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