Businesses may prefer ADR to litigation

Recessions produce a boom in disputes — and in the past have produced a correspondingly increased volume of litigation. However, the results may differ this time around.  

Unexpected and especially sudden changes in the economy and, even more so, volatility (the hallmark of the global economy in 2008) generate disputes.  

Business expectations are shattered. Prices fluctuate. Financing is withdrawn or fails to materialize. The economic foundations of contracts collapse. And business partners, suppliers and customers fail to perform, or even go out of business. Businesses then sue. Lacking new opportunities, they tend to pursue their claims with vigour and persistence. Those who are sued resist — they defend and they delay in order to defer their day of reckoning.  

But litigators here and in other parts of the world report that they have not been seeing the traditional recession litigation boom. The evidence is anecdotal. The former litigation head at a large U.K.-based firm said, “I do not get the sense, at the moment at least, that all these distressed clients are reaching for their litigation solution in the way they did in the past.” As a result, court dockets may not swell as in previous recessions. A different mentality may have taken hold. But if this recession is different, the question is why?  

One important answer is that businesses have become more sophisticated about their disputes and about litigation — its time, cost and trouble. Businesses are looking for — and finding — more business-like solutions.

This approach to disputes has been significantly driven by the institutionalization and greater sophistication of the in-house counsel role since the last recession. In-house counsel who understand the litigation process are more aware of the downsides of litigation. Their incentives are based on their staying within their (often reduced) budgets rather than on starting expensive litigation with limited promise or distant and uncertain reward.  

They are able, willing and motivated to carefully analyze the prospect for their potential cases, to develop (with their outside counsel) sensible and sophisticated strategies and to play a hands-on role managing their disputes. They are now also aware of expanded dispute resolution options that were barely on their radar screens one recession ago — and certainly not two or three recessions ago.  

How will disputes be handled this time? In-house counsel who manage their companies’ disputes may focus on negotiated resolutions. Next, they may consider mediation and other forms of alternative dispute resolution. And they may make greater use of arbitration, domestically and internationally, than in past recessions because of existing arbitration clauses in their contracts or arbitration agreements they will make when disputes arise.  

The use of arbitration has grown dramatically over the past five to ten years, whether because of actual or perceived problems in the court system or the attractiveness of being able to select the adjudicator, customize procedures, maintain privacy, more readily control costs and limit judicial review and appeals. As a result, today many more in-house counsel and most commercial litigators have experience in arbitration.  

Despite what some may suggest, the growth and acceptance of mediation and arbitration have not resulted from competition with the courts. Our courts have been crucial partners and supporters of the expansion of dispute resolution options, recognizing the part that these options must play in an efficient and effective justice system. Our best judges have been among the leading proponents of mediation, and mandatory mediation has played an important role in driving the acceptance of mediation by the commercial litigation bar and inhouse counsel.  

Arbitration requires, and has received, the support of Canadian courts, which recognize that almost all types of disputes can be arbitrated. Courts hold parties to their agreements to arbitrate or to mediate and arbitrate (med-arb). They give arbitrators a sensibly wide berth to determine the scope of disputes covered by an arbitration clause. They provide interim relief to support an arbitration when that process cannot be established fast enough or the arbitral tribunal needs additional clout. They assist in obtaining evidence from nonparties and other jurisdictions; respect the narrow scope of review and appeal in arbitration statutes and agreements; and assist with the enforcement of awards.  

In turn, arbitration assists the courts, although this has not been widely recognized. Since arbitration is a forum in which parties and arbitrators have greater flexibility to adapt and develop procedures, courts can and do learn from innovations and attitudes developed in arbitration. Some judges and court reformers argue that courts should adapt more of arbitration’s processes for the judicial system. Whether that is so, these processes and attitudes are not proprietary; the courts continue to have open access to them.  

With the growth of mediation and arbitration has come a growth and sophistication of suppliers. The number of mediators and arbitrators with good training and experience has increased. Not only former judges serve as mediators and arbitrators — now practising senior commercial litigation counsel also do so. Arbitrators increasingly encourage procedural flexibility that is available in arbitration to reach the heart of disputes eff iciently, yet fairly.  

A positive outcome of this recession may be the stimulation of both the ongoing restructuring of the ways that businesses resolve their disputes and the growth of arbitration and alternative forms of dispute resolution. 

This article first appeared in The Lawyers Weekly