIP) | An AIP is a company with expertise in managing very large, highly capital-intensive data centers. Having invested in the creation and management of high quality information technology resources in their data centers, AIPs lease this hosting infrastructure to companies that focus on managing content and services for their customers. An AIP focuses on issues such as data center security, location redundancy and contingency planning to ensure that the data center infrastructure is always available to its customers. In addition to data centers, AIPs may also own certain network connections. |
| Network Service Provider (NSP) | A NSP is a company that manages network resources. Traditional NSPs are phone companies, although network connections are also provided by Internet Service Providers (ISPs). The network connections provided by NSPs not only make up the phone network, but also make up the public Internet. In the least sophisticated versions of the ASP model, delivery of services occurs over the Internet. Although this makes services very easy to access, the performance of those services is subject to the performance of the Internet links between the ASP and the customer and is therefore unpredictable. For companies seeking to ensure that they have a secure, reliable connection to their ASP services, NSPs can provide dedicated links between the data center and the customer site through "virtual private networks". |
| Service Portal (SP) | A SP is a function that is only just beginning to emerge. The core competence of a SP is the management and retention of customers for the ASP value chain. SP functions are currently being provided at a number of points in the value chain. The SP provides a one-stop shop for: (i) finding out which services are available and how much they cost; (ii) subscribing to those services; (iii) providing a customer care and troubleshooting help desk; (iv) providing a single, itemized bill for the services consumed; (v) managing the customer interface for the other functions in the value chain; and (vi) presenting and managing the brands of the value chain to the customer. |
| Service Aggregator (SA) | In the emerging ASP market, a common variant of the SP concept is the idea of a SA. The SA provides links to other application providers and/or acts as a reseller, combining multiple applications into a single service or service bundle. The SA may be compensated as a percentage of the amounts spent by customers directed through the SA's site (based on usage data which must be collected at an appropriate point in the value chain) or may be compensated on the type of usage rather than a metered usage amount. |
| Value Added Reseller (VAR) | A VAR is a reseller of software, which also provides software training and integration services. For a complex business application such as enterprise resource planning, a VAR's role is essential in bringing a practical understanding of the application and marrying that knowledge with the details of the customer's business processes and business needs. |
| Systems Integrator (SI) | A SI carries out technical integration work to ensure that new software solutions integrate seamlessly with a customer's existing information systems. In addition to working with ASP customers, SIs also play a role in integrating the business solutions of actors in the ASP value chain. |
| Back Office Providers | Back office companies provide specialist solutions such as performance monitoring, billing and customer care help desk functions to actors in the ASP value chain. These solutions may not be visible to the customer, but form an important part of seamless service delivery. |
| Hardware Vendors | Hardware vendors provide the computing and networking hardware that resides in the data center. They also often provide consulting and support services associated with the hardware platform. |
Note: The classification of ASP supply chain "stakeholders" in the table above is intended to provide the uninformed reader with a guide to the terminology used in discussing ASP business models. It is to be noted that the stakeholders involved in these business models, the terms used to discuss the models and the stakeholders involved are rapidly evolving.
The entities identified in the table above represent functions, and not necessarily organizations that may be involved in delivering ASP services to a customer. Organizationally, these functions may be combined in any number of different ways, depending on each particular ASP's delivery model. Indeed, beyond the contract concluded directly with the customer, practically everything else that the ASP delivers to the customer may be sub-contracted to other suppliers. Some common ASP supply chain permutations are set out below:
- The ASP may provide application customization, integration and change management services directly or may outsource these activities to service organizations.
- The ASP may develop and own the application software or it may license the required applications from an ISV.
- The ASP may provide the application support services directly or it may outsource those services to an ISV or systems integrator.
- The data center itself may be owned by the ASP or outsourced to another supplier.
- An ASP may own and provide the connectivity services directly or may outsource this to NSPs and ISPs.
- The connectivity services may be the responsibility of the ASP's data center provider, which, in turn, may outsource these services to NSPs and ISPs.
- The required software infrastructure and tools may be developed and owned by the ASP or purchased from ISVs by the ASP or data center.
- An NSP may set up and manage its own data centers and its own service portal, partnering only for ISV content expertise, VAR services and systems integration.
- A software company, wishing to maintain control over its own brand may choose to combine its ISV and ASP expertise, leasing data center infrastructure from an AIP and outsourcing its network connectivity to an NSP.
The initial ASP offerings consist of applications that would previously have been purchased directly by a business, installed and managed on a server on that business' premises. Other early services include the outsourcing of specialist applications, such as on-line travel services and outsourcing of human resource management functions to a specialist ASP. As the ASP model matures, the range of services offered is expected to expand to include high-bandwidth, time-sensitive applications. Moreover, as the comfort level with the consistency of service provided by ASPs increases, service purchases will likely be extended to supplement monthly flat rate billing for business tools, such as customer relationship management and enterprise resource planning to on-demand, pay-as-you-go, sporadic rental of services, such as document sharing or virtual team rooms for one-off projects.
The diagrams on the pages that follow are based on the ASP as the lead supplier in terms of its relationship with the customer. They are provided to illustrate graphically the enabling products and sub-contracting relationships that an ASP may require to deliver the services.
THE ASP DELIVERY MODEL
Note: The arrows are intended to designate, generally, the possible connectivity relationships in the ASP delivery model and do not necessarily represent contractual relationships.
ASP CONTRACTUAL RELATIONSHIPS
The table below provides various analysts projections of the size of the ASP market.
Revenues Generated by Application Services Providers
Source |
Market |
1998 ($ M) |
1999 ($ M) |
2001 ($ M) |
2004 ($ B) |
Forrester |
ASP Worldwide |
6,400 |
|||
Durlacher |
ASP Europe |
140.0 |
340.0 |
1.5 |
|
Ovum |
Total ASP Worldwide |
43.0 |
|||
Cherry Tree Co. |
Enterprise ASP US |
150.0 |
2.0 |
||
IDC |
Total ASP Worldwide |
296.0 |
7.8 |
||
IDC |
Enterprise ASP US |
84.0 |
310.0 |
2.2 |
|
Gartner |
ASP Worldwide |
2,700 |
22.7 |
Initially, the principal high growth area is expected to be the United States of America. By 2001 predictions are that conditions in the European market space will also be ripe for increased acceptance of the ASP delivery model. The Asian-Pacific region, particularly Australia, New Zealand and Japan, is also likely to witness an increasing adoption of the ASP model, albeit at a much slower rate.
SECTION II:
ASP SUPPLY CHAIN DISPUTES
To date there have not been a significant number of reported disputes(Footnote 4) in the ASP space. Based on DART's information-gathering activities,(Footnote 5) this situation can be principally attributed to the following factors:
The ASP business model is still new and the market for ASP services is still in an embryonic stage.
Small- and medium-sized enterprises that may have faced difficulties with their ASP services may not have had the resources (financial or otherwise) to pursue a dispute.
Larger enterprises have a higher threshold of tolerance for technology underperformance and, currently, are less dependent on ASP services for mission critical functions.
The financial loss suffered by customers or end-users that have had problems with their ASPs has not been sufficient to justify pursuing formal dispute resolution, regardless of the forum.
ASPs and their customers have sought to avoid dispute resolution processes because of the cloud this may cast on the prospects of future funding, and because of the general adverse effects on business and marketing activities.
Many ASPs are taking additional precautions and measures in service delivery and customer care, which at a later stage may become cost-prohibitive.
However, as the market for an ASP services grows, it is to be expected that the number of disputes will rise as a result of ASPs' failure to meet service-level commitments to end-user satisfaction. In addition, if analysts' predictions that the ASP industry will experience significant short-term consolidation are correct, disputes over such issues as data ownership, data transfer, or software ownership could well materialize. A compilation of problem areas that persons interviewed by the WIPO Center and DART, or those who submitted comments separately, indicated they (a) have faced in the past, (b) are presently trying to resolve, or (c) believe could be flashpoints in the future, is provided in Annex G.
The salient characteristics of ASP supply-chain disputes are summarized below.
One-to-Many. The critical distinguishing characteristic of ASP supply chain disputes is a consequence of the "one-to-many" delivery model. Thus, a single technical problem affecting an ASP's service delivery, regardless of the source of that problem, could have widespread ramifications, giving rise to the possibility of multiple claims (potentially by all of the ASP's customers/end-users) in chain reaction (as a result of the claims that may then be made against the ASP's customers).(Footnote 6)
Multi-jurisdictional. The ASP delivery model may involve multiple partners, some or all of which may be located in different places. An ASP's customers may also be located in different geographic areas. Thus, ASP supply chain disputes may implicate the laws of multiple jurisdictions, as well as different business and legal cultures. In addition, an ASP may be subject to suit in multiple jurisdictions, thus facing the prospect of being hailed in to court in several different locations, possibly at the same time.
Problem-Sourcing Complexities. Because of the multi-layered partnering relationships and technical complexities involved in the ASP delivery model, it may be very difficult to identify, isolate and understand the source or multiple sources of a technical problem - whether software, hardware or connectivity-related - potentially giving rise to legal liability. In many instances, it may take considerable time and resources to determine legal liability. In addition, although the commercial and legal issues to be resolved in a dispute may be relatively simple, the related technology and technical issues may involve significant complexity.(Footnote 7)
Cutting-Edge Legal and Business Issues. The ASP delivery model is still in its infancy, and the pricing, contracting and business models are still evolving. ASP supply chain disputes are thus likely to raise novel legal (procedural and substantive) and liability issues, which the existing legal framework may not adequately address. The delivery of software over the Internet also raises a plethora of complex intellectual property issues that are still being debated in national and international forums.
Symbiotic Relationships. As noted, the ASP delivery model can involve multiple partnering relationships, where each of the partners is mutually interdependent. A dispute that arises could therefore involve parties who have a very important vested interest in a continued and harmonious relationship with the other. The time and financial resources required to establish a new partnering relationship to fulfill the role of a relationship ruptured as a result of a dispute may be prohibitively high.
Unique Characteristics of the Parties. Many ASPs, their partners and customers are young companies or newly formed divisions of established firms seeking to scale their operations in the ASP space. As such, they will have a particularly strong interest in the expeditious resolution of any disputes, so that important and possibly scarce resources are not diverted away from other areas of activity. There will also be great interest in preserving the confidentiality of the dispute, in order to minimize bad publicity about their emerging businesses.
Wide Value Range. While little data is currently available, it is likely that the value of ASP supply chain disputes will range widely. For example, the losses suffered by a small e-tailer as a result of a two-hour downtime of its Web site may amount to only a few thousand dollars, whereas the same downtime may result in a loss of several hundreds of thousands of dollars for a large enterprise involved in business-to-business e-commerce. Similarly, a higher level of responsibility and liability will likely attach to a human resource type application than a rudimentary word processing program. Accidental disclosure of the human resource application could result in damage amounts that far exceed the damage associated with accidental disclosure of the word processing application.
In view of the foregoing, what is required for the cost-effective and quick resolution of ASP supply chain disputes are procedures for dealing with multiple disputes, involving multiple parties, some or all of which may be located in different legal jurisdictions. In addition, because no direct contractual relationship relating to the application services that may be the source of the dispute will normally exist between an ASP's partner and its customer, procedures and contractual mechanisms are required through which this lack of contractual privity can be overcome. It will be important for the decision-makers to understand the underlying technology and business models. And it will also be fundamental that the resolution processes maximize the likelihood that the parties' relationship will be preserved.
SECTION III:
DISPUTE RESOLUTION BEST PRACTICES AND GUIDELINES
| Best Practice |
| ASPs should promote and rely upon alternatives to court litigation for resolving disputes that may arise with their vendors, partners and customers. Alternative dispute resolution procedures provide a confidential, neutral, quick and cost-effective means to resolve disputes, give the parties significant control over the process and allow for the involvement of specialist neutrals with relevant experience. The earlier on such procedures are invoked, the greater the likelihood of a prompt disposition of the dispute. |
At the outset of a business relationship, characterized by optimism and the promise of commercial reward, the possibility of future conflict typically is farthest from the parties' minds. Even the most carefully drafted contract, however, cannot prevent a dispute from arising. There will always be unforeseen circumstances or matters where the parties genuinely will not be able to agree and where internal problem resolution procedures will prove to be inadequate. In such instances, the parties will need to resort to a formal dispute resolution mechanism to facilitate the settlement of their differences.
This section discusses several alternatives for managing and resolving ASP supply chain disputes and provides general guidelines for selecting the most appropriate dispute resolution methods. These guidelines should not be relied upon as a substitute for specialist professional advice regarding the appropriate method of dispute resolution in the particular circumstances of any individual business relationship.
A. Dispute Resolution Methods
As shown by the diagram below, the various dispute resolution techniques that are available to resolve ASP supply chain disputes differ in terms of their level of formality and, hence, the level of party control, expense and finality of outcome.
| Level of Formality | ADR Mechanisms |
Least Formal
Most Formal |
Negotiation Settlement Counsel Mediation Mini-Trial Early Neutral Evaluation Neutral Fact Finding Expert Ombudsperson Mediation-Arbitration Dispute Review Board Expert Determination Arbitration Litigation |
1. Litigation
Litigation is the formal, public process for resolving disputes before national courts. While litigation may be the most appropriate, or only available, method of dispute resolution in certain circumstances, it is generally accepted to be a slow, disruptive, resource-draining, expensive and time-consuming way of resolving conflicts, whether commercial or non-commercial. Indeed, the costs and delays involved in litigation, particularly for non-enterprise consumers and SMEs, may be prohibitive and soon eclipse the value of the services underlying the dispute.
Litigation also involves considerable uncertainty as to the final outcome, can jeopardize crucial business and investment plans, place valuable corporate assets at risk and result in the rupture of long-standing business relationships. Moreover, with litigation the parties have very little control over the dispute resolution process and outcome. This is because the court retains the ultimate authority to interpret and apply the rules of litigation. The court sets the procedural schedule (e.g., for discovery, conference and trial dates). The judge (i.e., decision maker) is determined by the court, usually on an arbitrary basis. The rules of trial practice and evidence in the presentation of the case must be followed. And only narrow forms of remedies are available.
