Pandemic places spotlight on ADR for in-house teams
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The impact of Covid-19 on the courts – coupled with the pandemic’s effect on how we work – has placed a spotlight on alternative dispute resolution (ADR). Lucy Trevelyan explores the ADR options available to in-house teams.
The global Covid-19 pandemic has had a tumultuous effect on all aspects of our lives – with access to justice being no exception. While some courts have adapted to the new normal and soldiered on with social distancing or remote hearings, many courts across the world have been forced to close due to lockdowns and staff shortages.
Backlogs of case hearings have been building exponentially as the Covid crisis generates more and more disputes, chiefly because companies are left unable to fulfill their contractual obligations.
In the UK, the dire state of the courts prompted former UK Supreme Court presidents Lord Neuberger and Lord Phillips to publish a note via the British Institute of International and Comparative Law, in which they urged parties to commercial contracts to adopt a conciliatory approach towards disputes arising during, and as a result of, the pandemic.
International courts and arbitral tribunals need ‘breathing space’ if they are not to be overwhelmed by a wave of commercial cases due to the pandemic, the pair declared. They called on parties to consider negotiation, mediation and conciliation, rather than focus on their contractual rights – which in any event are going to be uncertain.
Joe Tirado is a Member of the IBA Mediation Committee’s Advisory Board and co-head of international arbitration and alternative dispute resolution (ADR) at Garrigues, London. He says that while civil courts in some jurisdictions (such as England and Wales) have continued to function and move efficiently to holding remote hearings, even where the transition to the new normal has been relatively successful, the capacity of the court system is under significant and growing pressure.
‘The availability of judges and other key personnel is susceptible to the need to self-isolate, whether as a result of their own illness or that of a family member,’ says Tirado. ‘Running cases remotely may also cause additional delay as time estimates are overrun or extended. Logjams are beginning to build up that may take months or even years in some cases to overcome.’
‘Logjams are beginning to build up that may take months or even years in some cases to overcome’
Joe Tirado, Member, IBA Mediation Committee Advisory Board
Increase in disputes
The pandemic has already shown an increase in disputes related to the performance of commercial contracts, namely regarding late payments; difficulties with production of goods due to lack of supply or transport; labour shortages; the impossibility of delivering goods; the closure of facilities by imposition of the state; and modification of circumstances represented by the parties on formation of the contract.
Sofia Martins, Vice Chair of the IBA Arbitration Committee and a partner at Miranda & Associados in Lisbon, says it’s expected that, as a growing number of companies endure forced closure due to the lockdown, we will also see an increase in insolvency proceedings.
A recent survey conducted by Euromoney’s Legal Media Group shows a 15 per cent jump in the number of in-house teams planning to send litigation out to external law firms.
This is unsurprising, says Martins, given that the legislative changes enacted due to the Covid-19 pandemic have significantly increased the workload of in-house counsel.
‘Suddenly, these teams must be prepared to attend to the companies’ most pressing needs, namely related to the implementation of lay-offs and other employment related questions, or contractual breaches originated by the pandemic,’ she explains.
As their work is focused on daily problems related to Covid-19, in-house teams are no longer available to deal with complex litigation cases that consume a great deal of time, adds Martins.
‘From a pragmatic point of view, if an in-house lawyer is unable to work due to Covid-19, litigation teams in external law firms will be better prepared, due to their size and level of specialisation, to quickly respond to the challenges posed,’ continues Martins.
Conciliation and negotiation
Martins’ firm’s recent experience shows that parties are keener to seek negotiated solutions, at least for the time being. This is notably due to the fact that all companies are facing similar constraints and there is some degree of doubt as to what the outcome of a dispute may be.
Moreover, companies prefer to focus on activities that may minimise the impact of the pandemic rather than pursuing contentious routes, she finds.
‘The existing limitations in resorting to judicial proceedings – derived from the suspension of procedural deadlines – will make it extremely complicated for parties to resolve their disputes in a timely manner,’ says Martins.
‘And even if agreements contain arbitration clauses, arbitration procedures are costly and time-consuming,’ she adds. ‘Adopting a conciliatory approach and even resorting to ADR mechanisms such as mediation is both a sensible and interesting alternative.’
‘Even if agreements contain arbitration clauses, arbitration procedures are costly and time-consuming’
Sofia Martins, Vice Chair, IBA Arbitration Committee
A conciliatory approach is always a good starting point with disputes, says Melanie Willems, Head of International Arbitration at Haynes and Boone in London. ‘I would stress that “conciliatory” does not, obviously, mean being weak. For example, this year we at Haynes and Boone faced parties claiming with a straight face that Covid was not a force majeure event. That required a firm response.’
Chris Owen, Head of Commercial Dispute Resolution at UK law firm TLT, says that during the initial phases of the pandemic, the focus for parties in regards to commercial contracts was very much on resolving disputes by direct negotiation, which invariably led to contractual variations either on a temporary or permanent basis being agreed.
