How to Manage Disputes in a Flat World (ACC Docket)
May 29, 2013
By Peter J. Rees QC and Kathleen Bryan
ASSOCIATION OF CORPORATE COUNSEL (ACC DOCKET JUNE 2013)
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Peter J. Rees QC is legal director for Royal Dutch Shell plc, where he has ultimate responsibility for the Shell global legal function and advises the Shell group management on all legal matters of group-wide importance. firstname.lastname@example.org
Kathleen Bryan is the president and CEO for the International Institute for Conflict Prevention and Resolution. She was formerly head of worldwide litigation for Motorola and a corporate vice president of Motorola’s law department. email@example.com
You hear it all the time: “The world is flat” and “Our business is truly global, with the majority of our profits coming from markets outside the United States.” Indeed, large businesses are now almost always multinational, with markets on every continent.
The legal function, however, has not always kept up. It can still have a predominantly local focus, because laws are country-based and local expertise is often necessary to provide the proper understanding of very different legal systems. In the past, litigation risk for major corporations had been primarily a US phenomenon, with the majority of the focus, staffing, cost and exposure in the United States. This is changing, and savvy companies are getting ahead of the curve by taking a global approach to dispute management.
Three factors primarily drive the change to a global approach. First, the level and “Americanization” of disputes — both litigation and arbitration — is increasing outside the United States. Greater regulation, a move in some countries to create an enforcement scheme through private remedies, and a gradual breakdown in solving issues through local relationships all contribute to an increase in litigiousness around the world.
Second, management of disputes is a distinct skill set that can and should be handled by lawyers trained in that specialty, rather than handled by in-house commercial lawyers or simply turned over to outside counsel. While reliance on local outside counsel is necessary for speci"c legal knowledge, local court experience and, in many jurisdictions outside the United States, rights of audience, in-house lawyers with dispute management skills are needed to manage outside counsel, take a risked approach to the dispute and improve results.
Third, adopting a company-wide system for handling disputes is vital if a global perspective is to be taken on risk management and cost-effective dispute resolution. !is is epitomized by the International Institute for Conflict and Prevention’s (“CPR Institute”) 21st Century Corporate ADR Pledge.1 As a signatory to the CPR Institute’s 21st Century Pledge, Shell has committed to approach its entire portfolio of disputes in a way that understands the pros and cons of the one-size-"ts-all litigation model,and explores alternatives, including consensual ones, to resolve matters more quickly and with less cost. This approach applies equally to US and non-US matters, and requires training and educating business people, as well as in-house and outside lawyers supporting the company.
Traditionally, companies have approached each case in its particular jurisdiction and solely on its own merits, using litigation or arbitration process tools and expertise. A more sophisticated approach, however, considers the wide spectrum of alternative dispute resolution (ADR) options, de-escalates conflict, creates feedback loops and prevention opportunities, and examines how this case, and all cases with similar attributes, might be resolved more quickly and more effectively before the transaction costs increase. To be highly skilled in ADR, lawyers need resources, training and the ability to share innovations with
each other as they develop.
To respond to this need, Shell created a global disputes function to establish single-point accountability for the management of Shell’s litigation portfolio. !is single-point accountability enables Shell to drive best practices in the critical areas of early case assessment (ECA) and budgeting, coordination with outside counsel, and the collection and review of information for regulatory purposes. It enables a common approach to dispute analysis, strategy and resolution, and ensures a thorough understanding of the available tools and techniques. In doing this, it receives valuable assistance through the resources and training of the CPR Institute to help educate its in-house lawyers and outside law firms.
This consistent and coordinated approach to dispute management promises to move this global function to more creative and cost- effective solutions, which will assist Shell in maintaining and building relationships with its stakeholders, and adopting a focused and appropriate approach to each of its disputes. This article illustrates how to establish a robust dispute management system and shows why it is most effectively deployed on a global basis for large companies.
Design a system
Companies are accustomed to creating programs and systems for almost every aspect of their business, as evidenced by the growth in process and manufacturing systems (e.g., Six Sigma, Malcolm Baldrige National Quality Award, etc.); corporate social responsibility accountability (e.g., the Global Reporting Initiative’s Content Index, the United Nations’ Global Compact); compliance systems (e.g., US Federal Sentencing Guidelines), and so on.