There is no "international court" for the resolution of trans-border commercial disputes between private parties. Accordingly, unless other arrangements have been agreed between the parties, the normal forum for the resolution of their dispute will be the domestic courts of one of the parties; however, there may be others.(Footnote 8)
As a result, the non-local party required to prosecute its claims before a foreign court may find itself in a position of considerable disadvantage when faced with foreign laws, unfamiliar procedural and evidentiary rules and language differences. Even if a party is ultimately successful, because the network of treaties for the recognition of national court judgments is not extensive, a judgment obtained before the national courts of one country may be difficult to enforce in another country.
The most obvious advantage of litigation is that it does not require an agreement between the parties. It may be invoked unilaterally and, while notice of the litigation proceedings usually must be given to the other side, it may be prosecuted to final resolution without the adverse party's active participation. Litigation is appropriate where one of the parties wishes to establish a precedent to dissuade other parties from engaging in conduct similar to that underlying the dispute that is being litigated; or where preserving the confidentiality of the dispute itself or information disclosed in the proceedings is not critical; or if interim relief is necessary; or where the court's powers to compel are required (e.g., to enforce a request for discovery, to join third parties, enforce an order or judgment).
Litigation Suitability Screening Matrix
| MAIN ADVANTAGES | MAIN DISADVANTAGES |
|
|
| Generally appropriate where: | Generally not appropriate where: |
|
|
2. Alternatives to Litigation
The term "alternative dispute resolution" (ADR) encompasses a range of different and distinct techniques(Footnote 9)
for resolving disputes between two or more parties outside of formal court processes.(Footnote 10)
These techniques, sometimes referred to as "dispute management" techniques, are not necessarily mutually exclusive in any particular conflict, but can be and often are used sequentially or in a customized combination. They may also be and often are used as an adjunct to litigation.
a. Advantages
The main advantages of ADR procedures, which make them particularly suitable for resolving ASP supply chain disputes, are set out below:
Speed. Parties to a contract will disagree at some point. It is the length and level of that disagreement that drives a wedge in the relationship. Disputes distract from core business operations and the costs of a protracted dispute are typically high, both in terms of human and financial resources. For young companies, in particular, a speedy resolution of a dispute may be critical, as they may not survive the time it takes for a dispute to be resolved through litigation. Even in jurisdictions with expedited court dockets, typically ADR leads to a more expeditious outcome than litigation. This is due not only to the general informality of ADR procedures but, also due to the fact that the decision makers are focused on managing a continuous dispute resolution process and reaching a prompt disposition. The fact that they may have substantive expertise in the subject matter of the dispute is also a contributing factor. In addition, certain ADR procedures are based on the premise of party cooperation and implemented to facilitate such cooperation.
Substantial Cost Savings. An early settlement or disposition of the parties' dispute, normally, will result in substantial cost-savings. Even where non-consensual procedures, such as arbitration, are used, in the vast majority of cases, the costs associated with resolving the dispute normally will be less than if the dispute had been litigated in court.(Footnote 11)
Privacy and Confidentiality. For many companies, especially small- and medium-sized enterprises, it may be of vital importance that the fact of a dispute between the company and a vendor or customer does not become public. A public dispute may have severe consequences for future funding and other business and marketing activities. Moreover, the lower the profile of the dispute, the greater the likelihood that the parties involved will be able to resume normal business operations and work together toward a win-win outcome. ADR is, in its essence, a private procedure. As such, ADR allows for privacy to resolve a dispute, avoid a public record and judgment, and minimize the potential impact on other future disputes. The appropriate ADR procedure can also allow for confidential and proprietary business information to be disclosed safely. These features of ADR can often be the critical impetus for settlement.(Footnote 12)
Jurisdictional Issues. Because ADR is a private process, based on party agreement, it eliminates one of the most significant problems likely to emerge in ASP supply chain disputes - that of jurisdiction. While issues relating to the law to be applied to the substance of the dispute may still have to be resolved, the parties' agreement to use an ADR procedure, such as arbitration, eliminates the need for a claiming party to prosecute its claims in potentially multiple jurisdictions that may be implicated by the underlying commercial relationship giving rise to the dispute. It also eliminates the possibility that the party against whom the claim is brought having to defend its interests in several potentially inconvenient and unfavorable forums.
Neutrality. While national judges and forums are expected to be and generally are impartial, there will inevitably be a bias, perceived or real, in favor of the local party. More often than not the judge will share the same nationality as one of the parties and is likely to be more familiar with the business operations or other characteristics of the local party potentially having a bearing on the parties' dispute. The procedural rules and formal and informal legal norms will be more familiar to one party than to the other. The court will work in a language that will be more familiar to one party than to the other. And the support infrastructure and resources required in the litigation will be more readily available to the local party. With ADR, the parties are placed on an equal footing, as they may choose the place or venue of the procedure in a neutral country, the language of the proceedings, the procedural rules and the decision-makers.
Expert Decision-makers. The issues surrounding an ASP supply chain dispute may involve technology and technical issues that are hard for a layperson to visualize and comprehend. Moreover, because the ASP industry is still developing, the commercial models tend not to follow standard formats. They, too, are still evolving. Even if an initial level of understanding exists, lack of experience in the technical subject matter may result in the decision-maker failing to appreciate fully all of the technical issues or to consider all of the consequences of a particular determination. ADR procedures allow for the possibility of party participation in the nomination and appointment of the decision maker(s).(Footnote 13)
The parties consequently have the option of having an expert decision-maker who is knowledgeable about the business, technical and legal issues that may be involved in the dispute, which can lead to savings of valuable time and money.
Preservation of Business Relationships. As described above, certain ASP delivery models are predicated on partnering relationships that are fundamental to enabling the delivery of services. Accordingly, the parties to an ASP supply chain dispute will have a very important vested interest in a continued and harmonious relationship with the other. Where ADR procedures such as mediation are used, the lines of communication between the parties can remain open, and the parties assisted to balance their interests in pursuing the dispute against the value of preserving their commercial relationship.
Predictability of Outcome. The outcome of litigation is often characterized as an "all-or-nothing" result. Arbitration has sometimes been criticized for the "solomonic" nature of arbitral awards. In ADR procedures, such as mediation, by contrast, the outcome is based on the extent of the parties' willingness to compromise, rather than being imposed on them. The final settlement, as a reflection of each party's respective business interests and a consensus reached, thus has a much more predictable quality.
Creative Business-driven Solutions. In non-adjudicative ADR, such as mediation, the parties have the ability to fashion win-win resolutions reflecting business objectives and priorities, which might not be available from a court or arbitral tribunal where the decision will typically be based on more technical or narrow issues. Once the ADR process has opened up the lines of communication, parties can, and often do, go beyond the particular dispute at issue to resolve broader concerns. Moreover, ADR allows for greater involvement of the principals, which can be a big benefit in encouraging business-based rather than legalistic resolutions.
Procedural Flexibility and Party Control. National courts are strictly bound by their national rules of procedure. With ADR, the parties and their lawyers are free to choose an ADR procedure that they agree is most suitable for the circumstances underlying their dispute, their respective business objectives, timeframe and corporate mindset. Moreover, the parties and their counsel then have the ability to tailor and refine the chosen procedure to fit their needs and preferences. This includes not only mechanical and evidentiary aspects of the process but substantive aspects as well, including narrowing the factual and legal issues at hand. Most arbitral rules allow for considerable flexibility in defining the arbitral procedure, hearings, timeframe, location of hearings, location for arbitrator's meetings, gathering of evidence.
Business Disruption. While ADR does require management resources up front, the amount of time expended typically pales in comparison to the disruption occasioned by full-blown litigation or arbitration in the parties' day-to-day business activities. Litigation places significant burdens on business and operational personnel, as well as in-house counsel. Moreover, a longstanding contingent liability or pending challenge to valuable assets can have a major adverse impact on financing, marketing activities and business expansion plans.
Reservation of Rights. Where parties decide to deal with their issues through a binding adjudicatory process such as arbitration, they do so on the basis of waiving their right to have these issues determined by a court by way of litigation. They may still go to court for the purposes of obtaining interim relief or in aid of the arbitral process. However, where the parties use a non-binding, consensual form of ADR such as mediation, there is an implicit (and sometimes contractually explicit) reservation of their rights to have the matter resolved by adjudication, whether litigation or arbitration, in the event that no agreement is reached in the non-binding process. Pursuing non-adjudicatory ADR is thus largely without risk.
b. Disadvantages
Of the most frequently cited disadvantages of ADR, two deserve particular mention, in view of their relevance to ASP supply chain disputes: limited procedural options in the context of multi-party disputes and limited availability of interim relief.(Footnote 14)
As mentioned, ASP supply chain disputes may often involve more than two parties. This poses a significant, although not insurmountable, challenge for private dispute resolution mechanisms, such as arbitration and mediation. Generally, it is not possible for a mediator or arbitral tribunal to force a third-party that, by definition, is not a party to the contract out of which the dispute arises, to participate in the proceedings without its agreement. It is also not possible for an arbitrator to merge two or more arbitrations without the consent of all parties, even where common questions of law or fact arise affecting all of the parties, or where the arbitration clauses in separate and distinct contracts are similar (e.g., same procedural rules, place of arbitration, number of arbitrators, procedures for constituting the arbitral tribunal, language of proceedings).
A typical situation in which the "joinder" of parties or the "consolidation" of proceedings may be called for is in the context of a dispute where the ASP relies on a number of other parties to deliver the contracted for services. In the event of a complaint by the ASP's customers, the ASP may not be able to bring the parties that it considers responsible (e.g., NSP, ISV, AIP) for the problems complained of by the customer into an ADR proceeding commenced by any one customer. Nor may it be able to bring all of the complainants against whom it has to defend itself into a common proceeding. The ASP will thus have to proceed against its vendor or vendors in separate proceedings and defend itself separately in yet other proceedings. In such situations, it may appear desirable for all parties to be brought into the same proceeding, in order to save time and expense and avoid the risk of inconsistent outcomes. While this would certainly be in the best interests of the ASP, the customers may not be interested in becoming involved in a complicated dispute between the ASP and ISV, for example, but will simply be looking for redress against the ASP.(Footnote 15)
The ASP's partners, whom the ASP considers to be responsible for the problem, will almost certainly resist being brought into any proceedings with the customers.
The above complications are minimized in proceedings before national courts, which generally have the power to order parties subject to their jurisdiction to be joined in court proceedings when it is thought to be necessary or even convenient.
Another potential disadvantage of ADR is the limited availability of emergency or interim relief during the early stages of a dispute. A party exceeding its licensed rights in a specified technology, for example, may inflict serious and possibly irreparable harm that may be difficult to quantify and remedy with money damages. In such circumstances, the party that considers that it will be irreparably harmed may want to try to stop the offending conduct through some form of legal mechanism. There will also be circumstances in which a party will want to compel the other party to continue performing to prevent irreparable harm.
Although ADR presents the possibility that the parties will arrive at an earlier resolution of their differences than through litigation, it does not offer the possibility of well-developed procedural mechanisms for obtaining quick interim relief. In contrast, many national court systems allow for ex parte applications for interim relief (i.e., the proceeding takes place without notice to or contestation by the parties adversely affected and only the applicant party is heard), accelerated schedules for gathering proof and hearing such applications, and for a quick yet decisive interim determination, possibly subject to the posting of security by the party applying for the order. In addition, the coercive powers of the court will be available to ensure compliance with any such order in that jurisdiction.
c. Commonly Used ADR Techniques
The three most commonly used dispute resolution alternatives to litigation are direct negotiation, mediation and arbitration. Several other ADR techniques, such as mini-trial, early neutral evaluation and expert determination also have been developed in recent years and are being used increasingly in the United States of America and the United Kingdom.(Footnote 16)
Elsewhere in the world, however, these techniques have yet to gain widespread acceptance.
(i) Negotiation
Direct negotiation (as opposed to third-party facilitated negotiation), where the disputing partiestry to resolve their differences or work out a compromise themselves, is the most common form of dispute resolution. In direct negotiation the parties retain complete control over the process and the outcome, including the ground rules and the agenda, the venue, whether to seek third-party assistance, the decision to end the process at any time, the ability to focus on issues and examine solutions directly relating to the underlying problem, and whether to accept the final outcome.(Footnote 17)
Generally, a negotiated solution will also be less costly in terms of human and financial resources than any form of third-party procedure. It also allows for the possibility that the parties will agree a solution that improves their working relationship and lowers the risk of a recurrence of the dispute.
While the main advantage of negotiation is that it is an informal and unstructured process, thus facilitating the objective of quick and cost-effective settlement, its lack of structure is also the major cause of failure. Other causes of failure include intractable negotiating positions, incompatible negotiating style and cultural differences.
Negotiation Suitability Screening Matrix
| MAIN ADVANTAGES | MAIN DISADVANTAGES |
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| Generally appropriate: | Generally not appropriate where: |
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(ii) Mediation
Mediation (sometimes referred to as conciliation) is a voluntary, non-binding, confidential and flexible dispute resolution procedure in which a neutral intermediary, the mediator, endeavors to assist the parties to reach a mutually satisfactory settlement of their dispute. Typically, mediation is concluded expeditiously and at a moderate cost.(Footnote 18)
Mediation can cover a large and complex range of issues or can be used to resolve one of several issues in dispute. The number of parties that can participate in a mediation is not limited. In fact, the procedure can be particularly useful when there are multiple parties involved, in which case it may often be difficult to achieve an agreement by direct negotiations.
Mediation is especially suitable where the dispute occurs between parties to a continuing business relationship. First, because mediation is far less adversarial than litigation or arbitration, it is more likely that a working relationship will survive a mediation than it will litigation or arbitration. Second, mediation provides an opportunity for finding a solution by reference to the parties' business interests and not just their strict legal rights and obligations. In fact a hallmark of mediation is its capacity to expand the traditional settlement discussions and broaden resolution options, often by going beyond the narrow legal issues in controversy. Unlike the remedies that may be available through court processes or arbitration, mediation allows for the possibility of innovation on the part of the parties and the mediator in crafting a solution that not only addresses the parties' respective claims, but also restores a measure of health and stability to the environment that engendered the dispute. Experience has shown that, with the assistance of a skillful and knowledgeable mediator, parties are able to bridge wide gaps in their positions and have often developed mutually advantageous business solutions through the process. A mediator can also assist the parties in identifying the critical implementation paths for the resolutions achieved through the mediation.
