Keeping the End in Mind – The Bottom Line Approach to Dispute Resolution

Keeping the End in Mind – The Bottom Line Approach to Dispute Resolution

The author of this article and all parties and events described herein have been anonymized for confidentiality reasons.

I.     INTRODUCTION

Dispute resolution will always need a holistic approach keeping in mind, at all times, the bottom line. At the end of the day, the debate on theoretical or statistical superiority between court litigation and alternative dispute resolution[1] would and should be cast aside in favour of adopting a results-based and pragmatic approach.

Approaching dispute resolution by analysing the differences between court litigation and alternative dispute resolution, or “ADR”[2], is an attempt at a false dichotomy. Whatever conclusion you come to between court litigation and ADR, it would be made in a vacuum, away from the commercial realities of enforceability, cost, jurisdiction, viability of partnerships, and other commercial considerations.

Through my experiences in managing dispute resolutions of a luxury hospitality and club enterprise (“LuxCo”), this article will demonstrate the holistic approach to disputes that corporations should take.

II.    NEGOTIATIONS

A business relationship, like a contract, is about meeting of the minds[3], an exchange of promises. Therefore, the greatest dispute resolution of all is always negotiation. This is true for parties (1) who, prior to forming a business relationship, want to avoid disputes by agreeing to how their relationship would function and (2) who, at the end of the relationship, want to avoid protracted and costly disputes.

        a. Meeting of the Minds

In my own experience, almost all disputes between business partners could have been avoided if the partners assured a better meeting of the minds at the start. I had one such experience while negotiating on behalf of LuxCo’s business team.

LuxCo’s business was primarily in multinational hospitality products, and the counterparty (“ClubCo”) was negotiating terms to appoint LuxCo as manager of a high-end product situated in Asia (the “Club”). LuxCo had a reputation for success in the high-end market, but LuxCo needed the ClubCo’s trust to let it run the Club in accordance with its judgment. ClubCo, on the other hand, was interested only in bringing LuxCo into the venture for the purposes of persuading investors of the project’s potential, obtaining financing, and to some extent, using the Club as a branded trophy. There was a mismatch of intentions with regards to control of the Club, but the deal was closed. Once the Club opened, all hell broke loose. LuxCo was prohibited from managing the Club at every turn. ClubCo even went as far as barring LuxCo’s management team entry to the Club.

There were three reasons for this incident. The first is the segmented nature of business processes, where the transaction’s “head”, who negotiates the terms of the transaction, is not the transaction’s “tail”, who ensures the success of the transaction. Most corporations segment their operations into departments. Specialised negotiators make themselves familiar with the market and seek out new opportunities; whereas, operations specialists with their vast experience in management and hospitality implement the transactions. Think of it as the way a Microsoft sales director need not understand software programming. The problem, however, is that similar internal structures increase the risk that, when a deal is closed, there is no true meeting of the minds.

The second reason is disingenuousness, or more bluntly, dishonesty. Leading up to the incident, the leadership of ClubCo had no intention of honouring their promise to grant LuxCo control of the Club. It is not uncommon that deals are struck with one party looking out only for its own gain, having no intention to honour its obligations.

The third reason is personality-driven business. In business, we tend to assume that everyone is profit- driven, or at least driven by rational goals. However, the decisions of corporates are driven by individuals, and individuals are oftentimes governed not by rationality but rather, their personalities. Leading the transaction, ClubCo’s owner (“Club Owner”) was more concerned with claiming a trophy with LuxCo’s name on it, rather than the Club’s profitability or the legal ramifications of ClubCo’s discontent.

If LuxCo fully understood what Club Owner was up to, a deal would probably never have been struck. If LuxCo and ClubCo had a proper meeting of the minds, they might have realised that the appropriate transaction here was not a management arrangement, but a franchise, – where ClubCo could borrow LuxCo’s name without needing LuxCo’s boots on the ground.

     b. Realigning the Relationship

The second aspect to the meeting of the minds is that a dispute can be avoided amidst a business relationship if the gap in understanding is bridged and the relationship realigned. This explains the growing popularity of mediation as a form of ADR. In fact, mediation is merely guided negotiation, and you rarely see parties enter into a ‘binding’ mediation.

The first step every corporation takes in a dispute is to seek an amiable negotiation to resolve outstanding issues. This can be achieved by adjustments in commercial understanding, introduction of third parties such as new investors to the business relationship, leveraging relationships with government authorities to persuade the counterparty, straight-up bargaining, or any other means to re-frame the commercial issue. Whether promises were not fulfilled because they no longer make business sense or promises were misunderstood to start with, new promises have to be made, and the meeting of the minds re-established.