Nevertheless, the development of an integrated system to help companies manage their litigation has been largely nonexistent until recently. Aside from fairly widespread employment grievance systems and in mass claims situations, many companies have tended to handle each dispute independently.
Several studies have demonstrated the benefits of employing a systematic approach to dispute management. In 2003, a study by the American Arbitration Association (AAA) found that the “dispute-wise” companies reported “stronger relationships with customers, suppliers, employees and partners” and “lower legal department budgets.” The price/earnings ratios for the dispute-wise companies were also higher.2
In 2007, the London law firm of Herbert Smith conducted an ADR usage survey of 21 European companies, and concluded:
Embedded Users (companies which used ADR consistently and earlier in the process) achieved greater savings in external legal costs and in management time spent on dispute resolution. They also enjoyed the most constructive relationships with their external dispute resolution lawyers, taking positive steps to align the approach of their external dispute resolution lawyers on ADR with their own views.
Companies that have both developed systems and a willingness to share their results have consistently shown signi"cant cost savings in addition to improved relationships. For example, Bloomington, Minn.-based lawnmower manufacturer, the Toro Company, documented estimated savings of more than $100 million in legal costs and claimant compensation between 1991 and 2005; Georgia Pacific saved almost $45 million from 1995 to 2006.3
A systematic approach provides appropriate and adequate checks and balances to help overcome the natural human tendency to escalate conflict. The typical “escalation cycle” means that the longer a conflict continues, the more intense and complex it will become. This is demonstrated by the five common transformations that often
occur as a conflict escalates:
1. Tactics shift from light to heavy.
2. Issues proliferate.
3. Stereotyping and demonizing ensue.
4. Good intentions give way to bad.
5. Conflict expands to include more parties.4
Escalating threats and intimidation triggers a loss of face and decreases the counterparty’s willingness to engage in collaboration and compromise. Thus, early intervention and analysis, and scheduled “brakes” in the process provide the most significant opportunities to achieve better and earlier resolution of disputes.
Furthermore, the programs themselves need to build in self- assessment methods to maintain their viability. As discussed below, conflict resolution methods are developing rapidly. Programs must measure, assess and adjust to ensure that the company’s ADR efforts continue to reduce litigation, and produce faster and measurably more effective results than traditional litigation.
Educate, educate, educate
“Litigation is war” is a common refrain, and bitter experience bears this out. !e long discovery process, the aggressive tactical maneuvering and the win/lose mentality of the protagonists create hostilities that last long after the final ruling. Historically, lawyers have been trained only in the litigation model, and may lack the skills and understanding of other approaches to dispute resolution. Despite significant gains in scholarship and teaching of a multifaceted approach to addressing conflict, in law schools across the United States (and, indeed, in many other parts of the world), primary analytical skills instruction still tends to lead to a courtroom to resolve problems.
More significant, business leaders may have their own impressions of the “weakness” of taking anything less than a full-blown litigation stance. To fill this gap, in-house lawyers need to learn, and to require their outside counsel to understand and embrace, a culture of conflict resolution that extends from the macro perspective of systems design to ways of addressing individualized case details that can minimize the impact of disputes.
The company should invest in education and training in order to provide the right dispute resolution resources, both internally and externally. This is not a static skill. As noted throughout this article, there are new techniques and tools arriving continually. Increasing our understanding of the elements of decision-making is producing new interpersonal settlement techniques.
The 21st-century lawyer should be trained as a problem solver and as a conflict manager, and understand the difference between rights- based and interest-based problem solving. Today’s lawyers need to be skilled at more than just “zero sum” or adversarial negotiation. They should understand how identifying the parties’ interests and bargaining on the basis of increasing the value of those interests can yield better results and create more flexibility for all the parties involved.
Drafting dispute resolution clauses
In most companies, and, indeed, in many law firms, the litigation lawyers are disconnected from the transactional lawyers who advise the business managers making the deals and contracting with suppliers, joint venture partners and vendors. Consequently, the dispute resolution clause is frequently inserted at the last minute, using boilerplate language that is not customized to the situation or thought through in terms of optimizing legal outcomes. As in most aspects of life, a one-size-fits-all approach rarely produces optimal results. With better feedback and connections between the litigation and transactional lawyers, and resources and training in proper clause drafting, the company can adopt a more bespoke approach to dispute resolution clauses. The right clause for the right agreement can achieve tremendous savings in streamlined processes and effective de-escalation techniques at the contract stage.