Mediation is not a suitable procedure for settling disputes in all cases. For example, where deliberate, bad-faith counterfeiting or software piracy is involved, mediation, which requires the cooperation of both sides, is unlikely to be appropriate. Similarly, where a party is certain that it has a clear-cut case, or where the objective of the parties or one of them is to obtain a neutral opinion on a question of genuine difference, to establish a precedent or to be vindicated publicly on an issue in dispute, mediation may also not be the appropriate procedure. Mediation will also be inappropriate where the parties' views on the merits, legal or technical, are very different.
As mediation is a voluntary and non-binding procedure, the mediator does not have any power to impose a settlement on the parties and any party may, if it so chooses, abandon the mediation at any stage prior to the signing of an agreed settlement. This means that, even though parties have agreed to submit a dispute to mediation, they are not obliged to continue with the mediation process after the first meeting. In this sense, the parties always remain in control of a mediation: the commencement of the process depends on their agreement to use it; its continuation, on their continuing acceptance and participation.
Because mediation is a confidential procedure, it encourages frankness and openness in the process by assuring the parties that any admissions, proposals or offers for settlement will not have any consequences beyond the mediation process. They cannot, as a general rule, be used in subsequent litigation or arbitration. Depending on the rules applicable to the mediation, the confidentiality of the existence and outcome of the mediation can also be preserved.
There are two main ways in which mediators can assist parties in reaching their own decision, which correspond to two types or models of mediation practiced throughout the world; although, in practice, the distinction is not so stark, depending on the mediator's mandate, personal style and the circumstances of the mediation. It is up to the parties to decide which of the two models of mediation they wish to follow.
Under the first model, "facilitative mediation", the mediator endeavors to restore and then facilitate communication between the parties and to help each side to understand the other's perspective, position and interests in relation to the dispute. The mediator and the parties then explore opportunities for a creative "win-win" solution, such as a mutually advantageous new business arrangement. The mediator ordinarily will not offer opinions on the merits of the case or the positions of the parties.
Under the second model, "evaluative mediation", the focus is on the parties' legal rights and obligations, the strengths and weaknesses of their positions, the likely outcome if the case were tried in court, and what represents a fair settlement. The mediator provides a non-binding assessment or evaluation of the dispute, which the parties are then free to accept or reject as the outcome of the dispute.
Unlike a judge or an arbitrator, whose mandate is to issue a binding decision or award, the mediator is not a decision-maker. The role of the mediator is rather to serve as a catalyst for negotiations and to assist the parties to reach their own decision on a settlement of the dispute. The mediator works to improve communication between the parties; helps the parties clarify their understanding of their mutual interests and concerns; probes the strengths and weaknesses of each party's legal positions; explores the consequences of not settling; and helps generate options for mutually agreeable resolutions of the dispute.
Unless or until encapsulated in a formal agreement, a mediated settlement is non-binding. Once the case is settled in a way that is agreeable to all sides, the mediator and/or the parties will draft a document specifying their agreement and stipulating how it will be implemented. The settlement agreement is a contract and an action for breach of contract may be brought if it is not performed on either side.
Mediation can be used at any stage. It can be used effectively during the parties' contract negotiations to help overcome a negotiating impasse. It can also be invoked during litigation or arbitration where the parties wish to explore the possibility of settlement. Regardless of when it is used, mediation has enjoyed high rates of success in achieving a result acceptable to the parties involved. Because other dispute resolution options are not foreclosed if mediation fails, entering into a mediation process is essentially without risk.
Mediation Suitability Screening Matrix
| ADVANTAGES | DISADVANTAGES |
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| Generally appropriate where: | Generally not appropriate where: |
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(iii) Arbitration
Arbitration involves the adjudication of rights by a tribunal composed of one or several arbitrators, who have the power to render a decision that is binding on the parties.(Footnote 19) As with other ADR processes, for an arbitration to take place there must be an agreement between the parties evidencing their intention to submit their dispute to arbitration. Unlike litigation, arbitration can neither be commenced against nor initiated by a person that is not a party to the arbitration agreement. However, similar to litigation and in contrast to mediation or other forms of non-adjudicatory ADR, arbitration does not always require the active participation of all of the parties to the arbitration agreement in order for a binding decision to be issued.
While arbitration and mediation share a number of characteristics, there are critical differences between the two procedures. First and foremost is the fact that while mediation is non-binding (at least not until there is a signed settlement agreement), the decision rendered by an arbitral tribunal in the form of an award is final and binding on the parties. Although subject to challenge on limited grounds, the award is rarely subject to an appeal on the merits to a court of law.
In mediation the parties retain responsibility for and control over the dispute and do not transfer decision-making power to the mediator. In arbitration, the authority to issue a final and binding decision is delegated to the arbitrator.
In arbitration, the outcome (of which there typically is one) is determined in accordance with an objective standard, the applicable law. In mediation, the outcome (of which there is no guarantee that there will be one) is determined by the will of the parties. Thus, it is often said that arbitration is a "rights-based" procedure, whereas mediation is an "interest-based" procedure.
In arbitration, a party's task is to persuade the arbitral tribunal of its case. It addresses its arguments to the tribunal and not to the other side. In mediation, since the outcome must be accepted by both parties and is not decided by the mediator, a party's task is to convince, or to negotiate with, the other side. It addresses the other side and not the mediator, even though the mediator may be the conduit for communications from one side to the other.
Arbitration procedures are thus much more formal and rigid than mediation procedures.
In addition to the generally accepted benefits of ADR (e.g., confidentiality, freedom to select decision makers with expertise in the subject matter of the dispute, party participation in choosing the decision makers, procedural flexibility, time and cost savings(Footnote 20)), arbitration is a particularly appropriate form of dispute resolution for commercial disputes arising out of international relationships:
(1) For several years there has been a general trend worldwide for courts to recognize the validity of and enforce parties' agreements to arbitrate and, as such, typically courts will not entertain a dispute that is to be referred to arbitration and will stay concurrent court proceedings to enable the arbitral process to function.
(2) Arbitration avoids the uncertainties and complexities that may be involved in litigating before a foreign court or courts, including whether a foreign court will assume jurisdiction to hear the case; the necessity for advice and representation by local lawyers; the necessity to have documents translated and for interpreters; and exposure to technical and formal rules of procedure and evidence.
(3) The arbitral tribunal and the procedure for the arbitration can be chosen so as to have a non-national character, acceptable to the parties, their representatives and arbitrators from different legal and cultural backgrounds.
(4) As a result of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which obliges contracting States to recognize and enforce foreign arbitral awards, international arbitral awards are enforceable in more than 126 countries. Because of such conventions (and the principle of comity(Footnote 21) ), it is often easier to enforce an arbitral award given in one country in the courts of another than it is to enforce court decisions across national boundaries. Many domestic regimes permit the registration and enforcement of arbitral awards as court judgments. In countries where arbitration is favored, including those that have ratified the New York Convention, court review of an arbitral award is extremely limited. An award will not be disturbed merely because the court may consider that the arbitrators reached the wrong conclusion on a question of fact or law. Instead, the award will normally be enforced unless there are specific reasons, such as those set out in Article V of the Convention.(Footnote 22)
There are two variations on the traditional arbitration procedures that are worthy of mention. The first is "expedited arbitration", a form of arbitration in which certain procedural modifications are introduced in order to ensure that the arbitration can be conducted and an award rendered in a shortened time frame and, consequently, at a reduced cost. Typically, under expedited arbitration procedures, a sole arbitrator is appointed, the timeframes for the procedures are shortened and rounds of written submissions or pleadings minimized.
The second is "med-arb", in which mediation is combined with arbitration. In med-arb, the dispute is submitted first to mediation. If a settlement is not reached within a defined period of time (for example, 60 or 90 days), or if a party refuses to participate or to continue to participate in the mediation, the dispute is referred for a binding decision through arbitration (or, if the parties so agree, through expedited arbitration). An often-mentioned advantage of the combined procedure is the incentive that it offers for a good faith commitment by both parties to the mediation process, since the consequence of a failure to reach an agreed settlement will be more tangibly measurable in terms of the financial and management commitment that would need to be incurred in the subsequent arbitration procedure. However, a potential downside of the med-arb procedure is that the presence of assured third-party resolution following the mediation might diminish the incentive for the parties to resolve the dispute through mediation.
Arbitration Suitability Screening Matrix
| MAIN ADVANTAGES | MAIN DISADVANTAGES |
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| Generally appropriate where: | Generally not appropriate where: |
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The results of an end-user survey commissioned by the ASPIC Research Committee and conducted by Intermedia Group show that, in general, end-users prefer less rigorous methods of conflict resolution over arbitration and litigation. Speed and confidentiality were cited as important factors, as was relationship preservation. According to the Intermedia Group's analysis of the results of an end-user survey conducted for ASPIC in September 2000:
"It is easy to see why. In the Internet Age, when time-to-market imperatives and the ability to respond quickly to changing market conditions dominate over all other concerns, conflicts, especially if they have the potential to hinder business, must be resolved quickly. To prevent damage to brand equity, as well as consumer and trading partner confidence, confidentiality too, is extremely important. Finally organizations spend a great deal of time, money and effort selecting and screening hosting and e-service suppliers, and it is in their interest to preserve relationships."
While ADR processes can be used at virtually any stage of a dispute, parties to a dispute should invoke an ADR process as early as possible to maximize the likelihood of an early resolution of their differences. Experience has shown that when a dispute has just begun, typically the parties are more flexible and often more willing to consider various proposals to resolve the matter. As a dispute progresses, the parties become entrenched in their positions and are less open to compromise. An early resolution of the dispute also minimizes business disruption and can result in a significant savings on legal costs.
SECTION IV:
DRAFTING GUIDELINES FOR DISPUTE RESOLUTION CLAUSES IN ASP SUPPLY CHAIN CONTRACTS
Whether at the time of negotiating their agreement or after a dispute has arisen, the resolution procedure agreed by the parties, in light of the circumstances underlying their contractual relationship (e.g., value of the contract, local versus cross-border) or the dispute between them (e.g., issues in dispute, amount in controversy, number and identity of parties), must be recorded in a written agreement.
The importance of a properly drafted dispute resolution clause (i.e., a clause in the parties' contract regarding the process or procedures by which future disputes arising out of, or relating to, their contractual relationship will be submitted for resolution) or submission agreement (i.e., a separate contract between the parties recording their agreement on the dispute resolution procedure to which they will submit a dispute that has arisen out of their contractual relationship) should not be underestimated. Where insufficient attention is paid to the drafting of such provisions, more often than not the parties will find themselves fighting over the clause itself or the resolution procedure that is to be followed before even getting to the merits of their dispute. On the other hand, although there is much merit in attempting to draft for all contingencies and to clarify as much as possible the necessary procedures, by doing so, the parties run the risk that with each additional condition or requirement, there may be yet another issue to argue about or potential hurdle to overcome in getting to a final disposition of the dispute.
Set out below are some of the more important elements that should be considered when drafting, adopting or recommending a dispute resolution clause or submission agreement, especially in the context of an international relationship; in domestic contracts, specific local requirements regarding the form or content of the clause may have to be taken into account. The interrelationship of these issues is reflected in the decision tree on the page that follows. (The characters appearing in parentheses refer to the section sub-paragraphs following the diagram.) Several model dispute resolution clauses are provided in Annex A.
Decision Tree for Drafting a Dispute Resolution Clause
A. Pre-Dispute or Submission Clause
The first issue to be addressed is whether or not to include a clause in the contract dealing with the ADR procedures through which the parties' future disputes will be resolved, or to wait until the disputes have arisen to agree on a resolution procedure.
Generally speaking, subject to consumer protection restrictions,(Footnote 23)
it is preferable to include a dispute resolution clause at the time of concluding the parties' agreement. Once a dispute has arisen, it may be impossible for the parties to agree about anything, let alone the procedures about which to resolve their dispute. Moreover, a pre-dispute clause provides both parties with a degree of certainty regarding how problems will be resolved and can expedite the dispute resolution process.(Footnote 24)
It is also possible to decide on a dispute resolution process after a dispute has arisen and to reflect the parties' agreement on that process in a separate contract, particularly if their relationship is such that an agreement could be achieved without significant delay, expense or acrimony. One of the most often cited benefits of this approach is that it allows the parties to agree on a dispute resolution procedure that best suits the nature of their dispute. While this may be true, the fact that the parties may have previously agreed on a dispute resolution procedure would not preclude their subsequently agreeing on a different procedure in light of the circumstances of their dispute, if they considered this to be in their mutual best interest.
It should be noted that, in the absence of a clause or agreement submitting the parties' disputes to an ADR procedure, their disputes would have to be resolved by litigation in the courts.
B. Ad Hoc or Institutional Procedures
ADR procedures may be conducted pursuant to a set of procedural rules developed and sponsored by an institutional dispute resolution service provider (e.g., WIPO Arbitration and Mediation Center, International Chamber of Commerce, American Arbitration Association, Cairo Regional Center for International Commercial Arbitration, Hong Kong International Arbitration Center) and incorporated by reference in to the parties' agreement,(Footnote 25)
or according to procedures developed and agreed to by the parties themselves on the basis of their perception of their specific circumstances; that is, as specified in an ad hoc dispute resolution clause. A second issue to be decided, therefore, is whether to proceed on the basis of a set of institutional rules or to proceed ad hoc.
Generally, the negotiation and drafting of an ad hoc dispute resolution clause is time-consuming and difficult and should not be undertaken without specialist advice. Whatever may be the perceived advantages of tailoring the procedures to the parties' specific circumstances, typically, these are far outweighed by the potential pitfalls of undertaking such an exercise.
A dispute resolution procedure administered by a dispute resolution service provider, in accordance with its institutional rules, has many advantages and is generally the preferred form.(Footnote 26)
Although this entails additional administrative costs attributable to the fees charged by the provider, the benefits received in return are considerable. These include an administrative and supervisory infrastructure; a trained staff focusing on the efficient administration of the dispute resolution procedure; and an independent framework for resolving difficult issues that might arise in the course of the proceedings.(Footnote 27) Another very important benefit of institutional ADR is the availability of a tried and tested set of procedural rules providing a known and predictable structure.
