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ADR in commercial disputes

Urban Thier Federer > Uncategorized  > ADR in commercial disputes

ADR in commercial disputes

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Use of ADR in commercial disputes, a quiet revolution?

This question was posed to a panel consisting of two private practice attorneys, an in-house counsel, and an ICC representative at the recent ABA/DAV Conference in Frankfurt, Germany, June 3, 2013.

 

Criticism of commercial arbitration has increasingly grown due to long cycle time/duration and high costs.

Criticism of commercial arbitration has increasingly grown due to long cycle time/duration and high costs. What was originally considered a beneficial alternative to slow and expensive litigation, is now often questioned and criticized as more of the same: a long and expensive process, extensive pleadings, voluminous written statements, multiple battling experts, high arbitration fees, high expert fees, high attorney fees – and in the end, a ruling which cannot be appealed. Most of the cost and delay seem to be caused by discovery, motions, and large panels of experts. Parties have started looking for alternative means of dispute resolution and are turning to mediation; the ADR vehicle which has taken a reluctant root in Germany and other European countries. Recent European surveys indicate that between 1997 and 2011, Fortune 1000 companies increased their participation in mediation and mediation-arbitration.

Status of ADR and Mediation in Europe 
There is still a vast difference between the US, UK, and Europe when it comes to ADR and mediation. At the annual ICC Mediation Conference in 2012, one contribution was entitled, “The inside track – how blue chips are using ADR”. GCs and Heads of Litigation complained about having to overcome hurdles before European parties would agree to mediation. Some of the quotes from this panel included ““……mediation was considered not acceptable; not part of the culture””; “they would run into a European view that any process that may have had its genesis in the United States is probably not very good” (Head of Worldwide Litigation, Multinational); ““it was sad that some lawyers appeared more interested in fees than settling cases” (Head of UK Litigation, Financial Services). Interestingly, the same litigator stated they “always involve external lawyers…. in mediation and they are heavily involved in the strategy, the tactics and the actual delivery of what happens at the mediation”. Dr. Alexander Steinbrecher, the in-house counsel for Bombardier stated at the ICC Conference, “the only people who benefit from litigation are outside counsel”; and, “external counsel never recommends mediation”. Dr. Steinbrecher made a case for businesses resolving business problems as business problems: a commercial mindset to avoid escalation of the conflict, realistic cooperation with external counsel, and a clear provisioning for risks and opportunities. Dr. Steinbrecher conceded that mediation is not magic and does not work for all disputes, but that it may bridge the gap between negotiation and litigation – possibly more effectively than arbitration.

The ICC reports a mediation settlement rate of 80 % when a first meeting of the parties with a mediator took place prior to the mediation conference. Average cost is quoted as $20,000.00 with an average duration of four (4) months. Multi-party mediations are common. The challenges to mediation were described by the ICC representative as follows: 1. mediation is considered exotic outside the US/UK; 2. geographic distance; 3. cultural and legal differences; 4. selection of independent and competent mediator; 5. risk of manipulation of the mediator/mediation, and; 6. combination of mediation with arbitration.

There is no question that arbitration is expensive and requires significant amounts of work by the participants. In a 200+ million Euro arbitration case the defendants had spent millions of Euros in attorney fees, expert fees, and ancillary expenses before the hearing had even begun. There were several rounds of pleadings, multiple experts and thousands of document pages.

In a recent US-German case, the claimant wished arbitration regarding an amount of $130,000. The claimant had to pay $30,000 in initial filing and attorney fees before the respondent even received the complaint. The other party refused to pay their share of the DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. EUROPE UPDATE is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in EUROPE UPDATE are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors. fees, and the arbitrator demanded that the claimant made a payment of ca. $15,000 before he would even start considering the matter. Not surprisingly, the claimant decided to settle for $5,000. Like litigation, arbitration requires payment of proceeding filing costs and payment of attorney fees. Additionally, arbitration proceeding filing costs are usually much higher than intiating a court proceeding, and usually include a significant deposit towards the arbitrator and arbitration panel fees. If one party fails to pay its share, usually the respondent, the claimant is often forced to advance all arbitration costs and deposits if the claimant wishes to proceed. These factors can clearly make arbitration a much more expensive proposition than traditional litigation.

by Anna Engelhard-Barfield and Carl-Christian Thier

Improvements of Arbitration procedures

The longer arbitration takes, the more it cost. However, some improvements have been implemented. Recent practice developments have allowed for optional expedited procedures (JAMS, 2010) and increased arbitration management by agreement of the parties. Revisions to the ICC and Swiss rules on arbitration took effect in 2012; each with the primary goal of improving the efficiency of arbitration proceedings in terms of time and cost.

Parties can agree on limiting discovery (as to how much and what kinds), how many depositions should be allowed, how long the hearing should last, how much time should be spent on witness testimony (direct and cross), whether a court reporter should be retained (useful for post-hearing briefs), and how many experts will be allowed. For example, the parties could agree to jointly retain an expert for a particular technical issue, or to utilize an “expert witness panel” (simultaneous testimony of experts who can comment on each other’s opinion).

It seems that the most important step towards limiting arbitration cost exposure is cooperation between the parties and the arbitrators and an early and comprehensive preliminary conference to establish an overall time schedule with specific provisions for discovery and an early exchange of witness lists and exhibits. Arbitration is not litigation. Unnecessarily disputing facts and documents, throwing reams of paper at the other side, insinuating low-brow motives and false accusations, making unreasonable demands and utilizing other litigation tactics have no place in arbitration or mediation – the alternative dispute resolution vehicles.

Short, concise pre-hearing briefs are helpful to focus the arbitrators on the issues to be resolved. Oral arguments should provide a road map for the tribunal, but be on point.

Pressure from In-house Counsel

[A pervasive] European view [is] that any process that may have had its genesis in the United States is probably not very good.

In-house counsel are already demanding a more streamlined approach to litigation costs from outside law firms. The same is true for arbitration. Lengthy arbitration may be financially beneficial to the attorney, but is certainly not financially beneficial to the client. Attorneys should have the best interest of their clients in mind and should strive to resolve issues at the lowest overall cost for the client. Repeat business from a client will more than make up for the “lost” business of avoided arbitration or extensive arbitration or court proceedings.

Options for Practitioners

What if attorneys were to dare recommending mediation? Should they be concerned about the “lost” business or should they make every effort to represent the client to the best of their ability, including a thorough preparation for the mediation conference? We can assume that in-house counsel will not be fooled and will take their business elsewhere. There is money to be made in mediation; strategy and tactics planning, collecting facts and figures, as well as effective delivery at the mediation – with the chance to develop a mutually agreeable solution while preserving the business relationship.

There is no question that attorneys need to reassess arbitration as an alternative to litigation. New arbitration rules hint at future developments leading to a more efficient arbitration process and overall cost savings. Whether arbitration can be truly streamlined will depend on the willingness of the parties to work towards a mutual financially reasonable resolution process, without getting lost in billable hours. At the same time, mediation deserves to be reassessed by European attorneys. If business calls for resolving business problems as business problems, not legal problems, the legal community should listen and take action. Business lawyers are certainly familiar with a commercial mindset; balancing the need for risk assessment with the wisdom of realistic cooperation.

DISCLAIMER: The materials and information in this newsletter do not constitute legal advice. EUROPE UPDATE is a publication made available solely for informational purposes and should not be considered legal advice. The opinions and comments in EUROPE UPDATE are those of its contributors and do not necessarily reflect any opinion of the ABA, their respective firms or the editors.
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