Having a defined process set out in the contract promptly channels behavior into constructive solutions and reduces the likelihood that the issues will ripen into lawsuits. Court systems have long recognized that mediation settles cases, and the earlier the intervention the better. Of course, by the time courts see the cases, they have already ripened — and the view often is that the filling is more evidence that ADR is needed as soon as possible.
For example, a new mandatory mediation proposal to be implemented
in New York is based on this tenet after noting that 90 percent of cases settle and announcing the mandatory mediation program, the “Chief Judge’s Task Force on Commercial Litigation in the 21st Century — Report and Recommendations to the Chief Judge of the State of New York” (June 2012)(available at http://bit.ly/N1fMo6), explains:
While mediation can facilitate settlement at all stages of a litigation, both parties and the court system commonly can achieve even greater benefits to the extent that the parties are able to resolve their disputes before engaging in the protracted and expensive disclosure and motion practice that modern business litigation typically entail. Indeed, at times parties feel that they have little disincentive to continue to litigate if they already have incurred substantial legal costs. The Task Force, therefore, proposes that the New York County Pilot Mandatory Mediation Program be structured to provide for mediation before the parties have reached this tipping point, but to provide sufficient time so that limited, cost-effective, settlement-related information exchange can occur — either through formal disclosure or in the course of the mediation itself.
The measure requires the parties’ action on appointing a mediator within 90 days of a case filing where applicable.
The same study examined ADR cases for three elements: “(1) when an ADR intervention was introduced; (2) the average time from the introduction of ADR to the final disposition; and (3) the average time from filing of the case to final disposition.” Id. at 34. The results,” according to the analysis, “clearly show that when ADR is introduced early in the life of the case, it takes the case less time to reach final disposition.”
That effect holds wherever mediation takes place, including private disputes. Different approaches will be needed for different companies (again, this should not be one-sizefits-all) depending on the size of the company, the nature and variety of the contracts they enter into, and the culture and uniformity of their counter-parties. Some companies might want to consider adopting a series of business escalations to encourage managers to work even harder to find innovative solutions before the matter goes the litigation route. For example, when senior-level managers are unable to fix the problem, the contract requires the CEOs or chairmen to meet. This can create tremendous (and beneficial) pressure on lower levels of management to solve the problem by business rather than legal means.
Instead of a simple reflexive clause — negotiate, mediate, litigate — there are many more creative options. Streamlined arbitration with tight time limits; the novel “economical litigation agreement,”5 which combines the best of arbitration with litigation, using early neutral evaluation; and ombuds or standing neutrals are but a few of the many innovative options available for adapting to the specific industry, business needs and corporate culture.
An added bonus is that those who are directly involved in designing a conflict system will buy into concepts that fit their unique business environment.6 The result is that those same executives will be vested in the means of resolving the problems, and likely more committed to resolving them sooner. When in-house lawyers are trained in and understand productive conflict management and “focus on substantive issues, open dialogue, flexibility of the parties and consideration of others’ legitimate needs and concerns,” they are better equipped to de-escalate and avoid polarization, and to promote productive conflict resolution.7 The effect of early intervention producing earlier resolution has been quantified in employment cases by the US Justice Department. [See Lisa Blomgren Bingham, Tina Nabatchi, Jeffrey M. Senger, and Michael Scott Jackman, “Dispute Resolution and the Vanishing Trial: Comparing Federal Government Litigation and ADR Outcomes,” 24:2 Ohio State Journal on Dispute Resolution 1 (2009)(available at http://ssrn.com/abstract=1127878).]
The study also compared voluntary ADR cases to court-ordered cases, and found that while 60 percent of the Justice Department cases studied reached settlement in ADR, “a statistically significant” higher number settled in voluntary ADR cases than did in court-ordered cases. Id. at 31.