The WIPO dispute resolution system comprises three sets of procedural rules,(Footnote 28) namely, the WIPO Mediation Rules (Annex C; http://arbiter.wipo.int/mediation/mediation-rules/index.html), the WIPO Arbitration Rules (Annex D; http://arbiter.wipo.int/arbitration/arbitration-rules/index.html) and the WIPO Expedited Arbitration Rules (Annex E; http://arbiter.wipo.int/arbitration/expedited-rules/index.html).(Footnote 29)
Developed by leading experts in cross-border dispute settlement, the Center's rules are widely recognized as particularly appropriate for information technology, intellectual property, electronic commerce and other disputes arising out of use of the Internet. They are available in the following languages: English, Arabic, French, German, Japanese and Spanish.
There are several features of the various WIPO procedures that make them a particularly appropriate choice for resolving ASP supply chain disputes. The most important of these features are summarized in the table below.
| Confidentiality |
| The WIPO Arbitration, Expedited Arbitration and Mediation Rules contain comprehensive provisions dealing with confidentiality. Articles 73-76 of the Arbitration and Expedited Arbitration Rules deal with the maintenance of confidentiality in relation to the existence of the arbitration, the disclosures made within the arbitration, and the award itself; they specify the confidentiality obligations on the part of the parties (including their witnesses), the arbitrators and the Center; and they identify the limitations on the confidentiality requirements, such as when disclosure is required by law or by a competent body. Both sets of Rules allow a party to invoke the confidentiality of a special class of information it may wish to submit. Article 52 contains elaborate provisions allowing an arbitral tribunal to make protective orders in respect of trade secrets and other confidential information that one party wishes to have specially protected. To assist its determination as to whether and to whom the information may be disclosed, in exceptional circumstances, the tribunal is authorized to designate a confidentiality advisor. Articles 11 and 12(b) of the WIPO Mediation Rules clarify that the mediator cannot disclose information received from one party to the other party, without express authorization. Article 14 prohibits any sort of record to be made of meetings of the parties and the mediator. Article 15 prohibits all persons involved in the mediation (the mediator, the parties, party representatives and advisors, independent experts, other persons present at the meetings) from using or disclosing information concerning or obtained in the course of the mediation. Following the termination of the mediation, Article 16 requires the return of written pleadings and other documents and materials received by all persons involved in the mediation to the submitting party and the destruction of notes relating to meetings with the mediator. Article 17 prohibits the introduction into evidence during any subsequent judicial or arbitration proceeding any views expressed by a party in the mediation regarding settlement; party admissions made in the course of the mediation; proposals made or views expressed by the mediator; or a party's unwillingness to accept a particular settlement proposal. |
| Speed |
| Bearing in mind the typical need of parties to an ASP supply chain dispute for speedy dispute resolution, the WIPO dispute resolution scheme is especially notable for the emphasis placed on the expeditious resolution of disputes. This is evidenced not only by the WIPO Expedited Arbitration Rules, but also in the WIPO Arbitration Rules. The latter contain numerous provisions drafted with the objective of eliminating causes of unnecessary and avoidable delay. See, e.g., Article 13 (exhorting each party to ensure that its representatives "have sufficient time available" to enable the arbitration to proceed expeditiously); Article 18 (requiring in cases involving multiple claimants or respondents, where three arbitrators are to be appointed, that unless each set of claimants or respondents makes a joint nomination, neither side will be allowed to make an appointment); Article 23 (requiring an arbitrator's commitment "to make available sufficient time to enable the arbitration to be concluded and completed expeditiously"); Article 33, (stating that the Center has the discretion not to allow a party to make a new appointment after the replacement of its previous nominee); Article 34 (providing that a replacement arbitrator is not entitled to a repetition of prior hearings except by decision of the arbitral tribunal); Article 35 (permitting two arbitrators to proceed with the case notwithstanding the non-participation of the third arbitrator); Article 38 (instructing the tribunal to ensure that the arbitration takes place "with due expedition"); Article 54 (empowering the arbitral tribunal to limit the presentation of irrelevant or redundant witness testimony); Article 61 (providing that, in the absence of a majority, the presiding arbitrator may decide as if acting as a sole arbitrator); Article 63 (obliging the tribunal to inform the WIPO Center about delays in closing the proceedings and in making the award); Article 65 (stating the tribunal's discretion to suggest that the parties explore settlement). The WIPO Mediation Rules reflect a similar concern for speed. See, e.g., Article 6(a) (undertaking by mediator "to make available sufficient time to enable the mediation to be conducted expeditiously); Article 10 (requiring the parties to cooperate in good faith with the mediator to advance the mediation "as expeditiously as possible"); several other provisions where terms such as "immediately" or "promptly" are used. |
| Appointment of Neutrals |
| The WIPO Arbitration Rules contain detailed provisions regarding the appointment of the arbitral tribunal. Of particular relevance to ASP supply chain disputes is the fact that the Rules leave it to the parties to decide whether the arbitrator(s) should possess certain technical expertise or other qualifications. The WIPO Center, as administering authority, does not reserve the right to confirm the parties' appointment. The parties thus have the freedom to agree any of the different possible variations for constituting the arbitral tribunal with or without the appointment of experts. Moreover, given the "one-to-many" feature of ASP supply chain disputes, the provisions contained in Article 18 of the WIPO Arbitration Rules regarding the appointment of the arbitral tribunal in multi-party disputes are notable. |
| Appointment of Experts |
| Article 55 of the WIPO Arbitration and Expedited Arbitration Rules authorizes the arbitral tribunal to appoint one or more independent experts to report on specific issues designated by the tribunal. That provision sets out the procedures for party participation in determining the expert's terms of reference, comments by the parties on the expert's findings, and the weight to be given by the tribunal to the expert's report and testimony. |
| Technical Primers |
| Article 51 of the WIPO Arbitration and Expedited Arbitration Rules contains a unique provision allowing for the parties to submit jointly a technical primer setting out the background of the technical, scientific or other specialized information that may be required for the tribunal to understand fully the matters in issue. |
| Interim Relief |
| The WIPO Arbitration and Expedited Arbitration Rules expressly provide that a party's request to a court for interim relief, or to enforce an interim order by the arbitral tribunal, will not be considered incompatible with the parties' agreement to arbitrate, or a waiver of that agreement (Article 46(d)). In addition, both sets of Rules state that an arbitral tribunal has the authority to issue any provisional orders or take other interim measures that it deems necessary, if required, subject to the requesting party furnishing appropriate security (Article 46(a)). Moreover, in recognition of potential enforceability concerns under the New York Convention, the Rules provide that "[m]easures and orders contemplated under this Article may take the form of an interim award" (Article 46(c)). |
| Outcome Oriented Mediation |
| The WIPO Mediation Rules are designed to provide the mediator and the parties with a considerable degree of flexibility in the conduct of the mediation. They also provide the mediator with a range of options to maximize the likelihood of an outcome. Thus, where a mediator believes that issues in dispute between the parties are not susceptible to resolution through mediation, under Article 13 of the WIPO Mediation Rules, the mediator is authorized to propose procedures or means most likely "to lead to the most efficient, least costly and most productive settlement of those issues", including (i) an expert determination of one or more particular issues; (ii) arbitration; (iii) arbitration on the basis of last offers of settlement by the parties; (iv) arbitration in which the mediator will, with the express consent of the parties, act as sole arbitrator (with the understanding that the mediator will be able to take into consideration information received during the mediation). |
If institutional arbitration is chosen, it is generally advisable to use the standard dispute resolution clauses made available by the selected institution. Such clauses typically have been drafted or reviewed by experts and significantly minimize the possibility of dilatory tactics on the part of the one of the parties once a dispute has arisen and the resolution procedure invoked. Moreover, as the clauses normally will incorporate the institutions' procedural rules, the need to spell out a myriad of procedural matters in the parties' agreement is eliminated. Examples of the WIPO Center's clauses are provided in Annex A.
C. Complexity of Clause/Procedure
The contracting parties will also have to decide whether they desire a single-step or multi-tiered dispute resolution procedure. Typical multi-step procedures often require the parties to first try to settle their dispute through negotiation, and will identify the level of operational or executive personnel at which the negotiations should take place as well as set time limits within which the negotiations must be completed. In the event that attempts to reach a negotiated settlement fail, the clause may call for the parties to enter into mediation or proceed directly to arbitration (or even litigation). Where mediation is required, it is typically time-barred. If the parties are unable to reach a settlement through mediation within the stipulated time period, the dispute is submitted to arbitration. By contrast, in a single-step procedure, the parties' dispute is submitted directly for third-party resolution without any pre-requisites, with arbitration being the most commonly chosen method.
While arbitration is generally regarded as an effective method of resolving disputes, it can be costly and time consuming. Thus, it is often considered as a last resort to be employed when other efforts to resolve the dispute fail. The rationale underlying multi-tiered dispute resolution clauses is that if there are to be attempts to resolve a dispute before resorting to arbitration, these attempts should be formalized and specified in the parties' contract. Having an appropriate multi-tiered clause often may result in the resolution of the dispute by a specified and relatively cheap and cost-effective procedure without having to resort to arbitration.(Footnote 30)
Typically, multi-tiered clauses are found in high-value or long-term contracts.
There are several potential difficulties with multi-tiered dispute resolution clauses. The drafting of the clause may raise questions concerning the meaning and operation of a particular stage or stages of the dispute resolution procedure. There may also be an issue as to the point of time at which one procedure terminates and the next may be employed. Another question that arises is whether each stage, or procedure, is enforceable at law. Yet another question is whether a multi-tiered clause can be enforced under laws and conventions that specifically give effect to arbitration agreements. Because of these and similar issues, expert assistance should be sought in deciding the appropriateness of a multi-tiered clause in the context of the parties' specific contractual relationship and the form that it should take.
D. Scope of Clause
Another issue to be decided is whether the clause should be drafted widely so as to include all possible disputes arising out of the parties' relationship, or to exclude certain categories of disputes for resolution by litigation. In part, this decision will be based on business and company policy considerations; for example, software developers may wish to litigate an alleged copyright infringement issue in court in order to send a message and set a precedent. It will also have to take into account which types of disputes may or may not be resolved through ADR as a matter of law.
The issue arises most frequently in the context of considering the use of arbitration. The question of the arbitrability of a dispute relates to the power of a sovereign government to decide which matters may be settled by arbitration and which may not. If an arbitration clause covers matters that cannot be settled by arbitration under (1) the applicable law of the agreement, (2) the law and public policy of the place of arbitration, or (3) the law and public policy of each country where the award may be taken for enforcement, the resulting arbitration award may be partially or wholly unenforceable.(Footnote 31)
That said, there are very few substantive issues that cannot be settled by arbitration.
E. Number of Decision-makers
The parties will also have to decide whether to specify the number of decision-makers that will decide the dispute and, if so, whether to submit the dispute to one or more third-party neutrals.
The election most typically made when a dispute is to be submitted to mediation is to specify a sole mediator. However, in international cases, co-mediation by two mediators, one often located at the place of one party and the second located at the place of the other party, has proven to be quite successful. If more than one mediator is desired, this should be clarified in the clause. The WIPO Mediation Rules cater for the possibility that more than one mediator may be appointed.(Footnote 32)
It is generally the better practice to specify the number of arbitrators in the arbitration agreement, even though this may limit some flexibility in choosing the number later in response to the nature and complexity of the dispute. The considerations that should be taken into account in deciding on the number include, the value of the contract, the location of the parties, their nationality, the place of arbitration, to mention but a few.
The advantages of a sole arbitrator typically include easier logistics, lower fees and a quicker path to a final decision than with a three-member panel. The appointment of a sole arbitrator may also mean fewer procedural complexities, in the event of a dispute involving more than one claimant or respondent. On the other hand, if a sole arbitrator arrives at a wrong decision, normally, there is no appeal procedure by which that decision can be corrected. A sole arbitrator is also denied the benefit of consultation with fellow tribunal members.
Where the arbitral tribunal is to be composed of three members, under most institutional rules, including the WIPO Arbitration Rules, each party will usually have the right to nominate one arbitrator, leaving the presiding arbitrator to be chosen by the two party appointees. While the party-appointed arbitrator is not (or should not be) an advocate for a party's position, the party appointee can ensure that a party's case is properly understood by the tribunal, and can clarify issues that may arise due to language differences, different legal terminology, and unfamiliar legal principles and concepts. Also, even though a three-member tribunal may take longer in arriving at a decision and the costs involved are significantly higher, the risk of an erroneous award is lowered considerably.
The WIPO Arbitration Rules provide that the arbitral tribunal will consist of the number of arbitrators as agreed by the parties.(Footnote 33)
They also provide that if the arbitration clause is silent and the parties are unable to agree on the number of arbitrators, the WIPO Center will designate a sole arbitrator, unless the circumstances of the case justify a three-member tribunal.(Footnote 34)
The WIPO Arbitration Rules contain particularly detailed clauses dealing with the tribunal appointment procedures when the parties, or their appointees, are unable to agree or in the event of a default.(Footnote 35)
Under the WIPO Expedited Arbitration Rules, unless the parties agree otherwise, the proceedings are always before a sole arbitrator.(Footnote 36)
F. Specifying the Identity or Qualifications of the Neutrals
The parties will also have to confront the issue of whether specifically to identify the neutral(s) by name, or to describe with any particularity the qualifications of the person(s) who should serve as the neutral(s).
Generally, it will be easier for the parties to agree on the identity of the neutral(s) or their qualifications before a dispute has arisen. Particularly if the parties are able to name the neutral(s) in the agreement, can greatly expedite the dispute resolution process. There are, however, several downsides. For example, the person(s) identified in the agreement may not be the best suited for the type of dispute that must be resolved, or may not be willing or able to serve.
There are additional factor to be taken into account where the parties are considering only describing the qualifications of the person(s) who should serve as the neutral(s). The appointment of a technically sophisticated neutral can reduce the need for an expert opinion on complex matters. It can also lead to a quicker and cheaper outcome. In practice, however, the choice of a technically sophisticated neutral must be weighed against the need for a neutral who is a dispute resolution specialist with the skills to keep the procedures on track. In addition, the dispute may not necessarily require a neutral with the particular skill set identified in the dispute resolution clause.(Footnote 37)
Lastly, experience has shown that the very same individuals who previously were able to agree on the qualifications or characteristics of the neutral(s), will very quickly come to an intractable impasse as to whether the candidates proposed by the other side satisfy the contractual criteria. It may also not be possible for the dispute resolution service provider as the appointing authority to find one or more suitable candidates.
