An escalation procedure commits people on both sides of a contract to meet and attempt to resolve disputes without costly arbitration or litigation. If there is no procedure agreed to in the initial document, the parties may find it difficult to work out a process to resolve major problems when they are already at odds. Putting a workable escalation procedure into the contract itself establishes the framework to be used if and when it is needed.

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I discussed escalation procedures with attorney Phillip Cannatti of Lehtola & Cannatti the other day. I could not understand why this kind of process isn’t used in more agreements, particularly in service contracts. Phillip agreed. He pointed out that the attorney’s focus should be on keeping their client out of litigation, and this kind of procedure could further that goal.

Here is how an escalation procedure might work, using a master service agreement as an example:

  • First, the project managers must meet on the issue. If you failed to name project managers on both sides with equal authority, you did not get the original agreement right. The chances are that the project managers would meet quickly on a major issue anyway, but the escalation procedure has time limits (such as five business days) that force two very busy people to address the issue quickly and personally.
    • Project managers usually have a good perspective on what has happened to date.
    • They also should have a firm understanding of any technical and/or business issues.
    • It is also probable that the project managers will have a good handle on what the costs would be to make changes to the project, through a change order process (yes, you need a change order process – I have written about it before), and can present a plan to their respective management teams.
  • If the project managers cannot resolve the issue in the allotted time, the appropriate vice presidents from each firm become involved. Note that this is not an optimal outcome for the project managers, so they will be motivated to resolve the issue before escalating it. The procedure again requires very busy people to find time to meet and sets a time limit on their deliberations, say ten business days.
    • The vice presidents should have a firm understanding of the importance of the project in question.
    • They should have the authority to make changes that will alleviate the problem without further review, increasing the probability of the dispute ending here.
  • Finally, if the other initiatives have failed, the CEOs of the companies must meet.
    • This puts tremendous pressure on the project managers and vice presidents to resolve the issue themselves. Otherwise, the CEO is forced to take a meeting he or she would rather avoid.
    • The CEOs can make the tough decisions that may be required to fix any damage or choose to part ways.
    • CEOs like to get deals done, and they will be motivated to find common ground to avoid appearing as though they
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      failed.

If the escalation procedure is unsuccessful, a mutually-agreed termination may result, or there can be a provision providing for mediation and, if necessary, arbitration. Your attorney may prefer litigation in place of mediation and arbitration.

The procedure does not have to be more detailed than that. The time limits are important to prevent things from spiraling out of control. The rest should be based on experience and common sense.

Obviously, the escalation procedure is not a panacea. If the companies just cannot agree on anything, there may be no solution. However, sometimes the escalation procedures work, avoiding costly arbitration or litigation. Particularly smaller companies should adopt this as a useful tool for placement in all its major agreements.