In more than 90 percent of the lawsuits "led, the costs, time delay and risk of total loss by adjudication do not outweigh the attractiveness of a settlement.8 Early case assessment programs provide the best way to evaluate settlement potential and avoid conflict escalation. ECA programs are “among the fastest growing organizational conflict management strategies because they provide significant cost savings and control over disputes.”9
There is a natural tension between the need for more information through discovery or disclosure and the value of an early settlement. While it is important to identify “just enough” information to conduct a thorough assessment, it should not be underestimated how much can be done on the basic information and documentation available in the early stages of a potential dispute. At Shell, all members of the global litigation group have been trained in the same approach to ECA. The ECA process is conducted early, usually in the first 30 days of a dispute arising. Such an approach creates the discipline of analyzing what the dispute is really about (which may often not be what it seems at first sight), discovering what the wider ramifications could be, identifying what information is available and what is not, and understanding what will need to be established to achieve the right result. It is a valuable internal “brake” on leaping straight into confrontational mode and ensures the correct resolution strategy is adopted at the earliest possible stage. The CPR Institute provides a free “Toolkit” of information on how to customize a company ECA program to fit each unique business model and litigation portfolio.10
Understanding global trends
The creation within Shell of a unified global litigation group that shares their knowledge and understanding in dispute management techniques from around the world means that the company can adopt an ever more sophisticated and nuanced approach to its litigation portfolio worldwide, and ensure that trends in dispute resolution can be tracked, understood and applied. !e importance of this is exemplified by brief consideration of trends in two of the more “traditional” forms of ADR.
Mediation is increasingly taking root in many countries outside the United States, even in civil law jurisdictions. As an example, in 2008, as an initiative of a number of German companies, the “Round Table Mediation & Conflict Management of the German Economy” was formed to promote conflict management and mediation skills among participants.11 With working groups and regular meetings to exchange experiences, this group considers itself a proponent of mediation as “an important element of a modern conflict management system and — wherever suitable — make use of it regularly and successfully in order to achieve an interest-oriented and sustainable conflict resolution.”12
The quality of training and education on mediation still varies widely, however, and outside lawyers may be part of the problem.13 Lawyers who use standard adversarial practices in mediation and fail to support a “client-centered” view can negatively affect the experiences business managers and in-house lawyers have in mediation.
To counter this and to respect the globalization of mediation, it is important for in-house lawyers in all jurisdictions to have training in mediation skills so they can:
- Identify the best time for mediation;
- hire a mediator with the best fit of skills for the matter;
- prepare the case and the business clients for the mediation process; and
- control outside counsel’s potential to derail the process through excessive or inappropriate advocacy.
For the vast majority of international contracts, arbitration remains the best alternative to the local courts. But concern with arbitration becoming too much like litigation with all the attendant cost and time implications has affected US practices and is beginning to surface in international arbitration as well. In Europe, the Corporate Counsel International Arbitration Group was formed in 2008 to address concerns about the increasing complexity and expense of international arbitration. Arbitration providers worldwide have developed expedited processes and procedural rule changes that force parties and tribunals to reach the core of a matter faster, with the expectation that streamlined processes — for example, limiting discovery or barring e-discovery entirely — will produce speedier results.14
Some of the fundamentals of arbitration practice, such as party appointment of arbitrators, are also being challenged.15
All of this means that in-house lawyers conducting international arbitrations need to understand all the options available and how to make the most of the process while ensuring that the enforcement of the arbitral award is not jeopardized. Training in-house experts in arbitration law and global practices, as is done at Shell, provides the best way to optimize arbitration benefits in the United States and abroad.
Measurement systems and feedback loops
An essential part of any systemic approach is to define and measure success. Shell has put at the heart of its global disputes group its Litigation Objectives Realization Process (LORP). !is process aims to identify and assess litigation objectives and risks at the earliest possible opportunity, and then to develop and execute a comprehensive litigation strategy to manage and resolve disputes successfully in furtherance of targeted business objectives. Simply put, LORP identifies the litigation destination, charts the shortest, most effective route to getting there, and captures and communicates the learnings.
In essence, LORP can be considered as a four-stage process: Assess, Select, Execute, Review.
Each of the stages can be summarized as follows:
- Assess: Key facts assessed, potential exposure categorized, business objectives and outcomes identified and agreed upon, case management plan established.
- Select: Clear strategy designed around achieving the business objectives.
- Execute: Resolution of the dispute consistent with the desired business objectives, litigation strategy and agreed upon budget.
- Review: Communication of post-closing obligations, learnings for improvement shared with the business client and globally within the group.
Benefit from a global approach
Taking a holistic approach (i.e., globally) to dispute management provides a multinational company with the sophisticated skills to address an increasingly complex litigation environment around the world. A global approach provides corporate counsel with the tools they need and the leadership of their outside law firms, and ensures the highest quality results with improved stakeholder relationships. It is simply essential in today’s global economy. ACC
1 CPR’s 21st Century ADR Corporate Pledge reads: “Our company pledges to commit its resources to manage and resolve disputes through negotiation, mediation and other ADR processes when
appropriate, with a view to establishing and practicing global, sustainable dispute management and resolution processes.” It can be found at: www.cpradr.org.