G. Place of the Dispute Resolution Procedure
Where the parties' dispute is to be submitted to arbitration, it will be important to decide on the place or "legal seat" of the arbitration, particularly in the context of an international relationship (although designatingthe venue can also facilitate matters in a domestic contract). Indeed, choosing the place of arbitration may be one of the most significant issues to be negotiated in an international contract as it is the law of the place of the arbitration (which is not to be confused with the law that will apply to the substance of the parties' dispute) that will govern the arbitral proceedings.
Under most institutional rules, including the WIPO Arbitration Rules, it is possible for the arbitral tribunal, unless otherwise agreed by the parties, to meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties.(Footnote 38)
This, however, does not change the "legal seat" of the arbitration.
The most important consideration when selecting an arbitration venue, is to ensure that the country in which the seat of arbitration will be located offers and "arbitration friendly" environment; that is, for example, where the local courts will enforce the arbitration agreement, not interfere unduly in the arbitration process, and respect the finality of the award. Generally, these objectives can be achieved by locating the place of arbitration in a country that:
(1) is a signatory to the New York Convention, which provides for both the enforcement of arbitration agreements and the enforceability of arbitral awards.(Footnote 39)
(Even if the country of the place of arbitration is a signatory to the Convention, the local law should be reviewed to determine the extent to which the courts of that country, as practical matter, may be able to interfere unduly in the arbitral process in connection with the enforcement of the award.); and
(2) has fully and properly adopted the UNCITRAL Model Law on International Commercial Arbitration;(Footnote 40)
this is not an absolute criterion, as there are other countries that have adopted pro-arbitration laws.
Other factors to be considered in choosing the place of arbitration include geographical and cultural neutrality, convenience of venue for the neutrals, the parties and their counsel, and witnesses, availability of local counsel, and availability of support services, transportation, hotels, meeting facilities, court reporters.
If the parties have not agreed on the place of arbitration, the WIPO Arbitration Rules provide that this decision will be taken by the WIPO Center, taking into consideration any observations of the parties and the circumstances of the arbitration.(Footnote 41)
The choice of the place of the mediation does not have the same legal implications as is the case with the choice of the place of arbitration. Generally, the place of mediation should be determined on the basis of convenience to the parties; because of the multi-party factor in ASP supply chain disputes it may be advisable for an ASP to insist on the place of mediation being where its principal offices are located. It should be noted that many mediations have been concluded successfully without any physical meeting of the parties or their counsel. It is increasingly common for preliminary meetings and even mediation caucuses to be held using video-conferencing, Internet-based facilities and other communications technology. The extent to which such tools are used depends not only on the parties' acceptance, but also on the mediator's and the administering entity's familiarity with them.
H. Language of the Proceedings
In an international contractual relationship, the language to be used in the mediation or arbitral proceedings should be specified. As a practical matter, this may eliminate the need to use interpreters and translators. More importantly, it can minimize the disadvantage resulting from having to struggle with an interpreter's approximations and transliterations of technical terms and legal jargon. When choosing the language of the arbitration, consideration should be given to the applicable law of the contract, the place of arbitration, the language of the contract, the language of the other principal documents, among other factors.
If no language is specified, the WIPO Arbitration Rules provide that the language of the arbitration will be the same as that of the arbitration agreement, subject to the power of the arbitral tribunal to decide otherwise.(Footnote 42)
I. Applicable Law
The many important consequences of the choice of applicable law are beyond the scope of this document. Suffice it to say that parties should not leave the choice of substantive law unspecified. Rather, the parties should try to resolve the question of what law will govern their substantive rights and obligations under the contract at the time of negotiating the contract.
The WIPO Arbitration Rules provide that the tribunal will decide the substance of the dispute in accordance with the law designated by the parties. It is further clarified that the law designated will be taken to mean the substantive law and not the conflict of law rules of the jurisdiction in question, unless there is a contrary indication. If the parties have not made a choice, the tribunal is authorized to apply the law that it deems to be appropriate.(Footnote 43)
The law applicable to the arbitration, is the law of the place of the arbitration, unless the parties have expressly agreed on another arbitration law and such agreement is permitted by the law of the place of the arbitration.(Footnote 44)
J. Optional Clauses
As mentioned, one of the main advantages of using a model dispute resolution clause furnished by the selected administering entity, in which that institutions' procedural rules will be incorporated by reference, is that it obviates the need to draft language dealing with a wide range of issues bearing on the dispute resolution process. While it is possible to derogate from the provisions of a particular institutional rule, this should be clearly stated in the parties' agreement and done with extreme caution.
Discussed below are several matters which are not typically addressed by institutional dispute resolution rules and which the parties to an ASP supply chain contract may wish to address in the dispute resolution clause with additional language. The list of items discussed is by no means all-inclusive and which of the supplementary items should be included will depend on the specifics of each individual contractual relationship.
1. Scope of Relief
The issue of limiting or expanding the scope of relief that may be granted arises most frequently in the context of drafting an arbitration clause; however, the parties may also wish to take the relevant considerations in that context into account in determining whether to circumscribe the scope of settlement in a mediation.
Generally speaking, under a broad arbitration clause, the tribunal will have a wide-ranging authority regarding the relief that may be granted. In certain circumstances the parties may wish to include or exclude certain specific remedies. For example, the parties may wish to specify that the tribunal will have no authority to award punitive damages; or to exclude the possibility of an award of consequential damages or injunctive relief; or to limit the amount of the award to a specified monetary amount or to such amount as may be available pursuant to a liquidated damages clause.
In connection with the foregoing, it should be noted that the WIPO Arbitration and Expedited Arbitration Rules provide that "in the light of all the circumstances and the outcome of the arbitration" the arbitrators may apportion the costs of arbitration(Footnote 45)
and order a party "to pay the whole or part of reasonable expenses incurred by the other party in presenting its case".(Footnote 46)
The award may be rendered in any currency and the tribunal is authorized to award simple or compound interest to be paid by a party on any sum awarded against that party. In this connection, the tribunal is free to determine the interest rate that it considers to be appropriate, without being bound by legal rates of interest, and is free to determine the period for which interest is to be paid.(Footnote 47)
Under Article 24 of the WIPO Mediation Rules the parties are required to share all costs associated with the mediation (e.g., the registration fee, the fees of the mediator, the required travel expenses of the mediator, any expenses associated with obtaining expert advice), except if they have agreed otherwise.
2. Third Parties
As discussed above, ASP supply chain disputes will often involve multiple parties and the circumstances of the dispute may benefit from the joinder of third parties in to the dispute resolution proceedings or the consolidation of separate proceedings. However, in the absence of specific contractual clauses dealing with consolidation and third-party joinder, disputes which might better be dealt with together must nevertheless be dealt with separately and several proceedings, normally, will have to organized on the basis of each separate dispute resolution clause.
Set out below are examples of joinder and consolidation clauses, pursuant to which multi-party proceedings have been successfully conducted. It is to be noted that, aside from the fact that the clause must be technically correct, the extent to which a multi-party proceeding will be possible will depend largely on the level co-operation between the parties. It will also depend on the extent to which the various arbitration clauses are materially similar (e.g., same place of arbitration, same language, same number of neutrals). In addition, such factors as the laws applicable to the arbitration, the underlying procedural rules, and the experience and organizational capabilities of the administering entity and the neutrals will also be significant.
| Joinder |
| The parties acknowledge that performance of this contract is affected by the contracts or the types of contracts listed in Attachment __ ("Related Contracts"). To the extent that a dispute, controversy or claim ("Dispute") arising under, out of, or relating to this contract is based on or would affect a Related Contract, the parties undertake to cooperate to ensure that such Dispute and any issue with respect to any such Related Contract shall be resolved in a cost and time effective manner. In particular, the parties hereby agree and consent to the joining of the parties to any such Related Contract to the extent that the Arbitral Tribunal rules that such joinder would be of assistance in resolving the Dispute and any related disputes under Related Contracts. The parties expressly authorize the jurisdiction of the Arbitral Tribunal to order any such joinder on such terms as the Arbitral Tribunal shall decide. Each party shall ensure that its Related Contracts provide that the Arbitral Tribunal with respect to any Dispute has jurisdiction to join parties to such Related Contracts to proceedings relating to the Dispute. In particular, each such Related Contract shall expressly provide that any Dispute thereunder is subject to the provisions of the [WIPO Arbitration/Expedited Arbitration/Mediation Rules]. If a party is unable to negotiate such provisions with respect to a Related Contract, it shall give the other party notice thereof and request that it waive such requirement with respect to such Related Contract. The other party shall waive such requirement if such a waiver is necessary or appropriate in the circumstances. |
| Consolidation and Joinder - Mediation |
[Clause to be included in ASP-Customer Contract] In the event that a dispute is referred to mediation under [paragraph number of the mediation clause] and one of the parties considers that this dispute is connected to: (a)Services or goods provided to that party under a third-party contract (Partner Contract), the other party shall not object to the participation of such third-party in any meetings relating to the mediation or to the participation of the third-party in the mediation. (b)A dispute relating to or arising out of a Partner Contract (the Connected Dispute), which is to be or has been referred to mediation, that party may, by notice in writing, require that the Connected Dispute be referred to the mediator appointed pursuant to this clause. The other party shall not object to the consolidation of the mediations. [Clauses to be included in ASP-Partner Contract] In the event that: (a) A mediation has already been commenced under a separate contract for services to be provided by [the ASP] (the Services Contract), and (b) A dispute relating to or arising out of this contract is to be referred to mediation under [paragraph number of the mediation clause], and (c) [The ASP] considers that the dispute under this contract is connected to the dispute that is the subject of the mediation under the Services Contract (a Connected Dispute), [The Partner] shall not object to a request by [the ASP] that the dispute under this contract be consolidated with the dispute referred to mediation under the Services Contract. In the event that: (a) A mediation has been commenced under the Services Contract, and (b) [The ASP] considers that the Connected Dispute is connected to services or goods to be provided under this contract, [the ASP] may, by notice in writing, request that the [the Partner] provide such information and attend such meetings in connection with the mediation of the Connected Dispute, as may be considered reasonable. |
| Consolidation and Joinder - Arbitration |
[Clause to be included in Customer Contract] In the event that a dispute is referred to arbitration under [paragraph number of the arbitration clause], and one of the parties considers that this dispute is connected to: (a) Services or goods provided to that party under a third-party contract (Partner Contract), the other party shall not object to the joinder of the third-party in to the arbitration. (b) A dispute relating to or arising out of a Partner Contract (Connected Dispute), which is to be or has been referred to arbitration, that party may, by notice in writing, require that the Connected Dispute be referred to and finally settled in the arbitration pursuant to this clause. The other party shall not object to the consolidation of the arbitrations. [Clauses to be included in Partner Contract] In the event that: (a) An arbitration has already been commenced or is to be commenced under a separate contract for services to be provided by [the ASP] (the Services Contract), and (b) A dispute relating to or arising out of this contract is to be referred to arbitration under [paragraph number of the arbitration clause], and (c) [The ASP] considers that the dispute under this contract is connected to the dispute that is the subject of the arbitration under the Services Contract (a Connected Dispute), [the ASP] may, by notice in writing, require that the dispute under this contract be referred to and finally settled in the same arbitration concerning the Connected Dispute (the Connected Arbitration). [The Partner] shall not object to the consolidation of the arbitrations and shall participate in the Connected Arbitration and be bound by the award rendered in the Connected Arbitration in the same manner as if the dispute under this contract had been referred to and finally settled in a separate arbitration pursuant to this clause. In the event that: (a) An arbitration has been commenced under the Services Contract, and (b) [The ASP] considers that the Connected Dispute is connected to services or goods to be provided under this contract, [the ASP] may, by notice in writing, request that the [the Partner] shall be joined as a party in the Connected Arbitration. [The Partner] shall not refuse any such request and shall participate in the Connected Arbitration and be bound by the award rendered in the Connected Arbitration in the same manner as if a dispute had been referred to and finally settled in a separate arbitration pursuant to this clause. In the event that: (a) An arbitration has been commenced under the Services Contract, and (b) [The ASP] considers that the Connected Dispute is connected to services or goods to be provided under this contract, [the ASP] may, by notice in writing, request that the [the Partner] shall provide such information and |
3. Continued Performance
It may be useful to clarify the parties' respective performance obligations, whether the provision of services or payment for those services, in the event of a dispute. Language dealing with this issue may be important for two reasons. First, it is unlikely that, in the event of a dispute, a customer will no longer continue to require the application services; and if it is to continue to receive the services, it should be obliged to continue making its payments. Second, the fact that the ASP would be required to continue performing in light of the contractual language and the customer required to continue to make payment may increase the likelihood of the parties coming to an amicable settlement of their dispute.
| Continued Performance |
| Each party agrees to continue performing its obligations under this Agreement during the pendency of any dispute resolution procedure commenced in accordance with this Agreement, except to the extent that issue(s) in dispute may preclude performance. A dispute over payment shall not be deemed to preclude performance. In the event of a dispute, pursuant to which a party believes in good faith that it is entitled to withhold payment during the pendency of the dispute resolution process, the other party shall, subject to the payment into an interest bearing escrow account of the disputed amounts, continue to perform in accordance with its obligations under the Agreement. The [identify party that is withholding payment] shall continue to pay any undisputed amounts to [identify the party that is the beneficiary of the payments]. Upon resolution of the dispute, the parties shall allocate the funds in the escrow account, plus any interest earned on such funds, in accordance with the resolution of the dispute. |
4.Discovery
Generally speaking, the term "discovery" in the context of dispute resolution refers to procedural devices that can be used by one party to obtain facts and information about the dispute from other parties in order to assist that party in preparing its case. Discovery is an integral aspect of trial practice in the Anglo-American legal tradition and is the most frequently cited reason for the long delays and high costs of court litigation. Discovery is not common in civil law traditions (e.g., in Continental Europe). The tools of discovery include depositions upon oral and written questions, written interrogatories, and production of documents or things.
