A study of businesses’ attitudes to commercial disputes finds that companies work hard to avoid litigation and arbitration. Despite this, the “Companies in Conflict: How Commercial Disputes are Won” study from Eversheds revealed that general counsel are most likely to see cases go all the way to court rather than being resolved by alternative dispute resolution (ADR). Here, Claudius Triebold, Head of Eversheds’ International Litigation and Arbitration Group and Mark Davenport, International Head of Commercial Disputes, ask “what is driving this apparent anomaly?”

Conflict is on the increase for big businesses – that was one of the main findings of the Eversheds’ study, Companies in Conflict. In this report, 82 top in-house lawyers explain what drives their large organisations into disputes, how those disputes play out, and what makes the difference between winning and losing. Each tells a different story, but there are some dominant themes. On average, businesses with a turnover of more than US$1bn have been engaged in between two and five large disputes during the last three years, with 16 per cent involved in more than 10.

The paradox

In this environment of increasing commercial conflict, today’s general counsel appear to be adopting a risk-adverse rather than an aggressive stance and focus their efforts on resolving the issues as quickly as possible. The majority of respondents to the study highlighted the costs of pursuing a dispute and the financial risk of losing at trial as the main disincentives for pursuing what appears to be a strong case.

So, with general counsel working hard to stay out of court it is perhaps surprising that over one third (37 per cent) of all large cases are still being resolved through litigation and 18 per cent through arbitration. What is more, in the vast majority of cases (90 per cent), businesses are able to predict the outcome of a case in its early stages.

This raises an interesting question - why do major corporates go all the way if they know the outcome before they even get there? After all, if both sides believe they know what is coming, and both sides state that litigation/arbitration is best avoided, why can’t they resolve their issues rather than resorting to a formal dispute mechanism?

Reputation is key

To understand why parties get ‘stuck’ in litigation, we need to understand more about why companies pursue disputes. The study shows the key reasons for pursuing a dispute are to recover financial loss and to protect an organisation’s reputation. The priority that companies give to protecting their reputation is perhaps best captured in a comment from one of the general counsel involved in the study, who said: “If it is something important to us we will fight to maintain our brand name and reputation, no matter what.”

So, with such business critical factors driving the pursuit of a dispute, it is perhaps not such a surprise after all that so many businesses still have their day in court. However, if reputation is fuelling such a significant proportion of disputes, would we not expect to see more businesses embracing ADR as a means of conflict resolution? In ADR, it is usual for parties to agree that confidentiality should be maintained throughout the process. The apparent failure of ADR is perhaps explained by one of its perceived shortcomings. Many would argue that ADR can only succeed with the threat of court looming.

Furthermore, regardless of the many benefits of ADR, it does not necessarily lead to less cost than litigation. In particular, if the attempts at ADR fail and a court case is still required, the length of the process will have been added to and the total cost increased. Professor Renato Nazzini from King’s College London and co-author of the study suggested that businesses often don’t take ADR seriously enough. He explains: “typically, when a dispute is not settled, this is either because 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.”

How to make settlement more likely

One would expect that early settlement is in tune with European business practices where more often than not companies strive to have disputes resolved behind closed doors. What sights does the Companies in Conflict report provide to make this more likely? Three broad themes emerge:

1. Involve the CEO or another very senior executive early in the process

Traditionally, in-house legal counsel have been given responsibility for managing a dispute without the authority to settle it. It is only after huge amounts of management time and money are expended that the senior decision maker gets involved. This is undesirable for two reasons:

First, at the initial stages, in-house counsel are taking instructions from business clients who may well be personally invested in the dispute. In most cases, an individual trying to defend his or her handling of a matter is unlikely to be best placed to determine objectively whether settlement is in the interest of the corporation as a whole. Secondly, disputes are sometimes fuelled by emotions as much as money. This is particularly the case where a determined individual feels wronged by a corporation, whether reasonably or unreasonably. The involvement of a senior individual may have a calming influence in that the complainant feels that the matter is being taken seriously before money, time and reputation is needlessly sacrificed in acrimonious litigation or regulatory investigations.

Little wonder that Alan Redfern from One Essex Court commented, “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. They should also attend conferences with the lawyers and counsel as the case develops.”

2. Focus on compiling evidence quickly

With sizeable disputes on the increase, it is more important than ever for businesses to have a good strategic overview of a dispute from the outset so they can make sound commercial decisions about how to secure the best outcome. It would appear that a significant proportion of commercial disputes will inevitably end up in litigation – no matter how hard the general counsel tries to avoid court. What is important is that the route to getting there is well planned and the journey is not rushed.

Whilst the study shows that legal advisers can accurately predict the outcome of disputes, they can only do this if they have a complete picture of the evidence that is going to come before the Court. In many cases, it is only when a ‘smoking gun’ emerges in the discovery process that the ultimate outcome of the dispute becomes clear and the parties quickly settle. This underlines the importance of gathering all available evidence at an early stage. A full picture of the evidence is needed in order for a business to feel the positive effects of early case assessments, as it allows legal advisors to form the most accurate view possible. Having access to all relevant information at an early stage can in many cases mean the difference between proceeding to litigation or reaching a favourable settlement.

Eversheds was an early convert to the early case assessments that are now favoured by many in-house counsel. It pioneered an approach known as RAPID (standing for Review, Analyse, Plan, Implement and Deliver). The firm strongly believes that it is worth making an early investment in a review and analysis of the facts, legal issues and evidence of material witnesses. Not only does this lead to a more accurate prediction of the likely results but it also leads to greater transparency of costs – extremely important in a time where legal budgets are constantly under pressure.

3. Consider the use of multi-tiered dispute resolution clauses

The findings of the Companies in Conflict report also supports the importance of incorporating multi-tier dispute resolution clauses in contractual agreements, which combine negotiation, mediation and, as a last resort, litigation or arbitration. One of the key benefits of such clauses is that issues are escalated within an organisation before proceedings start. As we have seen, the involvement of a CEO or other senior management can be key in unlocking otherwise intractable disputes.

While a contractual obligation would certainly engage businesses more seriously in ADR, others might be swayed by one of the most interesting findings in the study. When cases do end up going to court, the study found that businesses need an ‘A’ team of professionals to secure the right outcome, but while this includes representing counsel it also extends to the judge and the quality of the expert witnesses. Businesses are well advised to consider this in the early stages of formulating their strategic response to a dispute before relinquishing control and heading straight to court.