Author: Edward Richards

Lifecycle of a Business – Dispute resolution: What are a company’s options?

  • 6 November 2024
  • News
A group of six people is sitting and discussing around a wooden table in a modern office with large windows and colourful sticky notes on the glass.

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

Dispute resolution: What are a company’s options?

While disputes are something commercial parties naturally seek to avoid if at all possible, one will arise at some point in the lifecycle of most businesses. When a dispute does arise, there are a variety of legal mechanisms available to seek to resolve matters. These include adversarial proceedings in which a binding decision is made by a court or tribunal, as well as “alternative dispute resolution” procedures based on party to party negotiation.

Adversarial proceedings: arbitration vs. litigation

If adversarial proceedings are to be pursued, the two main options are litigation and arbitration. In litigation, disputes are determined by a country’s national Courts. In contrast, when parties choose to arbitrate, they agree to submit their dispute to a privately appointed tribunal for determination, usually pursuant to an arbitration clause in their contract.

Aside from this difference, the procedures in litigation and arbitration are often similar. The parties will typically serve statements of case, give disclosure of relevant documents and exchange factual or expert witness evidence, with the proceedings culminating in a trial, sometimes known as an evidentiary hearing.

Whether arbitration or litigation is preferable is context-sensitive. However, litigation may be the better option in the following scenarios:

  • Precedent: Arbitrators’ decisions on points of law do not bind other Courts or tribunals (not least because they are usually confidential – see below). Litigation will therefore be preferable where it is important to obtain a decision that will bind other parties in future (e.g., a case regarding the meaning of a clause in a supplier’s standard terms and conditions).  
  • Multi-party disputes: Arbitration requires all parties to have agreed to submit the dispute to arbitration. It is therefore often unsuitable for cases involving multiple parties, not all of whom have signed up to the same arbitration clause or otherwise agreed to arbitrate. That said, complex transactions increasingly involve all parties signing up to the same arbitration clause with a view to achieving a “one stop shop” for dispute resolution. Further, the rules of the leading arbitral institutions increasingly provide mechanisms for related disputes to be consolidated. Multi-party arbitration is therefore becoming more common.
  • Cost: It is sometimes said that arbitration is cheaper than litigation. While this may be true in some contexts, as a general rule, hard-fought commercial arbitration will often end up being more expensive than litigation, given the need to pay the tribunal’s costs (which can be extensive) on top of the other costs of the proceedings.

On the other hand, arbitration may be preferable to litigation in some contexts. For example:

  • Enforcement: Most countries are parties to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention. This makes enforcing arbitral awards more straightforward than enforcing Court judgments in many jurisdictions, particularly emerging markets.
  • Confidentiality: Unlike Court proceedings, arbitral proceedings are conducted in private, with all submissions and evidence remaining confidential. This is likely to be desirable, for example, in cases involving sensitive commercial information or trade secrets.
  • Neutrality: While parties from the same jurisdiction will be content for their disputes to be resolved by the national Courts of that jurisdiction, parties from different jurisdictions may well wish to opt for arbitration to provide a neutral forum.

Alternatives to adversarial proceedings: “without prejudice” negotiations including mediation

As an alternative to adversarial proceedings, parties can pursue a variety of negotiation-based forms of “alternative dispute resolution” or “ADR”.

At its simplest, ADR involves negotiations between the parties or their lawyers either in person or via correspondence on a “without prejudice” basis. Such negotiations cannot be referred to before a Court or tribunal, and this encourages parties to take a pragmatic, “cards on the table” approach to resolving matters.

If the parties consider that a more structured approach would be beneficial, a further option is mediation. Here a third party mediator is engaged to facilitate the without prejudice negotiations between the parties, usually at an in person meeting. Unlike a Court or tribunal, a mediator will not make any decision which binds the parties. However, they are able to provide an impartial view on the strengths and weaknesses of their cases, and this can be helpful in encouraging more realistic settlement discussions.

Whichever option is pursued, ADR has the potential to resolve disputes more quickly and cheaply than adversarial proceedings, allowing the parties to return to their day to day business activities and, in some cases, to maintain their business relationship. In circumstances where the outcome of adversarial proceedings is often unpredictable, a settlement via ADR also has the advantage of crystallising the parties’ positions, with neither party being entirely vindicated, but neither losing outright.

Given these benefits and the burden placed on the state by running the Court system, the English Courts are increasingly keen to encourage parties to explore ADR as an alternative to Court proceedings. In Churchill v Merthyr Tydfil, a landmark Court of Appeal decision in 2023, the Court ruled (contrary to previous authority) that the Courts have the power to stay claims in order to compel ADR in certain circumstances. From May 2024 onwards, certain low value claims (those worth less than £10,000) are also required to be mediated before they can be determined in Court, and it seems likely that compulsory mediation will become increasingly common in future.

Disclaimer

This note reflects the law as at 10 October 2024. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Edward Richards
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Edward Richards

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No “real risk of prosecution” under Article 271 of the Swiss Criminal Code: Application to be excused from disclosure obligations fails

  • 20 July 2023
  • News
Black and white chess pieces are positioned on a chessboard, focusing on two knights facing each other amid rows of pawns, set against a blurred, neutral backdrop.