As discussed above, among the main benefits of ADR is that the scope of discovery is very limited, and largely subject to the discretion of the neutral. For example, Article 48(b) of the WIPO Arbitration and Expedited Arbitration Rules provides that:
At any time during the arbitration, the Tribunal may, at the request of a party or on its own motion, order a party to produce such documents or other evidence as it considers necessary or appropriate and may order a party to make available to the Tribunal or to an expert appointed by it or to the other party any property in its possession or control for inspection or testing.
In international contracts, where the parties wish to be more specific regarding the standards and procedures relating to the taking of discovery, reference may be made to the International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration (the "IBA Rules of Evidence"), which strike a sound balance between different procedural perceptions and traditions. The IBA Rules of Evidence supplement the arbitration rules chosen by the parties. The clause below is based on the clause recommended by the IBA.
| Discovery |
| The parties agree that the IBA Supplementary Rules Governing the Presentation and Reception of Evidence in International Commercial Arbitration (IBA Rules), as in force at the time of the institution of the arbitral proceedings, shall apply together with the WIPO [Arbitration/Expedited Arbitration] Rules governing any submission to arbitration incorporated in this contract. Where the IBA Rules are inconsistent with the aforesaid the WIPO [Arbitration/Expedited Arbitration] Rules, the IBA Rules shall prevail, but solely as regards the presentation and reception of evidence. |
5.Effect of Award
Where the designated procedural rules do not clarify the parties' agreement as to the effect to be given to the arbitral tribunal's award, the parties should include language in the dispute resolution clause along the lines contained in Article 64 of the WIPO Arbitration and Expedited Arbitration Rules. That Rule provides as follows:
By agreeing to arbitration under these Rules, the parties undertake to carry out the award without delay, and waive their right to any form of appeal or recourse to a court of law or other judicial authority, insofar as such waiver may validly be made under the applicable law.
The award shall be effective and binding on the parties as from the date it is communicated by the Center pursuant to Article 62(f), second sentence.
SECTION V
DISPUTE AVOIDANCE BEST PRACTICES AND GUIDELINES
Naturally, it would be optimal to avoid disputes from materializing in the first place. Particularly in the context of a long-term commercial relationship, however, this may not always be possible. Even so, there are a number of measures that, if properly implemented, can significantly minimize the risk of misunderstandings or prevent a minor technical or administrative problem from escalating into a full-blown dispute.
As the ASP business matures, the delivery of services is expected to migrate towards an automatic provisioning, real-time service delivery model in which the parties providing the service will rely heavily on the operational capabilities of their partners for the flow of information, payment and services to be as fluid and responsive as possible. As greater reliance between the parties occurs, the importance of sound contractual relationships, and effective and rapid contingency planning and dispute resolution processes will become even more critical to the avoidance of disputes in the ASP supply chain.
A. Operational Best Practices
| Best Practice |
Adopt and promote operational best practices in the following general areas:
|
1. General Guidelines
As a threshold matter, the best way of minimizing the risk of a dispute is to have a sound, well conceived and properly developed and implemented delivery model, including operational best practices in the areas broadly set out below.(Footnote 48)
Infrastructure Planning and Management |
|
Connectivity Planning and Management |
|
Security Planning and Management |
|
Application Management |
|
Implementation Planning and Management |
|
Support Planning and Management. |
|
2. Problem Identification Systems
| Best Practice |
| Be proactive in determining service-level compliance problems, for example: By deploying systems that can isolate the cause of a problem and the associated vendor that owns the problem component; and Through comprehensive and meaningful reporting of service level compliance issues to customers. |
It is axiomatic that a service-level deficiency that a customer complains of is a problem pregnant with the possibility of future litigation. On the other hand, a service-level deficiency reported by the ASP to the end-user is customer service.
ASPs and other supply chain stakeholders can significantly reduce the risk of a dispute materializing:
(1) by taking a proactive approach in determining service level compliance problems through systems that can isolate the cause of a problem and the associated vendor that owns the problem component; and
(2) through comprehensive and meaningful reporting of service level compliance issues to customers.
In order to achieve the above, ASPs must establish monitoring and management policies and deploy the appropriate tools that can monitor the delivery of service levels to the end-user. To establish the policies, it is important first to determine which infrastructure components within the application ecosystem to monitor and the thresholds or events that signify impending or actual degradation of service levels. Both objectives can be achieved through pre-production performance testing of applications using simulated user volume, load and transaction mix. The results of the testing program can also identify the usage levels at which specific parts of the infrastructure may need to be upgraded to continue acceptable service levels. Benchmarks can also be defined based on an application's actual historical performance trends and, subsequently, documented in a service level agreement. (If service levels and parameters are already determined and agreed upon and documented, initial benchmarking may not be needed.)
Ongoing measurements of the applications' performance using the appropriate monitoring tools can then reveal instances when the benchmarks or parameters are not being met. If the actual performance does not meet the benchmarks and the respective parameters that were agreed, meaningful reports can then be provided to the customer, together with recommendations for addressing the compliance problems.
3. Customer Care/Helpdesk and Escalation Procedures(Footnote 52)
| Best Practice |
| Provide timely and responsive problem resolution, proactive support services, and efficient information management by establishing customer care policies and comprehensive help desk facilities. |
In the event of a service outage, it will be critical for both the service provider and customer to have a clear course of action that will be used to recover the services. This minimizes service downtime and sets expectations about the amount of time required to resolve the outage, thereby minimizing the risk of the problem escalating into a full-fledged dispute.
The purpose of a Help Desk is to provide support for a customer's end-users as the central point of control for the logging, tracking, escalation, and resolution of end-user inquiries, problems, or requests. The Help Desk also provides advance customer notice for scheduled activities (e.g., planned outages, service upgrades). In addition, it acts as the liaison between third party vendors, application support and the customer base to facilitate optimum resource utilization and cost-effectiveness. As the centralized support area, the Help Desk should provide timely, responsive problem resolution, proactive support services, and efficient information management.
Integral to a successful Help Desk, are formal, clear and transparent escalation procedures for technical (e.g., service interruption, latency) and administrative problems (e.g., billing issues) that identify how, when and to whom customer problems should be escalated in order to ensure timely and satisfactory resolution. The benefits of properly developed and implemented procedures, include:
Prompt resolution of customer issues/problems;
Clear guidelines and directions regarding issue/problem escalation;
Increased customer satisfaction and loyalty as a result of timely response to reported problems, as well as actions taken to divert potential problems;
Minimizing the risks of full-blown disputes requiring the intervention of formal dispute resolution processes.
Set out in the table below is a checklist of the main items that should be considered in developing a problem escalation procedure. A model problem escalation contract clause is provided in Annex B.
| Problem Resolution Checklist |
|
B. Service Level Agreements
| Best Practice |
| Negotiate and implement fair, balanced, comprehensive and clearly-drafted service level agreements that set out the respective rights and obligations of the parties and ensure that each party fully comprehends, at an operational level, the legal and technical implications of the contractual commitments. |
1. A Primer on Service Level Agreements
An ASP's supply chain can involve a variety of contractual arrangements, the parties to and characteristics of which will depend on the type of ASP delivery model. These can include software licensing agreements, contracts for the sale or rental of hardware, co-marketing, co-selling, data center services, networking services, integration and consulting services, support and, perhaps the most significant and commonly encountered, service level agreements (SLA) with end-users and within the SLA value chain (e.g., between an aggregator and an ASP).(Footnote 53)
An SLA is a legal contract that specifies the contractual deliverables, terms and conditions between the service provider and an end-user.(Footnote 54)
As such, the SLA is a formal, legally binding, statement of expectations and obligations between a service provider and its customer or customers, setting out the minimum service levels and performance standards that the ASP agrees to deliver and the customer expects to receive, and which both agree to when deciding to do business with each other. The SLA provides a means to define the quality and level of service in the ASP-customer relationship, the ASP-hosting vendor relationship, the ASP-ISV relationship and the ASP's relationship with NSPs. The SLAs between such organizations may also be symbiotic in nature, in that the two contracting parties may each be a customer of the other's services.
2. SLA Terms and Conditions
Generally speaking, the objectives of an SLA are to assure that ASP's customers of a basic set of expectations that the ASP commits to meet and to protect the ASP by limiting liability, identifying responsibilities and rationally managing expectations. Well-negotiated, comprehensive and well-drafted SLAs(Footnote 55)
that set out clearly the rights and obligations of the parties thus are fundamental to reducing the scope for disagreement in the course of the parties' business relationship.
It is beyond the scope of this document to provide a comprehensive itemization of the various elements, terms and conditions of an SLA. Some of the key elements of an SLA are provided in the table below.
| CLAUSE | DESCRIPTION |
| Definitions | Definitions of key contractual terms |
| Term | Start date and effective period of the parties' agreement, as well as renewal terms and conditions |
| Scope | Services to be provided and, if necessary, those not to be provided, if a customer might reasonably assume the availability of such services |
| Implementation Schedule | Installation timeline for the service(s) to be fully operational or schedule for provisioning new end-users with service(s) |
| Users and Locations | Numbers and locations of users and/or hardware for which the service(s) will be offered |
| Performance Levels | Expected performance levels, in terms of reliability and availability (i.e., hours and days during which the service will be offered and what are the bounds for service outages, e.g., a database server will be available 99% of the time) and responsiveness (i.e., how soon the service provider can perform, e.g., 95% of problems will be resolved within 1 hour of complaint), as well as explanations of how the various service quality metrics are calculated |
| Payment | Payment terms and conditions associated with each type of service |
| Data Ownership and Return | Terms and conditions regarding the ownership and return of data, including the circumstances (expiration and/or termination of the agreement), and conditions (e.g., payment, other performance) under which data will be returned, the form and method, allocation of costs related thereto |
| Customer Obligations | Customer's responsibilities under the SLA (e.g., updating its infrastructure (internal networking, desktops) to ensure compatibility with the new ASP services, user training, maintaining proper desktop configuration, not introducing extraneous software or circumventing change management procedures) |
| Software Licenses | Software licensing obligations and requirements, especially with respect to third-party software, and related payment issues |
| Reporting | Usage tracking, auditing and reporting responsibilities (i.e., how is the application monitored, who will do the monitoring, what type of statistics will be collected, how often will they be collected, what visibility will be provided to the customer) |
| Credits, Refunds, Charges | Credits, refunds, charges or other consequences as a result of the service provider's failure to deliver the specified services at the specified standards, including a clear indication of key service levels and the trigger points at which the non-performance penalties will kick-in. An ASP can significantly reduce the risk of disputes by offering objective and fair latency,(Footnote 56) outage(Footnote 57) and packet loss(Footnote 58) guarantees and associated credits. Clear and well-negotiated compensation schemes have the added advantage of limiting liability exposure to known amounts. Remedies should be directly proportionate to the severity on business impact of the underlying service level problem. |
| Support | Level and nature of support to be provided (e.g., what support is available, when is the helpdesk available, when are account and billing management staff available, how many operators may be on duty at a given time), including the account management contact (e.g., who at the ASP is responsible for the customer and services its needs, does the ASP take responsibility for telling the customer about network problems, or is onus on the customer to identify problems) |
| Problem Reporting Procedures | Process for reporting problems with the service (e.g., person to contact for problem resolution, format for filing complaints, procedures for resolving the problem quickly) and the metrics for problem resolution (e.g., time limits for problem response and resolution) |
| Third Parties | Clause specifying the extent to which the ASP is responsible for the actions, inaction, obligations, operations, etc. of third parties (i.e., its partners) |
| Force Majeure | Conditions under which the service level will not apply, or under which it is considered unreasonable to meet the expected performance levels (e.g., when the service provider's hardware has been damaged by a natural disaster such as an earthquake, flood, fire or affected by an event such as war or civil disturbance). Such force majeure clauses excuse a party's failure to perform if the failure resulted from an act or event beyond the party's control. The ASP may wish to include failures resulting from the customer's non-performance, failures of third parties, and failures in hardware and software.(Footnote 59) |
| Limitation of Liability | Provisions limiting the liability of the parties.(Footnote 60) Such a clause could provide that neither party is liable for any lost profits or for any indirect, incidental, consequential, punitive or other special damages suffered by the other party or any third party arising out of or related to the agreement, for all causes of action of any kind (including, but not limited to, tort, contract, negligence, strict liability and breach of warranty). A total cap on the amount of direct damages, in the aggregate and additionally per event, may also be included. Alternatively, a liquidated damages clause may be used, i.e., an agreed-upon monetary remedy, in instances where it may be difficult to ascertain actual damages, typically in the form of adjustments to payments to be made under the agreement. |
| Indemnifications | Provisions dealing with indemnification. For example, the clause could require that an ISV or VAR must defend, indemnify and hold harmless the ASP against any and all claims, losses, actions, damages, expenses and liabilities, including reasonable attorneys' fees and court costs, resulting from a claim asserted against the ASP that any information, design, specification, instruction, software, data, or material furnished by the ISV/VAR and used by the ASP infringes a copyright or patent.(Footnote 61) |
| Termination | Grounds on which a party could terminate the agreement, e.g., for convenience, for cause, material breach, for failure to provide critical services, for change of control, dissolution or winding-up, insolvency, failure to make payment, the notice periods and methods, and the consequences of the termination for existing and future obligations under the agreement (e.g., payment, data ownership, other intellectual property rights ownership). |
| Change Request Procedures | Explanation of change request procedures, including expected times for completing routine change requests |
| Insurance | Provisions dealing with insurance obligations |
| Choice of Law | Substantive law that is to govern the parties' agreement |
| Dispute Resolution | Method and procedures that will be used for resolving disagreements arising out of the parties' relationship that cannot be resolved in the normal course of business |
a. Network SLA
As described above, in the ASP delivery model, application services are delivered across an IP (i.e., Internet Protocol) network from the ASP's data center to the customer's offices. There are several ownership and management models for the IP networks: the network services may be provided by an NSP partnering with an ASP, an ASP may own and operate its own IP network or a business customer may make separate business arrangements with an ASP and an NSP in order to have the services delivered directly to its offices. The Network SLA sets out the terms and conditions regarding the delivery of IP services by the NSP. It covers the network connections and performance the NSP will provide to transport the application services to the customer. The Network SLA may be concluded between the customer and the ASP, the NSP and the ASP or the NSP and the end-user directly.(Footnote 62)
b. Hosting SLA
The ASP delivery model often mandates that hardware be hosted or co-located with a third party. The hosting vendor's role in the ASP value chain is to provide state of the art facilities to house the hardware required for ASPs to deliver applications and the expertise to administer the hardware environments. Hosting solutions deliver a wide array of services and the SLAs associated with these services must often be tailored to the specific solution. The Hosting SLA covers the quality and level of service that the computer hardware vendor expects to deliver and the ASP expects to receive. The focus of the Hosting SLA is the availability of the resources, more than the performance required to deliver applications reliably. Accordingly, the Hosting SLA, normally, is specified in terms of availability levels (e.g., 99.99% system availability over a specified time-period) rather than performance levels, as the provider's performance largely depends on the applications that are being hosted and the number of users being supported, neither of which is controlled by the hardware vendor.(Footnote 63)
c. Application SLA
In the ASP model, there are a variety of application ownership models (e.g., the applications may be licensed by the customer and serviced by the ASP, or owned by the ASP or ISV). The Application SLA provides guarantees of the levels of service that a subscriber can expect from its ASP. The application service level is impacted by several factors and the underlying technologies are complex. For example, in addition to the quality of the application code and the functionality, application service levels are affected by the systems that they are hosted on, the system architecture, the network performance.(Footnote 64)
C. Relationship Management
| Best Practice |
| Implement technical, administrative and operational mechanisms that enable proactive relationship management. |
The final written agreement between contracting parties, typically, is the reflection of a process of needs assessment, negotiation and consensus building. The document that emerges is a memorialization of the parties' mutual understanding of their future business relationship. It provides an objective reference point for evaluating or measuring their respective performance obligations in accordance with their agreement.
