Arbitration, Mediation, or Walking Away: Alternatives to International Litigation

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Editor’s Note: The Campbell Law Observer has partnered with Judge Paul C. Ridgeway, Resident Superior Court Judge of the 10th Judicial District, to provide students from his International Business Litigation and Arbitration seminar the opportunity to have their research papers published with the CLO.  The following article is one of many guest contributions from Campbell Law students to be published over the Spring 2015 semester.

BY: Alex Rector, Guest Contributor

Competition is fierce in today’s hyperactive international economy, and with small profit margins, small- to medium-sized businesses often do not have the large litigation budgets or the time necessary for handling international disputes.  These companies need alternatives to litigation that provide a more efficient resolution of disputes and jurisdictions that will recognize these mechanisms of disputes and their judgments.  These options include arbitration, mediation, and even mutual rescission of a contract.

The World Bank Organization has done extensive research into the cost of contract enforcement around the world as a part of its “Doing Business” database.  By measuring three important variables in any legal dispute: (1) days to resolve commercial sale dispute through the courts; (2) attorney, court, and enforcement cost (as a percentage of the claim); and (3) steps to file a claim, obtain judgment, and enforcement of judgment; the World Bank has compiled a ranking for each individual variable and aggregate score for over one hundred and fifty countries.

The results are not surprising.  The industrialized European and Central Asian countries score higher than any other geographical region, with a total time of resolution averaging 441 days, at a cost of twenty-five percent of the claim, and an average of thirty-seven procedures to complete.  The longest time to complete a claim is in South Asian countries, with an average of 1,075 days needed.  The most expensive area to litigate a claim is Sub-Saharan Africa, with the average cost being fifty-one percent of the claim value.  The United States is ranked eleventh in the world in settling contract disputes. The average amount of time for completion of a claim is 370 days, with a cost of eighteen percent of the claim, and thirty-two procedures needed to complete.

The Litigation Cost Survey of Major Companies found that Fortune 200 companies spent on average $115 million on litigation expenses (PDF) in the year 2008.  The biggest culprit of the cost can be pinned on the overly broad discovery rules in the United States.  In 2008, Fortune 200 companies reported producing 4,980,441 documents for discovery in major cases (major cases consist of cases where litigation expenses surpassed $250,000).  However, only 4,772 exhibited documents were used on average.

Since international litigation is expensive, time consuming, takes attention away from product development, and can strain relationships between companies, business leaders are always looking for alternatives.  The most obvious answer to the counselor might be arbitration or mediation, but the management team might still be reluctant to resort to these vehicles.  Many small and medium-sized businesses simply have to let the dispute go, and cannot arbitrate or mediate at all since both processes still have high cost and can be time consuming.  By using informal techniques of persuasion, high-pressure negotiation, the threat or realization of a damaged reputation among an industry, threatening to cut off future business, and other strategic negotiating tactics, some management teams can avoid arbitration and mediation all together.  Other times, the value of the contract might not even be enough to fight over, and both parties mutually rescind the contract.  This is especially true for smaller companies, while medium-sized companies might have more resources to enter legal negotiations.  There are many variables to consider when making the decision to enter into litigation or an alternative form of dispute resolution, such as: which path to take in regard to arbitration or mediation, cost, procedural hurdles, confidentiality, availability of appeal, judgment enforceability, and total length until resolution.

Many times arbitration or mediation is the answer that management teams must come to in settling cross-border disputes.  Surrounding both vehicles is a host of questions that need to be answered to decide if this remedy should be used to settle the problem a business could face in international disputes.  Before approaching these different choices, parties should do their best to include dispute resolution clauses in their contracts.  This can help avoid confusion and delay if problems do arise, and establish confidence going forward.  A trend towards doing so has been shown by the World Intellectual Property Organization in a recent survey (PDF) which found that over ninety-four percent of parties in technology related disputes contract for dispute resolution clauses.

Arbitration                                                  

Arbitration is a process which two or more parties can agree, whether in their contract or after a dispute arises, will determine their legal rights.  Arbitration disputes are normally presented to one or three mutually agreed upon arbitrators to make a binding decision between the parties.  Some of the basic, but debated, benefits of arbitration are: consensual choice in venue, reduced procedures, specialized arbitrators, reduced time to settlement, reduced cost, heightened confidentiality standards, limited discovery, and absence of appeal.

