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This article was first published on LexisPSL Dispute Resolution on 23 April 2014. Click here for a free trial of LexisPSL.

Why commercial disputes are being fought in court

23/04/2014 Dispute Resolution analysis: How do companies handle large commercial conflicts? Stuart Dutson, international arbitration and litigation partner at Eversheds, explains why negotiations fail and how lawyers have adapted to their clients' needs.

Original news
Report: Companies in conflict: how commercial disputes are won A new study from Eversheds (alongside academics at King's College London and the University of Surrey) has revealed a significant increase in the number of large scale commercial disputes. The study focuses on businesses with an annual turnover of more than $1bn, which are engaged in disputes worth more than $10m. The study shows that although large corporates do not want to resort to litigation, the majority of conflicts are being resolved in court.

Why are the majority of commercial conflicts still being resolved in court and via arbitration?
The study demonstrates that the outcome of a dispute was entirely unpredicted in only 10% of cases reviewed. Why then do companies litigate if the result can be foreseen with such accuracy? The study suggests although there is a preference for a negotiated settlement, companies litigate when one party refuses to engage in meaningful negotiations or mediation, or because both parties see the strengths of their respective cases as being too far apart. Increased board oversight of commercial disputes may lead to more settlements and less recourse to litigation and arbitration. However, the study reveals that in only around half of the cases reviewed did the CEO and CFO have oversight of the dispute in question. Furthermore, the study notes that alternative dispute resolution (ADR) is not always better value than litigation. In particular, if the attempts at ADR fail and a court case is still required, the length of the overall process will have increased, as will the total cost. Many commercial disputes end in court, including 37% of the very large cases examined by the study, regardless of how cordially they began. A significant number of the companies participating in the study stated that safeguarding their reputation was the key factor in taking on a commercial dispute. As one general counsel of a manufacturing company in the Netherlands put it: 'Our name and our reputation mean a lot to us...we will fight to maintain our brand name and reputation, no matter what'. This desire to see a company's reputation upheld may only be satisfied with the publicity of a day in court. A similar line of thinking can be applied to those executives who seek out the finality of a court judgment against those who they perceive to have wronged their company, as they wish to see blame apportioned wholly and publicly to the party with whom they are in dispute.

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Some parties, due to the nature of their dispute and their desire for the use of a certain forum or jurisdiction, may only accept the settlement of that dispute in a court which they know contains a certain level of expertise. As noted by Alan Redfern of One Essex Court and an important contributor to the study: 'The English Commercial Court has a good reputation for resolving business disputes sensibly, fairly and efficiently. This is evidenced, for instance, by the number of Russian and other Eastern European companies and individuals who choose to fight out their quarrels in that Court.'

How can recovering financial loss be the main reason for engaging in commercial disputes, when the financial cost of pursuing a claim is also the strongest disincentive?
The study found that although recovering financial loss was the main reason for engaging in commercial disputes, the financial cost of pursuing a claim was also the strongest disincentive to do so. These findings actually correspond to each other as they demonstrate clearly that the key consideration in any decision as to whether to engage in a commercial dispute is financial. Whether or not to make a claim--with the associated potential for recovery of loss versus the potential for expending large sums on legal and associated costs for little return--is a decision that each company must weigh up carefully before deciding whether or not to take action. Effectively, a company considering whether to commence a commercial dispute must undertake a cost benefit analysis of accepting the loss they have suffered versus the potential cost of pursuing another party in respect of that loss. In undertaking this analysis a company will require expert legal advice. The study shows the matching of a potential claim, with its myriad strengths and weaknesses, to the most appropriate and cost effective method of dispute resolution is a key skill of the modern dispute resolution lawyer.

Why is an impasse at negotiation and mediation only really breakable by litigation or arbitration?
On this point the study is clear and the position adopted is perhaps best encapsulated by the words of Professor Dame Hazel Genn, which are cited therein: 'Mediation without the credible threat of judicial determination is the sound of one hand clapping. A well-functioning civil justice system should offer a choice of dispute resolution methods'. To mediation one could add negotiation and to judicial determination one could add arbitration without losing the clear message of Professor Genn's words. Mediation and negotiation promote problem solving and can be advantageous in many situations. However, without the threat in the background of the definitive and binding verdict of a court or arbitral tribunal, even the most conciliatory of general counsels may find themselves in a difficult position. The study highlights it is the knowledge (or even employment) of other methods of dispute resolution, which may result in a final and unfavourable decision. It can focus the minds of participants in a negotiation or mediation and help them resolve any impasse which they may have reached.

Should the CEO of a company play a bigger role in litigation?