The value of the written contract as a dispute avoidance (and resolution) tool, however, lies not only in the final written product, it also lies in the process the parties must go through to finalize their agreement, as well as in their subsequent management and implementation of that agreement.
The following general guidelines deserve mention:
Actively work with a prospective customer to define and clarify the customer's service needs and priorities;
In light of those requirements, before making any commitments to the customer, carefully examine capabilities and capacity to determine the level of service that can realistically be provided;
In developing the final SLA, take the lead in drawing the customer's focus to the importance of the process by which the parties will work together to create the final agreement. Discuss issues such as the division of responsibility for development tasks, scheduling issues and constraints, and concerns regarding potential impediments;
Before implementing the SLA, give all persons who have a stake in, or responsibility for, the success of the agreement an opportunity to review and comment upon the draft. Using this feedback, the developers can conduct further negotiations, gain the necessary approvals, and finalize the document. In addition to generating buy-in, this step improves the quality of the final document.
As an adjunct to the finalization of a customer SLA or partner contract, promote team-building and familiarization practices and provide appropriate training to ensure that operational level personnel from both contracting parties fully understand the parties' respective contractual rights and obligations.
Assess customer satisfaction on an on-going basis so as to understand clearly customer concerns and establish a baseline for assessing service improvements.
There are formal procedures that can be invoked to facilitate relationship management. In the construction and telecommunications industries a formal but voluntary and non-binding process known as "partnering" is often used to help parties involved in long-term or high-value contracts to manage their relationships. The objective of partnering is to create, from the outset of a project, an environment of trust, teamwork, open communication and cooperation among the key project participants. Typically through a series of workshops, the partnering process helps the parties to redefine their working relationship in the contractual documentation so that, so far as possible, they collaborate as a team rather than work solely in what they may see as their own separate interests. At the conclusion of the workshops, a "partnering charter", which is generally distinct and separate from the business contract, is drafted and signed by the participants. Some of the elements typically found in partnering charters include: (1) A statement of the objectives of the partnering relationship in terms of behavioral attitudes to matters such as improved project cost, program and quality, teamwork, and open communication; (2) an issue resolution procedure designed to determine claims and resolve other problems, beginning at the lowest possible level of management and at the earliest possible opportunity; (3) a timeframe and process for selecting a neutral facilitator to help with any negotiations; and (4) a dispute resolution procedure complementary to that reflected in the business contract. Generally, the more partners that are involved in the partnering process, the better the overall results.
D. Insurance Protection
| Best Practice |
| Acquire proper insurance coverage as part of an overall risk reduction plan by obtaining the best, most efficient insurance protection available. |
In the context of reducing risks to the industry and its individual members, insurance protection is often mentioned as an unwanted necessity of business life. Many businesses are busy responding to the needs of their customers in Internet time, which leaves little time to evaluate risk and protect against it. And those that pay attention to the need for insurance often purchase whatever their local agent sells, regardless of whether that insurance provides adequate coverage for the company's exposure.
Service and product providers, like their customers, are typically offered two forms of insurance protection: the kind that protects their own property and the kind that protects them against claims for damages brought by third parties. In many cases, the form policies provide protection against a variety of potential losses, from fire damage to client servers to bodily injury from a slip-and-fall at the home office. However, there is arguably little or no coverage in these policies for data that is lost during installation of a new Internet site; negligent installation of software that results in economic loss only, or a server crash that results in the loss of hosting capacity for several days.
Recently, insurers have been developing and selling newer policies that can accomplish several things. For those who only want to purchase the minimum coverage necessary, there are policies that simply address some of the intellectual property and loss of proprietary data issues that service providers deem most important. For those seeking broader coverage that is relevant to their business model, insurers are becoming increasingly more creative in their approach to these needs. This is not to suggest that there is coverage for every conceivable risk; it is only to suggest that with the passage of time comes greater variety in the kind of insurance available for the special risks presented by technology product and service providers.
Naturally, this discussion is not a substitute for a proper risk assessment and insurance product evaluation. Members should work with professionals who have the right kind of experience to obtain the best, most efficient protection. But acquiring proper insurance coverage should be part of every overall risk reduction plan.
Footnotes:
1. The importance of effective dispute resolution in the Digital World is evidenced by the number of public and private initiatives in this area. For example, the European Union has concluded several initiatives in the areas of e-commerce (Directive on Certain Legal Aspects of Electronic Commerce in the Internal Market, OJ EU 2000 No L 178/1), jurisdiction (Regulation on Jurisdiction and the Recognition of Judgments in Civil and Commercial Matters, COM (1999) 348 final), and consumer protection (Directive on the Protection of Consumers in Respect of Distance Contracts, OJ EU 1997 No L 144/19); Commission Communication: Out of Court Settlement of Consumer Disputes, COM (1998) 198 final). The European Commission has also published minimum quality requirements applicable to out-of-court dispute settlement bodies for consumer disputes (Commission Recommendation on the Principles Applicable to the Bodies Responsible for Out-of-Court Settlement of Consumer Disputes, 98/257/EC). The Organization for Economic Cooperation and Development (OECD) has issued Guidelines for Consumer Protection in the Context of Electronic Commerce (OECD, December 1999), discussing and encouraging the deployment of on-line dispute settlement and consumer redress mechanisms. There are also private initiatives such as the Global Business Dialogue and the Global Consumer Protection Dialogue that have set up working groups on the issue. In the United States of America, the Electronic Commerce and Consumer Protection Group, composed of leading companies in the Internet, online and electronic commerce industries, has issued Guidelines for Merchant-to-Consumer Transactions and a Statement on Jurisdiction (June 2000).
2. Ovum differentiates the ASP model from two other common IT services models in the following terms:
"An ASP is different from an application hosting service because, to host an application is simply to remove the hardware infrastructure from the customer's site, it is not to take responsibility for the design, implementation, operation or on-going maintenance and management of the application. Rather, these application services remain the responsibility of the customer, who may choose to use internal staff to deliver those services or may outsource the provision of those services. The source of confusion between an ASP business and an application hosting business lies in the fact that the one-to-many business model of the ASP dictates that application services are enabled by the hosting of the application in an off-site data center or server farm."
"An ASP is also delivering different kinds of services from the facilities management services with which IT outsourcing is widely associated. An ASP's mode of operation is quite different to the facilities management model, as it does not takeover the client's existing IT infrastructure, it remotely provides the client with access to the ASP's IT infrastructure. Nor does it ever operate locally on the client's premises; services are provided remotely and accessed on-line."
Ring, K., Hope, M. and Leston, J., Application Service Providers: Opportunities and Risks (Ovum Ltd, 2000) (the "Ovum Report"), pp. 165-167.
3. See, Ovum Report, pp. 165-167.
4. The types of "disputes" that may arise include but are not limited to:
(1) factual - disagreement about events;
(2) legal - disagreements over contractual terms and conditions and interpretation thereof;
(3) technical - disagreement about features or expected features or results performance;
(4) interpersonal - personality conflict;
(5) miscommunication;
(6) differences of opinion.
In the context of its various information-gathering efforts, DART did not focus on non-contractual disputes and inter-personal disputes. The focus of its efforts was solely on contractually-based and technical disputes.
5. The following information gathering initiatives were coordinated by the WIPO Arbitration and Mediation Center (WIPO Center) working with the ASPIC Dispute Avoidance and Resolution Team (DART), including:
(i) Interviews of senior personnel representing a cross-section of the ASP supply chain, based on an interview checklist. As the majority of the participants agreed to be interviewed only on a confidential basis, DART has not included a list of the companies and individuals interviewed;
(ii) Comments submitted through a Web-based comment filing system made available via the WIPO Center's Web site;
(iii) Contacts with experts in alternative dispute resolution knowledgeable about the ASP industry;
(iv) Results of a survey regarding service level agreements conducted under the auspices of ASPIC's Research Committee, in which several questions were included on alternative dispute resolution;
(v) Information provided by ASPIC members and other interested parties regarding ASP supply chain dispute models in response to a memorandum from DART;
(vi) Research regarding disputes that have arisen in connection with traditional outsourcing contracts and systems integration projects; and
(vii) Other bibliographic research, including legal databases, current press reports and Internet searches.
6. For example, according to a Computerworld news story dated June 28, 2000 ("Router Problems at Verio Waylay Web Sites"), some 1,200 companies experienced slow performance and other problems with their Web sites apparently due to difficulties experienced by Colorado-based ASP, Verio, Inc., with a router at its data center in Vienna, Virginia. The problems reported by customers included slow download times, delayed e-mail performance and total access loss. According to Verio, contributing to the router problem, were faulty hardware and flawed software that affected back-up capabilities.
7. For example, no matter where a server-based application is hosted (i.e., in-house or by an ASP), access to the application requires some form of network connectivity to the application. The connection from an ASP to an end-user of an application contains several components and usually employs multiple providers. Thus, an ASP may be dependent upon its data center provider for long-range transport of the data to the local loop provider, the local loop provider for getting the data to the customer's LAN, and the customer's IT/LAN manager for upkeep of the connectivity to the desktops. If any one of these components is down, the end-user has no access to the applications. While the problem may ultimately lie somewhere in the network stack, the customer will look to the ASP for the damages suffered, while the ASP will, no doubt, seek to place responsibility elsewhere.
8. The issue of court jurisdiction in "cyberspace" is a complicated one, with respect to which there are many views and no one correct answer. By virtue of the fact that certain ASP delivery models leverage the Internet, an ASP transaction may implicate several additional jurisdictions. Thus, in addition to the domestic courts of the parties, the courts of several other countries may be competent to decide their dispute, including the courts of those countries in which the application services are provided, where the AIP is located, or where the software was developed. Whether a court will exercise its jurisdiction over the parties or the subject matter of their dispute will depend on such factors as the existence (or not) of an agreement between the parties submitting to the court's jurisdiction, the jurisdictional laws of the country and of the court, and the relationship between the parties, the services and performance obligations underlying their agreement and the territory in which the court is located.
9. Although, technically speaking, arbitration is an alternative to recourse to the courts, according to one school of thought, because arbitration is intended to lead to a binding and enforceable determination of a dispute, it should not be classified together with such alternative dispute resolution methods as mediation or mini-trial, but rather as a separate and distinct dispute resolution procedure. For the purposes of this report, no distinction is made between non-adjudicatory ADR processes, such as mediation, and adjudicatory processes, such as arbitration.
10. Faced with huge backlogs, court systems in certain countries have started introducing alternative dispute resolution programs. Court-annexed ADR refers to an ADR program or practice that is authorized, mandated and used by a court. Private ADR is voluntary in nature, based as it is on the premise of party autonomy and consent. This report deals only with private ADR.
11. Non-adjudicatory ADR techniques will normally be cheaper than either arbitration or litigation, if they yield an outcome. If no result (i.e., settlement) is reached, the total cost to the parties of getting to an outcome may well be higher, as they may then have to incur the costs associated with the chosen form of binding dispute resolution.
12. However, it is to be noted that the confidentiality of ADR should not be taken for granted in all jurisdictions. For example, in Germany, express confidentiality agreements are required to protect all settlement discussions. The enforceability of such agreements in the context of mediation remains uncertain.
13. For example, in the arbitration rules of virtually all of the major dispute resolution service providers, the parties are empowered to appoint jointly the sole arbitrator or, if the panel is to consist of three arbitrators, each party is given the opportunity to appoint one of the arbitrators, with the third (presiding) arbitrator being chosen by the two that have already been appointed. Moreover, most rules also allow the parties considerable flexibility in terms of who may be appointed.
14. Other possible disadvantages that are mentioned, include (1) the non-binding nature of certain ADR methods, with the exception of arbitration; (2) the fact that the result has no or limited precedential effect; (3) limited avenues and rights of appeal; and (4) significantly circumscribed scope for discovery, where the procedural system allows for the possibility of discovery (although this is also cited as of one of ADR's main advantages).
15. According to Intermedia Group, which conducted an end-user survey commissioned by the ASP Industry Consortium's Research Committee:
"Respondent organizations expect the primary solution provider to manage all of their partners and subcontractors to meet the requirements of Service Level Agreements. In a similar vein, companies hold the primary ASP or service provider accountable for keeping a host system up and running. No other response should be expected given that one of the key value propositions of hosted solutions is that organizations do not have to deal with the multiple vendor constituencies to employ a given piece of software or service."