It is well established that the English Court has discretion to excuse a party from performance of its procedural obligations in litigation where it considers that performing those obligations would give rise to an actual risk of prosecution in a foreign state: Bank Mellat v HM Treasury [2019] EWCA Civ 449.

In Public Institution for Social Security v Al Wazzan & Ors [2023] EWHC 1065, the defendants sought to be excused from their obligation to give disclosure on the basis that doing so would lead to a real risk of prosecution in Switzerland under Article 271 of the Swiss Criminal Code1. The Court was not persuaded by the defendants’ arguments and refused to grant the order sought.

The decision provides welcome guidance in a previously uncertain area, as well as a salutary warning to parties seeking to rely on Article 271 to excuse themselves from their disclosure obligations in English Court proceedings.

Article 271

Article 271 prohibits the performance on Swiss soil of “official” acts i.e. those which are properly the preserve of the state. The article was originally introduced during WWII in response to a German gestapo officer’s kidnapping of a Swiss Jewish citizen.

It is well established under Swiss law that Article 271 is engaged by examination of witnesses or the service of proceedings for the purposes of foreign litigation. It is less certain, however, whether Article 271 applies to the collection and/or review of documents for the purpose of satisfying a foreign Court’s disclosure order. This was the issue considered by the Court in Al Wazzan.

The decision in Al Wazzan

The applicants were the defendants to a claim brought by the Kuwaiti government regarding an alleged fraud committed against Kuwait’s social security system and state pension scheme. They sought to avoid giving disclosure of documents obtained from the Swiss criminal authorities and other documents originally obtained from Switzerland on the basis that doing so would give rise to a real risk of prosecution in Switzerland.

However, the Court was not persuaded that Article 271 was engaged by the giving of disclosure, having essentially accepted the respondents’/claimants’ Swiss law expert’s evidence on the point:

  • First, the Court was not persuaded that Article 271 was capable in principle of applying to compliance with a disclosure order; in Swiss litigation the submission of documents (unlike, for example, the examination of witnesses) is not restricted to the Court and it is not therefore clear that it is an “official” act.
  • Secondly, even if Article 271 could in theory apply to a disclosure order, it was accepted by the parties’ respective experts that (subject to the third party information point discussed below) it would not apply if the sanction for non-compliance with the order was procedural rather than criminal. In English litigation, the sanction for non-compliance with a disclosure order is generally procedural (eg, striking out relevant sections of the party’s pleading). Although contempt of court would in theory be available, crucially it would not be applied absent a penal notice on the face of the relevant order. There was no such notice on the face of the order at issue.
  • Thirdly, while the applicants had sought to rely on a recent Swiss case which had indicated that the disclosure of documents containing information belonging to third parties protected by Swiss public policy would fall within Article 271 (even where the sanction for breaching the order was only procedural), the third party information in that case had been subject to Swiss banking and fiduciary secrecy laws. There was no suggestion that any third party information in the present case raised any such issues.
  • Fourthly, Article 271 was not engaged by virtue of the fact that Kuwait had sought copies of the documents in the context of the Swiss criminal proceedings and this had been refused. Kuwait was not seeking to subvert this result and thereby perform an “official” function simply by exercising its rights as a party to civil litigation.
  • Fifthly, and in any event, the relevant documents were already in the possession of the defendants’ English lawyers. Giving disclosure would not therefore require any act to take place on Swiss soil and Article 271, which was clearly restricted to such acts, was not therefore engaged.

Accordingly, the Court was not persuaded that the applicants would be at a real risk of prosecution if they were to give disclosure. It therefore declined to excuse them from complying with their disclosure obligations.

Comment

The Court’s findings on the application of Article 271 (and the attendant risk of prosecution) were findings of fact based on its assessment of the expert evidence on Swiss law. They would not therefore technically bind another Court. That said, it seems likely that any party seeking to rely on Article 271 to justify failing to comply with its disclosure obligations will (absent materially different facts eg, as to the relevant third party information) face an uphill struggle.

The Court’s decision creates potential difficulties for parties insofar as it is not certain that the Swiss Courts would reach the same view of the application of Article 271. It therefore remains possible that giving disclosure might give rise to criminal liability in Switzerland. It is worth bearing in mind in this regard that the defendants’ expert was of the view that Article 271 was probably engaged (and this firm has also previously received Swiss law advice to similar effect).

In all cases where Article 271 is potentially engaged, Swiss law advice should be sought at an early stage. In addition, any party which ultimately concludes that there is a risk that Article 271 is engaged might consider applying to the Swiss Federal Office of Justice (“FOJ”) for a clarificatory opinion. Although this would not permit the party to give disclosure in contravention of Article 271 (as would the lengthier judicial assistance procedure under the Hague Convention), it would provide an authoritative opinion from the Swiss authorities relatively swiftly as to whether Article 271 was engaged. This should give the applicant either comfort that they are able to perform their disclosure obligations without fear of prosecution or (alternatively) persuasive material with which to justify to the English Court a request to be excused from those obligations.

1The defendants also sought the same order on various other bases which are beyond the scope of this article.

Benedict Walton
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Benedict Walton

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Edward Richards
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Edward Richards

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