2 American Arbitration Association, Dispute-wise Business anagement: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts, 3, 8 (2006)(available at http://bit.ly/17boIRG); David B. Lipsky, et al., “Emerging Systems for Managing
Workplace Conflict: Lessons from American Corporations for Managers and Dispute Resolution Professionals” 77 (Jossey-Bass 2003).
3 Ashby Jones, “House Calls,” Corporate Counsel 91, 93 (October 2004); Phillip M. Armstrong, “Georgia-Pacific’s ADR Program: A Critical Review After 10 Years,” Dispute Resolution Journal 20 (May–July 2005).
4 Dean G. Pruitt & Sung Hee Kim, “Social Conflict: Escalation, Stalemate, and Settlement” 89-90 (3rd ed. 2004).
5 The “Economical Litigation Agreement” is a model contract clause that adopts both arbitration and litigation and allows commercial parties to design the level of discovery they choose. Information can
be found at http://bit.ly/11ij9OG.
6 Francis Aquila and Kathleen Bryan, “Resolving Disputes Before They Ruin the Deal,” M & A Journal (2011).
7 Michael Colatrella, Jr., “A Lawyer for All Seasons: The Lawyer as Conflict Manager,” San Diego L. Rev. [VOL. 49: 116, 2012].
8 Marc Galanter, “The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts,” 1 J. EMPIRICAL LEGAL STUD. 459, 477-80, 517 (2004).
9 Michael Colatrella, Jr., “A Lawyer for All Seasons: The Lawyer as Conflict Manager,” San Diego L. Rev. [VOL. 49: 131, 2012].
10 CPR’S “ECA Toolkit” can be found at: http://bit.ly/10vn4oN.
11 German member companies include: E.ON, SAP, Audi, Siemens, Deutsche Bahn, Deutsche Bank, Bombardier Transportation, Areva, the Fraunhofer-Gesellschaft, Deutsche Telekom and E-Plus Group.
12 Jurgen Klowait, “Round Table Mediation & Conflict Management of the German Economy,” Nederland-Vlaams tijdschrift voor Mediation en conflict management 2011 (15) at 75.
13 Bryan Clark, “Lawyers and Mediation,” 56 (Springer Press: 2012).
14 See, e.g., ICC Commission Report, “Controlling Time and Costs in
Arbitration” (Second edition, 2012) (available at http://bit.ly/11ie7lb); the CPR Institute’s Protocol on Disclosure of Documents and Presentation of Witnesses in Commercial Arbitration (available at http://bit.ly/XbBETx); 2012 International Arbitration Survey, “Current and Preferred Practices in the Arbitral Process,” School of International Arbitration, Queen Mary, University of London (available at http://bit.ly/Ps3inZ).
15 Prof. Jan Paulsson, “Moral Hazard in International Dispute Resolution,” inaugural lecture as Holder of the Michael R. Klein Distinguished Scholar Chair, University of Miami School of Law, (April 29, 2010).
[Side bar - Adopting a company-wide system for handling disputes is vital if a global perspective is to be taken on risk management and cost-effective dispute resolution.]
[Sidebar 2: effective ADR system An effective ADR system requires buy-in from senior management, the entire law department and outside counsel representing the company. Elements of a systems approach:
- A defined program;
- Buy-in from senior management;
- Commitment to continuing conflict competence education for managers and lawyers;
- Early intervention mechanisms;
- Feedback loops (e.g., after action reviews);
- Prevention and avoidance; and
- Appropriate metrics to measure success]
[Sidebar 3: The right clause for the right agreement can achieve tremendous savings in streamlined processes and effective de-escalation techniques at the contract stage.]
[Sidebar 4: Early case assessment programs provide the best way to evaluate settlement potential and avoid con!ict escalation.]
[Sidebar 5: Arbitration providers worldwide have developed expedited processes and procedural rule changes that force parties and tribunals to reach the core of a matter faster, with the expectation that streamlined processes — for example, limiting discovery or barring e-discovery entirely — will produce speedier results.]
[Sidebar 6: Simply put, LORP identifies the litigation destination, charts the shortest, most effective route to getting there, and captures and communicates the learnings.]