There are many benefits and few drawbacks of mediation compared to litigation, says Tirado. ‘The primary benefit is a faster, cheaper and more comprehensive and certain way to resolve disputes. It is particularly useful where organisations have or expect to have an ongoing relationship. It may not be useful where the commercial relationship has irretrievably broken down and a precedent is required to be established, however.’
It will usually be quicker to arrange a mediation during the pandemic, says Henry Garfield, a dispute resolution partner at Baker McKenzie, as it will likely take place virtually.
In ‘normal’ times, diary clashes meant it could take a significant amount of time to schedule a mediation. Given that people are typically now working from home, this poses less of a challenge.
‘The virtual nature of the mediation and the quicker scheduling also mean that there are costs savings to be obtained,’ says Garfield.
‘One downside of mediation, however, is that it does not guarantee a resolution of the dispute, such that costs and time could be incurred trying to mediate the matter, but to no avail,’ he adds. ‘Litigation may still ensue.’
‘One downside of mediation is that it does not guarantee a resolution of the dispute … Litigation may still ensue’
Henry Garfield, Partner, Baker McKenzie
The pandemic has generally made the legal community more open and ambitious in terms of digitalisation, says Ioannis Alexopoulos, a litigation and arbitration partner at Signature Litigation.
‘The same technologies and attitudes which have made the transition from physical to virtual court hearings successful can also be used to facilitate ADR and especially mediations in the new climate of remote working,’ says Alexopoulos. ‘The technology is certainly available and we have all become adept at using it’.
Practitioners have seen a rise in the costs of litigation as a side effect of litigating virtually/remotely during the pandemic. ‘To the extent that one of the arguments in favour of mediation is that it resolves disputes more cheaply than litigation, then this argument has actually acquired even more strength in the pandemic environment,’ says Alexopoulos.
Anecdotally, there’s also an indirect, perhaps soft, issue in relation to mediation: that the pandemic has made businesses more willing to discuss and find solutions.
‘The pandemic has also made many businesses focus on issues that go to the heart of their business model and existence,’ says Alexopoulos.‘This has directed a lot of management's time (and consequently legal time) to finding solutions rather than fighting disputes to the death.’
‘The pandemic has also made many businesses focus on issues that go to the heart of their business model and existence’
Ioannis Alexopoulos, Partner, Signature Litigation
Mediation, including online mediation, has been popular where it hasn’t been possible to settle disputes by direct negotiation, says Owen. ‘More recently, we have seen parties to commercial contracts taking a firmer line in response to breaches of contracts, with shorter periods of negotiation being entertained before legal proceedings are issued.’
A mediation can work in any jurisdiction as the process is flexible and can be tailored to suit the needs of the specific parties, says Lereesa Easterbrook, an associate in Baker McKenzie’s dispute resolution team. There are, however, different approaches to mediation in different jurisdictions.
‘In some jurisdictions, mediators are expected to be more direct and advisory whereas, in other jurisdictions, mediators are never expected to offer an opinion,’ she says.
In certain jurisdictions, mediation is less prevalent. Easterbrook suggests this is because there is a viewpoint that mediation is not useful because the outcome is not legally binding, or in more litigious jurisdictions it may be perceived as showing weakness or suggesting that the parties are incapable of negotiating themselves.
‘For example, in the UK it is generally more common to mediate than in the Middle East,’ adds Easterbrook. ‘In some jurisdictions (such as the UK and US) there may be a huge number of professionally qualified mediators who could assist on even the most legally complex of disputes. In other jurisdictions that may well not be the case.’
And recourse to mediation is not so common in many jurisdictions.
‘Unfortunately, mediation as a means of resolving disputes is still taking its first steps in countries like Portugal and is not yet a means typically considered by parties,’ explains Martins. ‘For this reason, when the parties have already reached the threshold of litigation, it is highly unlikely for one party to persuade the other into adopting such approach.’
Participating in a UK-based remote mediation is accessible for parties in/from many different jurisdictions, says Ryan Mowat, partner in the dispute resolution team at Kingsley Napley, London.
‘The concept and process is relatively straightforward,’ he says. ‘However, there are practicalities which need to be borne in mind when it involves parties residing in or from other jurisdictions, particularly during the current crisis, such as factoring in time differences when scheduling the mediation.’
It also needs to be ensured that all parties can access the platform remotely and confidentially, says Mowat. ‘However, it does work and there is no reason, in theory, why the same principles would not apply to remote mediations based in other jurisdictions where mediation already works well.’
Arbitration to the rescue
The arbitration community has adapted well to the challenges of resolving disputes in the current climate, in Tirado’s opinion.
It’s possible, he says, for arbitration to step up and rescue parties to litigation who want their trial-ready disputes to be resolved promptly but whose hearings are being squeezed out of the court lists by the impact of Covid-19.