One experience I had with LuxCo where the meeting of minds was lost and had to be re-established was with LuxCo’s management of a high end property in the Indian Ocean (“Ocean Club”). Ocean Club belonged to a combination of investors, including LuxCo’s own investment arm (“InvestCo”). Despite the good start and the good performance of Ocean Club, the joint venture soured with time as the parties started to find that cooperating both on an equity level and on a management level was a tedious affair. The venture was on the brink of collapse, but it seemed such a pity, considering the good results of Ocean Club. Eventually, the parties met and after negotiations, realised that there was a way for both parties to reap rewards from the venture. LuxCo bought out all the other investors’ shares from InvestCo at market rate, a price much higher than the initial investment. The investors exited with a healthy return, and LuxCo got to keep all the profits of a successful Ocean Club without having to deal with a tedious cooperative process any longer.

III.     LITIGATION AS THE FOUNDATION OF DISPUTE RESOLUTION

Litigation is the foundation of dispute resolution. Regardless of the nature of your business relationship, in almost any country, you have the right to enforce your legal rights and contractual terms in a court.

Below is a revised extract from Living With ADR[4]:

Litigation Policy of USA Corporates between 1997 and 2011

Corporate Policy 1997 2011
Defending Party Initiating Party
Always litigate 5.0% 6.1% 0.6%
Litigate first, then move to ADR for those cases where appropriate 24.7% 21.4% 18.8%
Litigate only in cases that seem appropriate, use ADR for all others 25.2% 27.0% 38.2%
Tries to move to ADR always 11.7% 11.3% 11.1%
No company policy 20.8% 22.1% 25.2%
Other 12.6% 12.1% 6.1%

 

The key point is the stark minority of 0.6% of corporates choosing to ‘always litigate’, and the increase from 21.4% to 38.2% of corporates deciding to ‘litigate only in cases that seem appropriate, use ADR for all others’[5]. Moving away from litigation was always the economical choice for corporations, because litigation is expensive, time consuming, and bound to make you enemies in the business world. Arbitration is also often seen as an advantageous alternative to litigation, usually due to expediency and reliability, but equal in its drawbacks of cost and being seen as a drastic remedy.

In my experience, litigation and arbitration were always more useful as a threat, or at least as a means of gaining an upper hand in negotiations. Only in a handful of case did arbitration or litigation lead to a result in itself. I will be citing two separate incidents to demonstrate my points above.

The first instance was a pleasant affair where LuxCo got into business with a Middle Eastern partner, a state-owned business (“StateCo”). Unfortunately, the transaction went sour amidst a financial crisis, and as financing dried up, StateCo decided they would unceremoniously boot LuxCo out of the business. StateCo wielded limitless influence locally and went as far as to convince local law enforcement personnel to put LuxCo employees on a watch list to be barred from entering or leaving the country. We knew litigation in local courts would be meaningless. Thankfully, in foresight, we had provided for disputes to be settled by arbitration in the Singapore International Arbitration Centre (“SIAC”), which we knew to be a reliable and neutral forum. However, we also knew that StateCo’s assets were all found in their domestic turf, so enforcement of an award by the SIAC would require going through the local courts. Regardless, LuxCo went ahead with arbitration, and SIAC gave a just award in favour of LuxCo. Thereafter, LuxCo did not pursue enforcement in the local courts. This is because the award was the end in itself. The award was a moral victory for LuxCo. It sent a clear signal that (1) it was LuxCo who was wronged in the transaction and (2) that LuxCo does not sit idly by while it is treated unfairly.

The second instance takes us back to the ClubCo incident. Club Owner’s irrational behaviour made it impossible for LuxCo to manage the Club successfully, and LuxCo repeatedly sought a middle ground resolution. Amid the tiresome dispute where ClubCo insisted on unreasonable terms, LuxCo commenced proceedings against ClubCo. Due to the one sided nature of the circumstances, it became evident that LuxCo would succeed in court. At this point, ClubCo adopted a softer approach, and became more amenable to seeking an amiable resolution. Throughout this process, LuxCo never ceased its provision of services to the Club, – its intention always being to make the Club a success. In other words, it was never the intention to end the relationship and walk away with damages. It was always LuxCo’s intention to find a resolution beneficial for both parties.

IV.    ENFORCEMENT

On jurisdiction, consider that the statistics cited above[6] are from the United States where litigation is somewhat of a national hobby, – to the extent that commentators have moved on to vexatious litigation as the prevalent trend[7]. Cynical observations aside, one of the reasons why litigation was and still is a popular form of dispute resolution in the United States is because the judicial system is relatively efficient, reliable, and fair. However, in today’s global economy with corporations and investors moving to tap into emerging economies, you will not necessarily be dealing with a reliable judicial system when business transactions fall apart. In many jurisdictions, you cannot expect the rule of law when corruption, nepotism, and political connections might be far more important than a well drafted contract.