Although the study cannot state definitively that companies whose CEOs play a bigger role in a commercial dispute are more likely to be successful in that dispute (a different dataset would be required to do so), the findings of the study and the opinions of the experts surveyed seem to point to this conclusion. In only around half the cases reviewed did the CEO have long-term oversight of the dispute in question. A lack of interest from company leadership in a commercial dispute may lead to: o o o a poorly defined strategy a lack of focus within the organization unclear or conflicting instructions to legal counsel

Also, as discussed above, increased involvement from the board and CEO of a company may result in more settlements of disputes.

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The study demonstrates clearly the vital importance of speed of response and dispute team integration in the early stages of a dispute. This is potentially less likely to occur without significant high level management involvement. As Alan Redfern of One Essex Court notes in the report: 'Senior management should be involved in any dispute of consequence (and not only a 'company threatening' dispute) from the very beginning; and they should insist upon regular reports as to the progress of the case. They should also attend conferences with the lawyers and counsel as the case develops.'

How have ADR lawyers adapted to the growing number of commercial disputes?
As the number of commercial disputes has risen in recent years, so too has the level of understanding that clients have for the intricacies of such disputes. The study quotes David Owen QC as noting: 'Overall, clients are becoming more sophisticated disputants, and are generally well aware of the options available to them. The good client will question and discuss the firm's approach, so it becomes a matter of joint responsibility. Past experience with the firm will also provide reassurance.' This trend requires ADR lawyers to think carefully about the nature of their client's dispute and work with that client to ensure the most economical and effective resolution procedure has been selected for the dispute in question. Furthermore, ADR lawyers who specialise in the non-adjudicative forms of ADR, such as mediation or negotiation, appear not to be delivering at present, as over 50% of the cases reviewed are being resolved through arbitration and litigation. The study suggests that for bigger cases, non-adjudicative forms of ADR are not currently meeting clients' needs. The increase in commercial disputes has also required ADR lawyers to become even more adept at mastering different disciplines and proving themselves to be agile and original thinkers. Clients now expect more than a standardised product and will often want their ADR lawyers to have a track record in the area which the dispute concerns. Some ADR lawyers have taken this trend a step further and become specialists in particular industries. The study shows clients are divided on this issue. Some believe a good litigator or arbitrator should be able to advise across different industries. Others suggest that in a large, multifaceted case, the firm must be extremely comfortable with the complexities of the specific industry concerned. Finally the study demonstrates clearly that a key dynamic for success in a commercial dispute is assembling the right team of professionals. ADR lawyers must be conscious their own quality is not the only factor in giving a client the best chance of success. The dispute team must also include elite expert witnesses and judges or arbitrators.

Do you see this trend [increasing commercial disputes] changing anytime soon?
There has been a net increase in large commercial disputes over the past three years, with the study finding that less than 10% of interviewees had experienced a decrease in the number of commercial disputes involving their organisation during this period. Historical comparison of disputes activity in the wake of economic recessions is unreliable, but a number of studies have claimed a strong anti-correlation exists between economic growth and commercial litigation. However, it would be premature to predict a slow-down in disputes now some signs of recovery are appearing in parts of the global economy. The recession (especially in the financial services sector) has left a legacy of complex and disruptive regulatory reform and continued volatility. An outbreak of military unrest (perhaps in the Middle East), an unexpected shift in the global powerbase (as may be occurring presently in the Ukraine) and a historic spike in natural catastrophes are all factors that may sustain the high level of disputes between companies.

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Why are engineering and financial companies more likely to have had a higher number of disputes in the past three years than any other sector?
In recent times engineering companies have become involved in a growing number of commercial disputes, with key factors being supply chain problems and cash flow issues. Many firms have adopted a more defensive approach to payment in the wake of the financial crisis and are less prepared than previously to delay the settlement of a debt, often demanding immediate payment, which can lead to conflict. Further the continued growth of global trade and diversification of engineering companies into emerging market economies has led to new challenges for such companies. The particular cultural complexities and unfamiliar (from a western point of view) business practices of some of these emerging markets, for instance in Africa, can result in some engineering companies becoming mired in commercial disputes. The survey also found regulatory issues are key drivers of commercial disputes. The financial sector has recently been subject to an array of new regulatory measures, which may have led to companies entering disputes that they could have avoided in the past. Further, the rise in the number of corporate finance related disputes may be linked to post-recessionary factors. While CFOs, in general, have gone through a sustained period of financial conservatism, that does not necessarily equate to a drop in finance-related disputes. Shareholder activism, offshore cash accumulation and tax avoidance have all been drivers of high-profile disputes in recent months. Interviewed by Rachel Moloney. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.