Over the years, the concept of using a neutral has expanded to include more preventive techniques for keeping business relationships healthy and addressing potential contractual misalignments earlier. For example, the construction industry has been utilizing the concept of a dispute review board (DRB) since 1975 to solve issues that arise during major projects, such as cost overruns, schedule delays, and disputes over payment or the quality of workmanship. The DRB is typically a panel of three independent expert advisors who are immediately available to help resolve disputes that arise during the contractual relationship.1 The panel is formed at the beginning of the construction project with the goal of resolving any issues or differences before they become formal claims.
Recently the concept has evolved further into what is now known as a “standing neutral” and has been adopted by companies in many industries outside of construction. A standing neutral is a highly qualified and respected expert, selected by both parties in a business relationship to help them resolve issues and maintain a healthy relationship. This can best be described as a proactive approach where the neutral provides quick, informal, flexible, adaptable, and nonadversarial ways for preventing disputes.
Unlike a neutral third party used on an ad-hoc basis for dispute resolution in mediation or arbitration, a standing neutral is a readily available “fast response” technique. It is designed to prevent any issues from escalating into adversarial disputes that might otherwise go to mediation, arbitration, or litigation. A key feature is that the neutral is “standing,” meaning it is integrated into the parties' continuing governance structure. Another key concept is that the standing neutral supports the relationship itself and both parties equally; the goal is to ensure the success of the relationship.
Embedding a standing neutral into a contracting party's governance structure can have a powerful impact on the success of the business relationship. The standing neutral provides a helpful "dose of reality" to the parties and encourages them to be more objective in their dealings with each other. When differences of opinion arise, the parties can quickly use the standing neutral as an objective sounding board, obtaining a recommended course of action that is minimally disruptive to the business relationship.
While the classic role of a standing neutral is to serve as a “real-time” issue-resolver throughout a relationship, companies have begun to expand how they have used a standing neutral. The University of Tennessee’s research—which is detailed in the white paper “Unpacking the Standing Neutral”—reveals the creative ways that companies are using a standing neutral.2 For example, some companies are increasing the role of their standing neutral to support annual relationship health checks and even using neutrals as “deal facilitators” to help craft highly complex or strategic outsourcing agreements.
Today, there are many different variations of a standing neutral. Figure 1 shows some of the most common options companies can consider when designing the role and scope of their standing neutral. In the figure, these options are organized across nine design principles or considerations. For an example of how a standing neutral can operate in a real-world setting see the sidebar “Idea in action: EY case study."
If you think using a standing neutral would benefit one of your relationships, we suggest going through the following simple stages. It’s important to note that the cost and expenses of the standing neutral are absorbed equally by both parties.
1. Selection: At the outset of their relationship, parties select one person (or three) with whom they trust and have confidence to serve as standing neutral throughout their relationship. A single standing neutral should always be entirely independent. In most cases where there is a panel of neutrals, each party nominates one member, and the two nominated neutrals will select a third member; in such cases, it is typically required that every panel member be acceptable to both parties and that all panel members be independent and impartial, with no special allegiance to the nominating party.
As part of the selection process, the parties formalize an agreement with the standing neutral, which includes determining the standing neutral's responsibilities and authority. The nine design principles in Figure 1 can be used to accomplish this.
2. Briefing: The parties brief the standing neutral regarding the nature, scope, and purpose of the relationship or venture. As part of the briefing, the standing neutral is usually equipped with a basic set of contract materials and supporting documents.
3. Continuing involvement: A key part of designing a standing neutral program is embedding your standing neutral as part of your ongoing governance. For example, we recommend at a minimum that the parties have their standing neutral attend the parties’ quarterly business reviews and lead an annual relationship health check. This enables the standing neutral to meet regularly with the parties to review the progress of the relationship, even if there are no issues.
Alternatively, it is possible to have a standby neutral (versus a standing neutral). In the case of a standby neutral, the neutral is merely available on an ad-hoc basis to be called on whenever necessary to give an advisory opinion.
Standing neutrals have had a remarkable record—especially for resolving issues before they become disputes. A study of the use of standing neutrals in the construction industry found that, in the vast majority of cases, the parties never look to the standing neutral to make any dispute resolution recommendations or decisions. (And in the small minority of cases where the standing neutral actually makes a recommendation, 95% of the recommendations are accepted by the parties without resorting to mediation, arbitration or litigation. 3)
It may seem counterintuitive that having a standing neutral reduces the likelihood of needing a third party to resolve disputes. But research has found that the presence of others causes people to behave more honestly and reign in unethical behavior such as cheating. These effects are amplified when the third-party observer is knowledgeable in the subject matter of the agreement and in the nature of the agreement.
The establishment of a standing neutral—which appears at first to be merely an efficient technique for quickly resolving disputes—creates a dynamic situation in which the participants change their relationship and their attitudes toward each other. The changes usually are an evolution, rather than a conscious effort. For example, at first it is common for contracting parties to feel they are simply choosing a neutral expert for resolving conflicts between them promptly. However, as the standing neutral interacts with the parties during ongoing governance forums, the parties develop a greater sense of confidence in the standing neutral's ability to quickly alleviate friction in the relationship. When this happens, the parties shift their view of the standing neutral from “dispute-resolver” to one of “sensible sounding board.”
The presence of a standing neutral also encourages teamwork and improved performance by all parties. The contracting parties become incentivized to concentrate on “fixing the problem” rather than “fixing the blame,” and use their mutual knowledge to solve the problem rather than relinquishing control to the neutral. A side benefit is when the parties construct their own solutions to problems, they often increase their trust and confidence in each other's abilities, which ultimately strengthens the relationship. For these reasons, the standing neutral serves as not only a standby dispute resolution process, but also as a remarkably successful dispute prevention process.
Notes:
1 For more information see A. A. Mathews, Robert J. Smith, Paul E. Sperry, and Robert M. Matyas, Construction Dispute Review Board Manual, (New York: McGraw-Hill, 1996): p. 10
2 The white paper can be downloaded for free at www.vestedway.com.
3 Dispute Resolution Board Foundation (DRBF), Dispute Review Board Manual (2007): http://www.drb.org/manual_access.htm [