International arbitration is performed by numerous arbitration bodies, the most prominent being the International Chamber of Commerce Court of Arbitration (“ICC”), located in Paris, France.  The American Arbitration Association (AAA) is the most popular arbitration institution in the United States and has an international dispute branch, the International Centre for Dispute Resolution.

The speed of arbitration is currently up for debate in many legal circles.  Arbitration was once thought as a surefire way to get disputes handled more quickly, but lately that idea has been met increased scrutiny, as noted in a survey by the Chartered Institute of Arbitrators (CIArb). The CIArb Costs of International Arbitration Survey 2011, which used data from 254 arbitrations between 1991 and 2010 from numerous arbitration groups and some ad hoc arbitrations, noted that international arbitration can take anywhere from seventeen to twenty months.  This is in contrast to the estimated 297-day arbitration period for arbitration with both parties residing in the United States.  A survey by the World Intellectual Property Organization (WIPO) found a little longer arbitration period, averaging around one year.

If management or counsel’s top concern is time of resolution, one important feature of arbitration that will shorten the length of the dispute  is the lack of appeal to public courts available to the parties.  In signing the arbitration agreement, parties negotiate if appeal will be available within arbitration bodies and the cost.  The Federal Arbitration Act and the New York Convention essentially only allow for appeal to public courts if there is a due process violation or procedural issues.  An appeal for incorrect findings of fact or law will not be allowed unless the parties themselves contract for the appeal.  Arbitration bodies will allow broader grounds for appeal within their bodies if the parties agree to them.  With this in mind, general counsel must be confident they have enough information to comfortably negotiate for their company before entering an arbitration agreement.

The CIArb survey (PDF) also found some damning statistics for another one of arbitration’s advantages: reduced cost.  The average amount of money spent in an arbitration claim was $2,219,389 in common law countries and $2,439,083 in civil law countries.  However, there are some formulas that suggest a lower price.  The International Arbitration Attorney Network has an International Chamber of Commerce calculator that figures the total cost of settling an international arbitration dispute.  The calculation includes administrative fees, arbitrator fees, legal fees, expert cost, anticipated witnesses, and other miscellaneous cost.  With inputs of a five million dollar dispute, three arbitrators, average complexity, and hiring an average American corporate law firm, arbitration will cost around $1.5 million dollars.  The WIPO survey found an average of $400,000 for arbitration.

Although arbitration might not be the money saver corporate counsel thought it would be, the upside to arbitration cost is limited discovery and limited procedures.  In litigation, the ratio of documents submitted into discovery and those exhibited at trial can be as large as 1000/1, according to the Litigation Cost Survey of Major Companies.  Discovery limits in arbitration can be limited by the parties, and sometimes even wholly excluded.

Along with discovery and evidence limitations, parties signing arbitration agreements also have the opportunity to modify rules of procedure that could otherwise drive up the cost.  Some commentators think this is one of the most efficient and effective reasons parties decide to arbitrate, “Perhaps the greatest strength of international arbitration is the ability to fashion procedural and substantive flexibility. Carefully drafted arbitration clauses will likely result in significant control over the way a dispute is decided and how much it will cost to achieve resolution.”  These procedural options are extremely important when it comes to picking the venue, as selecting a country bound by the New York Convention is essential in enforcing judgment.

Another important feature of arbitration, one so important that it might cause a company to overlook the declining benefits of speed and reduced cost, is the confidentiality arbitration offers in contrast to the public courts.  For industries that rely on keeping trade secrets under tight control, the confidentiality of arbitration is extremely important, not to mention that keeping nasty legal battles out of the press is desirable for all parties.  Parties can even negotiate (PDF) for stricter confidentiality controls in their dispute resolution contract, as long as the arbitrating body allows it.  A quick look into the proposed forum’s version of the Uniform Arbitration Act will undercover the baseline level of confidentiality (PDF), and the exceptions in the particular forum. ¹

One last concern counselors will need to understand in order to feel confident going into arbitration is the enforceability of awards.  The United States has signed the New York Convention (PDF), along with 149 other countries, which is governed by the Federal Arbitration Act.  The New York Convention allows for the enforcement of foreign commercial arbitration awards if the enforcing party can prove the court in which they file has personal jurisdiction over the defendant or the property in question.  9 U.S.C. § 203 establishes subject matter jurisdiction over parties in countries that have signed the New York Convention.