"Survey respondents were almost unanimous in their belief that it is the responsibility of the primary ASP to keep systems up and running. Hosting customers generally do not care about any particular component of the service, merely that the application or services itself continues to operate It is clear that respondent organizations expect to deal with a single solution provider, employing a single trouble ticket, to handle all problems associated with a hosted solution regardless of actual source of the problem."
ASP Industry Consortium and Intermedia Group, "ASP Industry Consortium Service Level Agreement End User Study" (September 2000) (the "Intermedia Survey").
16. A description of these other ADR techniques is provided in Annex H.
17. While negotiation is a voluntary process, courts in certain countries may require the parties to discuss the issues that separate them. Furthermore, dispute resolution clauses frequently contain language requiring the parties to attempt to negotiate in good faith prior to commencing arbitral proceedings.
18. It is debateable whether a mediated solution is more or less expensive than a negotiated one. While mediation will involve additional costs relating to the mediator (e.g., fees, travel expenses, accommodation) and possibly also lawyer's fees, if counsel is used, as well as administration fees, if an institutional dispute resolution service provider is used, the intervention of a neutral third party may well lead to a quicker outcome than if the parties are left to reach a negotiated settlement themselves. In such circumstances, the additional expenses relating to mediation could well be lower than those associated with the negotiations (e.g., negotiating team travel and living costs, opportunity cost). Mediation will almost always be cheaper than arbitration.
19. There is also a non-binding variant of arbitration. In non-binding arbitration, the procedures are conducted just as in binding arbitration. However, the outcome is a non-binding advisory opinion.
20. The time and cost involved will depend on the procedures agreed for the arbitration, the degree of co-operation between the parties, the availability of the arbitrators, and the fees charged by them. It should be noted that, increasingly, a common complaint heard about arbitration is that it has become almost as expensive as litigation in view of the fact that, in addition to lawyer's fees, the parties must pay the fees of the arbitral tribunal, the costs of the arbitral facilities (e.g., hotel conference rooms, transcripts, audio facilities) and possibly the fees of an administering entity. In contrast, the parties will not be required to pay for the fees of the judge or the court reporters and courtroom facilities. It should also be noted that, as in litigation, absent an agreement between the parties, it is common for the arbitral tribunal to apportion the costs of the arbitration between the parties, with the lion's share allocated to the losing party.
21. In general, the principle of "comity" provides that courts of one state or jurisdiction will recognize and give effect to the laws and judicial decisions of another state or jurisdiction, not as a matter of obligation, but out of deference and mutual respect.
22. Under Article V of the New York Convention, a foreign award may be denied enforcement if a party furnishes proof that: (i) the parties lacked capacity; (ii) the arbitration agreement is invalid; (iii) there was inadequate notice; (iii) the matter arbitrated was outside of the scope of the arbitration agreement or was otherwise not arbitrable; (v) the arbitral tribunal was not properly constituted in accordance with the parties' agreement or the law of the place of arbitration; (vi) the award is not binding or has been set aside by the courts where it was rendered; or (vii) the award is against public policy.
23. Under the consumer protection laws of certain countries (e.g., Germany), standard form dispute resolution clauses submitting the parties' disputes to arbitration proceedings are impermissible and may be unenforceable. Often a specific agreement, in writing, to submit the dispute for resolution by arbitration is required, after the dispute has arisen.
24. According to the results of the Intermedia Survey, the absence of a defined mechanism for resolving problems was rated by respondent organizations as one of the main obstacles/disadvantages to implementing an SLA with service providers.
25. See, e.g., WIPO Mediation Rules, Article 2.
26. In addition to their own rules, several dispute resolution service providers also act as the administering authority for arbitrations pursuant to the UNCITRAL Arbitration Rules.
27. For example, based in Geneva, Switzerland, the WIPO Arbitration and Mediation Center is one of the main dispute resolution service providers in the world. The Center, which is a unit of the International Bureau of the World Intellectual Property Organization, is assisted in its policy-making activities by the WIPO Arbitration and Mediation Council, comprised of external experts in international dispute resolution. The Center has also established an Arbitration Consultative Commission consisting of arbitration experts independent of WIPO, whose role it is to deal with non-routine issues that may arise under the WIPO Arbitration and Expedited Arbitration Rules (e.g., removal of arbitrators). The Center provides the following dispute administration services:
Guidance regarding the interpretation and application of the relevant procedural rules.
Assistance to the parties in selecting and appointing the mediator(s) or arbitrator(s), if necessary, with reference to the Center's database of more than 1000 neutrals from more than 100 countries with expertise in commercial, intellectual property and information and communications technology dispute resolution.
Fixing the fees of the neutrals, in consultation with parties and the neutrals.
Administering the financial aspects of the proceedings by obtaining a deposit from each party of the estimated costs and paying out of the deposit the fees of the neutrals and any other support services or facilities, such as fees for interpreters, where they are required.
Where the proceedings take place at WIPO in Geneva, providing a meeting room and party retiring rooms free of charge.
Where the proceedings take place outside Geneva, assisting the parties in organizing appropriate meeting rooms and other required facilities.
Assisting the parties in organizing any other support services that may be needed, such as translation, interpretation or secretarial services.
Providing such other services or functions as may be required to ensure that the arbitration or mediation procedures are conducted efficiently and expeditiously.
28. The WIPO Center also provides administration services in connection with disputes involving the alleged abusive registration and use of an Internet domain name (e.g., the Inernet Corporation for Assigned Names and Numbers' Uniform Domain Name Dispute Resolution Policy; http://arbiter.wipo.int/en/domains/index.html).
29. The WIPO Expedited Arbitration Rules consist of the WIPO Arbitration Rules modified in certain respects to ensure that the arbitration can be conducted in a shortened timeframe and at reduced cost. For example, the Statement of Claim must accompany the Request for Arbitration (Article 10) and the Statement of Defense must accompany the Answer to the Request (Article 12); there is always a sole arbitrator (Article 14(a)); the sole arbitrator must be appointed within 15 days after the commencement of the arbitration (Article 14(b)); any hearings must be convened within 30 days after the Claimant's receipt of the Answer to the Request and the Statement of Defense (Article 53(b)); the hearings cannot exceed 3 days, save in exceptional circumstances (Article 53(b)); whenever reasonably possible, the proceedings must be declared closed within 3 months (as opposed to 9 months under the WIPO Arbitration Rules) of either the delivery of the Statement of Defense or the establishment of the Tribunal, whichever event occurs later (Article 63); whenever reasonably possible, the final award should be made within one month thereafter (as opposed to 3 months under the WIPO Arbitration Rules) (Article 63).
30. Another reason cited for the employment of multi-tiered clauses is the diversity of possible disputes in complex contracts of lengthy duration. The purpose of a dispute resolution clause in a contract is to deal with future disputes. These future disputes can be varied in nature. They can involve very different issues and bear very different monetary values. Hence, it is argued, a multi-tiered dispute resolution procedure is likely to contain, in one tier or another, a procedure appropriate for a particular dispute.
31. Article V(2) of the New York Convention provides that the recognition and enforcement of an arbitral award may be refused if the competent authority in the country where enforcement is sought finds that, inter alia, the subject matters is not capable of settlement by arbitration under the law of that country; or the recognition and enforcement of the award would be contrary to the public policy of that country.
32. WIPO Mediation Rules, Articles 1 and 6.
33. WIPO Arbitration Rules, Article 14(a).
34. WIPO Arbitration Rules, Article 14(b).
35. WIPO Arbitration Rules, Articles 15 to 20.
36. WIPO Expedited Arbitration Rules, Article 14.
37. For example, a dispute involving a large scale integration project may relate to a relatively simple question of contract law rather than the technical aspects of the project. In such a case, a clause requiring that the arbitrator be a computer engineer with a doctorate could well limit the parties' choices unnecessarily.
38. WIPO Arbitration and Expedited Arbitration Rules, Article 39(b).
39. Article 2 of the Convention requires the courts of a signatory state to suspend court proceedings brought in breach of the arbitration agreement and refer the parties to arbitration. Also of relevance is the so-called "reciprocity reservation", pursuant to which the courts of a state that has adopted the reservation will enforce an award under the Convention only if it has been made within the territory of another state which has also adhered to the Convention. The nationality of the parties is immaterial. It is the "nationality" of the award that matters. There are other conventions that may also be relevant in an international arbitral proceeding, including: the European Convention on International Commercial Arbitration of 1961 and the Inter-American Convention on International Commercial Arbitration of 1975.
40. The Model Law was adopted by the United Nations in 1985 aimed at establishing an internationally acceptable arbitration law which countries could enact with their own legislation, subject only to taking account of any special requirements or idiosyncrasies of their particular legal system.
41. WIPO Arbitration and Expedited Arbitration Rules, Article 39(a).
42. WIPO Arbitration and Expedited Arbitration Rules, Article 40(a).
43. WIPO Arbitration and Expedited Arbitration Rules, Article 59(a).
44. WIPO Arbitration Rules, Article 59(b).
45. WIPO Arbitration and Expedited Arbitration Rules, Article 71.
46. WIPO Arbitration and Expedited Arbitration Rules, Article 72.
47. WIPO Arbitration and Expedited Arbitration Rules, Article 60.
48. This section is based on A Guide to the ASP Delivery Model, a comprehensive document prepared by the ASP Industry Consortium, itemizing best practices in a wide range of ASP operations.
49. Load balancing along with fail-over capabilities measures the responsiveness of a set of local servers in order to re-direct clients to the most responsive server in that set.
50. One common method of clustering involves the connection of different computers using software technology and physical interconnects. The physical connections are used to transmit data between servers and to tie applications together, so that if one server fails the end-user can continue as if nothing happened.
51. Ensuring the availability of systems must take into account the possibility of an entire LAN or even a data center becoming non-functional due to a localized problem. Geographical redundancy can minimize the impact of a local outage by allowing systems in another location to take over for the application.
52. This sub-section is based largely on materials provided to the WIPO Center and DART by Compaq Computer Corporation.
53. Given the importance of SLAs, the ASPIC Best Practices Committee undertook a separate initiative with the specific objective of identifying the standard elements of SLAs in four areas: networks, applications, hosting and customer care/helpdesk. The ASP Industry Consortium's Guide to SLAs provides an annotated standard SLA template identifying the various elements that should be included, depending on the underlying relationship, as well as industry and recommended standards and benchmarks for the various SLA metrics.
54. Frequently, the contractual relationship between an ASP and its customers may be reflected in two or three separate but interrelated documents, including a Master Services Agreement, a Service Level Agreement and a Scope/Statement of Work. Although in industry practice the SLA may be a separate addendum to an outsourcing contract or Master Services Agreement, it is not legally a separate agreement, but another set of terms and conditions defining the parties' legal relationship. This report uses the term "SLA" generically to describe the agreed terms and conditions between contracting parties in the ASP supply chain.
55. The business models of certain types of ASPs depend on the economies-of-scale to be realized from minimal customization. In the "apps-on-tap" ASP model, SLAs are not typically negotiated. Instead, customers are offered standard form agreements. Because these agreements are not negotiated, it is all the more important that they are comprehensive and clearly drafted.
56. Latency guarantees are meant to assure customers that data will travel from the entry to the exit of the NSP's network with minimal delays.
57. Outage guarantees are designed to ensure that a customer's connection to the NSP backbone will be maintained for a given amount of time every month.
58. Packet loss guarantees provide credits if a certain level of packet loss occurs on the host network.
59. For example:
"Definition. A "Force Majeure Event" is when the performance of this Agreement or of any obligation hereunder is prevented, restricted or interfered with by reason of: (i) acts of God; (ii) wars, revolution, civil commotion, acts of public enemies, blockage or embargo; (iii) acts of a government in its sovereign capacity; (iv) labor difficulties, including, without limitation, strikes, slowdowns, picketing or boycotts; or (v) any other circumstances beyond the reasonable control and without the fault or negligence of the party affected.
Notice of Force Majeure Event. The party affected by a Force Majeure Event shall provide written notice to the other party within five (5) days after becoming aware of such event, and shall be excused from its performance hereunder on a day-to-day basis to the extent of such prevention, restriction, or interference (and the other party shall likewise be excused from performance of its obligations on a day-to-day basis to the extent such party's obligations are related to the performance so prevented, restricted or interfered with); provided, however, the party so affected shall use its best efforts to avoid or remove such causes of non-performance and both parties shall proceed in their respective performance hereunder whenever such causes are removed or cease."
(Provided by Gadsby, Hannah, LLP).
60. The enforceability of such clauses (wholly or partly) under the applicable law should be examined carefully.
61. The indemnification may be provided, subject to certain qualifications, for example: (a) the ASP must notify the ISV/VAR in writing of its receipt of notice of the claim; (b) the ISV/VAR has sole control of the defense and all related settlement negotiations; (c) the ASP provides the ISV/VAR with reasonable assistance, information, and authority to perform the foregoing; and (d) reasonable out-of-pocket expenses incurred by the ASP in providing such assistance will be reimbursed by the ISV/VAR.
62. The Network SLA should address such elements as: network availability (guaranteed network up-time), network throughput (capacity, routine operating level capacity, number of customers residing on the same network), redundancy, network equipment and architecture, scalability, peering arrangements, security, encryption, key management, authentication, performance, bandwidth provisioned, granularity, data loss, expected jitter characteristics, expected delay characteristics.
63. ASP Hosting SLAs can be grouped into three broad categories: server uptime (guarantees related to managed server availability); field services tape backup and retention (guarantees related to execution of tape backups and length of time that tapes will be securely archived); server administration (guarantees related to the administration duties, e.g., server back-up and restoration, alarming, electronic software distribution, software maintenance, user account management, electronic messaging services, network configuration, print management/administration, reporting).
64. An Application SLA should address such matters as: delivery platform and architecture, scalability (i.e., as more users are added, can the applications architecture scale without degrading the service level below agreed-upon levels), data security and availability (e.g., where is the user data stored; how is it backed up; how quickly can it be restored; how secure is the archiving of data; how are service configuration data stored and recovered; is there a backup data center for catastrophic failure; is all user, configuration and security information available in backup facilities, are there "backdoors" to the applications that make them vulnerable to hackers), service guarantees for the performance of individual applications being delivered across the network, customer responsibilities relating to deployment, calibration, application version control, or other tasks needed for successful SLA implementation.