About half of all major commercial disputes end up being litigated or arbitrated despite the outcome being predictable in many cases, according to a survey of top in-house lawyers.
The Eversheds report, Companies in conflict – how commercial disputes are won, interviewed 82 general counsel on how they went about resolving high-value commercial disputes and found recovery of financial loss trumped all other reasons for pursuing a dispute.
By the same token, the financial impact of bringing a case, and particularly of losing was the main disincentive. The potential award being too small and the drain on managers’ time also put companies off litigating.
The research found that the number of large disputes was on the rise, with the termination or renegotiation of commercial contracts the main cause of problems, followed by regulatory and finance matters.
The need to safeguard a company’s reputation was considered very important, with nearly a fifth placing it as the most important of all. Introducing the report, Professor Renato Nazzini, director of research at King’s College, London’s centre of construction law and dispute resolution, said: “These numbers may still underestimate the importance of reputational concerns in commercial disputes, which are well understood.”
According to the survey, methods used for resolving disputes were litigation (37%), negotiation aided by lawyers (25%), arbitration (18%) and mediation (18%). Just 3% were resolved by managers from both sides alone.
Curiously, about two-thirds of general counsel saw cases unfolding as predicted early on, raising the question of why litigation or arbitration became necessary instead of negotiation or mediation. The report suggested that the former is needed to break an impasse in the latter, and that ADR can only succeed with the menace of court looming
Prof Nazzini said: “The solution to this impasse is not new: insistence on a contractual, multi-tier dispute resolution clause, combining negotiation, mediation and, as a last resort, litigation or arbitration. Such clauses ensure that neither party can initiate proceedings without an attempt to negotiate and mediate the dispute.
Just over half of all cases involved chief financial officers and chief executive officers in overseeing large commercial disputes. The report quoted Alan Redfern, a barrister at One Essex Court, as saying: “I find it shocking, though not entirely surprising, that CEOs and CFOs only had oversight of the proceedings in half the cases examined. 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.”
Among the organisations represented by the interviewees, engineering companies and financial institutions were most likely to have a higher number of disputes that other sectors. Added to economic recession, the report said a “shift in the global powerbase” and a “historic spike in natural catastrophes” were also factors in the level of disputes between companies.
Reasons given for choosing external lawyers put the highest value on experience of substantive law, followed by “astuteness and problem-solving ability”. The firm’s familiarity with the type of dispute resolution used and experience of the particular industry were also highly valued.
When a case proceeded to litigation or arbitration, factors considered important included the preparatory work, the performance of counsel, the quality of witnesses, and the quality of the judge or arbitrator.