Mediation

Although arbitration does offer glimmers of hope to the counselor that is considering methods of dispute resolution, mediation might also be a valid option to settle international disputes.  Mediation is similar to arbitration in some respects, such as limited discovery and consensual choice of venue and mediator, but is generally much less formal.

Similar to its more formal alternative, mediation can be conducted through the groups that provide arbitration services.  All of the groups mentioned above provide mediation and an experienced panel of mediators for parties to choose from in order to provide a neutral guide with experience in select industries, if needed.

The most noticeable and important difference for parties to understand about mediation and arbitration is that the mediator does not have the power to bind the parties, unless the parties elect for binding mediation, a hybrid between mediation and arbitration.  At the end of the process, the parties themselves must agree to the end result, unlike in arbitration, where a determination of legal rights is made.  The mediation process is more about the parties talking their problems out than having a pseudo-judge making decisions, “Mediation creates a larger forum that allows the parties to discuss everything affecting their relationship, instead of resolving a particular dispute.”²

As with arbitration, in deciding whether mediation is an applicable solution, one of the first variables counselors needs to analyze is if each party has enough information to comfortably negotiate.  Counselors should feel confident going into the mediation, as the opposing party will not want to participate in the mediation process if they do not feel prepared.

Cost is also a practical concern, if not one of the most important.  The cost of mediation will vary depending on the group that will be in charge of the process.  If the parties are mediating a dispute with the World Intellectual Property Organization, the parties will pay an administrative fee of .10% of the claim value up to $10,000, and fees for the mediator ranging from $1,500-$3,500 per day.  The WIPO also reserves the right to increase cost based on the complexity of the dispute, administrative time spent by the mediator, and other factors (a common practice among most arbitration bodies).  Respondents to the WIPO’s technology-dispute survey said they spent on average less than $100,000 per mediation.  This is compared to an average of $400,000 for arbitration in the same survey.

As to be expected with its less formal style, mediation is also capable of being completed quicker.  In the WIPO survey, respondents averaged an eight-month mediation process, compared to a year for arbitration.  Most of the time spent in mediation or arbitration will be spend on preparation, the limited discovery, and strategy, with only a few days spent at the negotiating table.

Making the Decision: Litigation, Arbitration, Mediation, or Mutual Rescission?

After comparing the options of litigation, arbitration, and mediation, general counsel must decide which path is best for their company.  Like most legal decisions, there is no bright line rule to follow, and the decision should be made on a case-by-case basis.  This is amplified the smaller the company and legal budget become.  Counselors must look over the variables discussed above: cost, speed, confidentiality, procedural hurdles, lack of appeal, venue, and other miscellaneous concerns when making their decision.

Although most general counselors and outside litigators might look to their budget before deciding between the three options, this should not be the first variable considered. Instead, counselors should look to the value of the claim that will be lost if the contract is mutually rescinded, and do a cost-benefit analysis with their management team.  Spending $50,000 on a contract claim bringing a judgment of $60,000 might not even be worth the $10,000 recovery if resources are better used elsewhere or relations will become strained with important customers and clients.  In exploring mutual rescission or breach of contract, counselors add another weapon to their arsenal.  Counselors must also be flexible to defer to the idea that the management team in their company probably desires a continuing relationship with the other party.  Therefore counselors treat the threat of arbitration, mediation, or a form of contract abandonment as a serious decision for both sides, especially in smaller industries where maintaining good business relationships is extremely important

The strength of argument against the opposing party should also be taken into consideration.  Stronger facts in favor of a position warrant a move towards arbitration, due to arbitration’s binding effect.  Strong facts could also result in a favorable outcome in mediation, but the opposing party might feel bullied and later seek arbitration, therefore driving up the cost of what was supposed to be a cheap detour.  Since mediation is haled as more of a counseling session than court proceeding, mediation might be a company’s best option if their hand is not as strong.

In conclusion, the decision between litigation, arbitration, mediation, and mutual rescission (or breach if the other party is not cooperating) must be made with a practical aim.  As demonstrated above, arbitration, mediation, and mutually rescinding the contract all have legitimate benefits and cost when compared to litigation.  However, counselors should not be quick to underestimate the power or threat of either option to the opposing party, especially in smaller industries where maintaining good business relationships is extremely important.

Alex Rector is a 2L student and will graduate from Campbell Law School in May 2016. He may be reached by email at aj**********@em***.edu.