‘Such a “conversion” of an impending trial to an arbitral hearing would allow the parties to use the pleadings and evidence already assembled for the litigation and to adopt a procedure with which parties more familiar with litigation than arbitration feel comfortable,’ explains Tirado.
‘The parties would be able to retain their existing legal teams and avoid wasting the huge resources sunk into the pre-trial process,’ he adds.
Parties, he says, should consider entering into an arbitration agreement or a protocol that provides for the rapid appointment of a tribunal with availability to prepare and hold a trial in short order. Such an agreement should also prescribe the applicable procedural rules and make provision for the costs of the litigation to date.
Tirado warns, however, that any advantages of the arbitration process will need to be assessed in the light of the limitations to, or the perceived disadvantages of, the arbitral process.
‘For example, depending on the seat or place of arbitration there may be limited or no right of appeal,’ he explains.
Other factors could include the arbitral tribunal having more limited powers to compel witnesses or to take other compulsory steps involving non-parties. ‘Also, whether the subject matter of the dispute is capable of being arbitrated and whether there are any formalities or impediments to producing a valid and enforceable award will all need to be carefully considered,’ adds Tirado.
Arbitration may also have some additional cost implications that may not be present in proceedings before a court, he says.
‘Most noticeably, the cost of the arbitral tribunal – normally consisting of three members in high-value cases – itself and the venue will need to be paid for by the parties,’ he explains.
It may be possible to mitigate such costs. For example, the parties may agree to appoint a sole arbitrator rather than a tribunal made up of three members where the matter is not particularly complicated notwithstanding the amount in dispute, says Tirado.
In any event, he adds, the general rule is that, subject to the discretion of the tribunal, the winning party in an arbitration may recover its reasonable legal costs and expenses from the losing party.
Moving forward, companies will be more cautious with the wording of clauses, ensuring they specifically contemplate events such as a pandemic, predicts Martins.
‘Special attention will also certainly be paid to the drafting of clauses relating to force majeure and hardship or material adverse change, but also those which govern the parties’ obligations, default, material breach or termination of contract,’ she says.
‘I do not believe there will be any sea change in the way that companies approach disputes,’ says Alexopoulos.‘Having said that, companies will definitely focus more on the technological aspects of solving disputes and possibly on digitalisation of legal services generally, and will demand more from the market.’
The pandemic may well encourage parties to adopt a conciliatory approach to disputes, grounded in pragmatism and commercial realities.
‘Whether this in fact happens and promotes a more longstanding shift in the way clients approach disputes very much varies case by case and depends on the individual personalities involved,’ says Mowat.
In Mowat’s view, some of the benefits of remote electronic working brought to light by the pandemic – such as attending mediations and hearings remotely in order to save time and costs, particularly in cross-border disputes – are likely to endure.
Given the massive boost to technology and the rapid adaptation of professionals to the new way of doing business, it seems clear that there will be new ideas and changes to what we were all used to, says Melanie Willems.
‘Perhaps the pandemic might be viewed, outside of its obvious devastation and without diminishing that, as an accelerator,’ she says. ‘It has allowed us all to examine how we live and work, and why, and what techniques we must deploy to achieve great results, whatever the situation we find ourselves in. Will that lead to a sea change? Not necessarily, but there will be important and useful developments.’
Tips for in-house lawyers on approaching disputes during the pandemic
Martins’ primary advice for in-house counsel is to define and organise clear rules for contract management. ‘This is to ensure that all relevant evidence is collated and systematically organised during the performance of contracts, making it easier, if and when a dispute arises, both for in-house counsel and external counsel to get a swift grip on relevant issues.’
Analysing the commercial impact of a contractual breach on the business at an early stage to ensure that a proportionate strategy for resolving the dispute is adopted is an important strategy, says Owen.
‘First address the issue with the counter party through direct dialogue and correspondence, ensuring that rights and remedies are not compromised. Attempt to negotiate acceptable settlement terms and document agreed terms in writing in a settlement agreement or contractual variation,’ he suggests.
He adds that if acceptable terms for resolving the dispute cannot be agreed, suggest a form of ADR, such as mediation.
Spending time checking key contracts, focusing particularly on force majeure provisions, dispute resolution clauses and termination procedures is key, says Garfield. ‘Consider whether there is a need for a pre-emptive re-negotiation or a restructuring of some kind. Think about obligations to mitigate the effect of contractual non-performance, any applicable time bars in contracts, any notification requirements and other procedural issues.’
Garfield suggests discussing issues as soon as possible. ‘In our experience, starting conversations with counterparties as early as possible when there is a sign of trouble reduces the risk of disputes further down the line and helps protect long-term relationships during times of distress.’
‘Be open-minded to ADR and flexible in terms of potential settlement,’ says Tirado. ‘Embrace the use of technology and alternative ways of financing disputes.’