Most corporations are savvy enough to introduce an arbitration clause to take the uncertainty of a reliable judiciary out of the picture. Arbitration takes place under the rules of fairly reputable arbitration centres like the Singapore International Arbitration Centre or the London Court of International Arbitration. However, when you seek enforcement of the award in a local court, you are going to face the odds of a local court throwing your arbitration award out the window due to what is deemed a procedural error. In some jurisdictions, even if they are signatory to the New York Convention[8], a foreign award is not valid until the local courts have recognized it. Even if a court system is not plagued by corruption, nepotism, or political pressures, a court might be inexperienced, come to an inequitable conclusion, or entangle a corporation in years of legal battles. Therefore, the first step a corporation should take is not simply choose between litigation and ADR, but decide based on the odds of enforcement.

One such incident, that I encountered with LuxCo, was in a transaction in the Middle East where the counterparty was a joint venture between the state and the personal investment firm of a member of the royal family (“RoyalCo”). Enough said, the transaction went sour. With the experience of StateCo under the belt, LuxCo understood (1) that litigation in local courts was not an option and (2) that arbitration would end up coming full circle to face enforcement in local courts. At this juncture, LuxCo had to weigh the low probability of succeeding in enforcement against the size of the claim. LuxCo went ahead with the claim anyway. This leads to my final point on cost.

V.   COST

Having determined whether a method of dispute resolution is a viable option based on enforceability, the next step to the logic of dispute resolution is cost. Oftentimes, laymen, businessmen, commentators, and legal academics – but never lawyers – consider arbitration the reliable and commercially savvy older brother of litigation. Lawyers will tell you it is the easy and expensive younger sister of litigation.

Regardless of how confident you are of a positive result and its enforcement, corporations need to consider whether the proceedings would benefit themselves more than they would benefit their attorneys[9]. Alternatively, but less rationally, the corporations need to ask themselves: does it hurt your counterparty enough to justify the benefit to your attorneys?

VI.    WALKING AWAY

This is an often overlooked option, but more often than not, the best option for a corporation is to walk away from a dispute. If a business relationship fails, sometimes the best solution is to take it as an acceptable risk of business. Seeking to enforce your rights via dispute resolution is often just throwing good money after bad. I frequently advised LuxCo that some fights are simply not worth fighting. In one instance, a cheap imitation of LuxCo (“CheapCo”) was parading around a market, where LuxCo was not present, and ignored all our initial threats of legal action. Ultimately, it was decided that nobody would ever confuse CheapCo with LuxCo, and a legal pursuit was simply not worth our money, and more importantly, our time.

That being said, it is a fine line to walk between knowing when to walk away and knowing when you are risking setting a precedent in your business relationships. If counterparties pick up on the scent that you tend to not put up a fight, you risk signalling to your partners that they can flout the rules and get away with it. This risk materialized in LuxCo’s approach with StateCo and RoyalCo.

VII.   CONCLUSION

A corporation weighing its options, be it negotiation, litigation, arbitration, or any other form of ADR, cannot make its decisions in a vacuum. The bottom line and commercial reality must constantly be at the forefront of any decision, be it enforceability, cost, jurisdiction, or the chance of reviving a partnership.

[1] See: Thomas J. Stipanowich, ADR and “The Vanishing Trial”: The Growth and Impact of “Alternative Dispute Resolution,” 1 Journal Empirical Legal Studies (2004) 843 at 845.

[2] Refers to anything as process driven as commercial arbitration, employment court, mediation, expert determination, or other processes involving rules and a determinate resolution, to resolutions as loose as “third-party intervention strategies” and other informal dispute resolution. See: Thomas J. Stipanowich & J. Ryan Lamare, “Living with ADR: Evolving Perceptions and Use of Mediation, Arbitration, and Conflict Management in Fortune 1000 Corporations” LEGAL STUDIES RESEARCH PAPER SERIES 6 (2013) 2-3.

[3] See: Baltimore & Ohio R. Co. v. United States 261 U.S. 592, 597, 58 Ct.Cl. 709, 43 S.Ct. 425, 67 L.Ed. 816 (1923)

[4] Supra note 2.

[5] See: David B. Lipsky & Ronald L. Seeber, The Appropriate Resolution of Corporate Disputes: A Report on the Growing Use of ADR By U.S. Corporations (Ithaca, NY: Institute on Conflict Resolution, 1998) 15.

[6] Ibidem.

[7] See: Alvin Stauber, “Litigious Paranoia: Confronting And Controlling Abusive Litigation In The United States, The United Kingdom”, 5:1 International Review of Business (2009) 11 at 27.

 

[8] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, 330 UNTS 38, 21 UST 2517 [New York Convention].

[9] See: Klaus Sachs, “Time and Money” in: Loukas Mistelis and Julian D M Lew (eds), Pervasive Problems in

International Arbitration (The Hague: Kluwer Law International, 2006) 103 at 115.

         

MJDR
info@mjdr.ca