In the badlands
20 October 2008
As the recent turmoil in the financial markets has shown, markets across the globe are now inextricably interlinked. As such, it is inevitable that there will be a greater number of cross-border disputes.
A report published by Lovells earlier this year, entitled The Shrinking World, highlighted the concerns of in-house counsel, with 31 per cent of respondents worldwide agreeing that there has been a trend towards more multinational disputes in the past three years. A further 26 per cent cited lack of knowledge of legal systems as the biggest challenge in managing disputes.
The research also identified China, Russia and the US as the jurisdictions of most concern. In Russia and China, lack of clarity and the unpredictability of the outcome give rise to anxiety. In the US, massive stakes combine with expense and the uncertainty of jury trials to cause apprehension.
The Chinese legal system is geared towards conciliation, negotiation and settlement. However, it is increasingly hard to generalise about the approach.
A generation of managers is emerging that has worked or been educated in the West and that adopts a more assertive outlook, particularly where a foreign entity is involved. Combined with economic growth, this produces a potent mix of deep pockets and hardline attitudes.
Chinese courts have the right and duty to scrutinise any claim filed and decide whether it should be accepted. This results in cases that the court believes have no merit being quickly dismissed.
But the unpredictability of the process acts as a deterrent. The procedures for dispute resolution are only laid down in broad terms and are open to interpretation at a local level. Protectionism and corruption are still factors in local courts, although less so in the major cities. The use of political pressure is on the wane. Enforcement is also a major issue for a claimant – getting a judgment only gets you part way towards the resolution of a dispute.
Alternative dispute resolution (ADR) is broadly accepted, both culturally and legally. The Chinese people have traditionally been discouraged from resolving disputes through the courts and thus have found alternative solutions. For instance, in China an individual can act as both an arbitrator and mediator on the same case. However, the courts are slowly trying to reassert their primacy, allegedly as a result of high-profile cases of misconduct by arbitrators, so the landscape is changing.
In Russia, businesses still tend to settle disputes informally and go to a court as a last resort, except where one party is sure that it can succeed by exerting influence. A litigant may sometimes seek the upper hand by obtaining interim measures from a court that may be disposed to rule in its favour. Broadly speaking, though, if one Russian corporate is in dispute with another, political influence and discreet pressure are still the preferred tools.
When faced with a dispute with an international company, political leverage might be less important. Here, Russian businesses tend to take a fairly aggressive stance: settlement is rarely seen as an option and cost considerations are less important.
Disputes with state authorities are rarely settled amicably and are best avoided. State authorities will fight to protect their prestige and assert their authority. Shareholder disputes can be bitter and long-running. Only commercial cases involving the recovery of assets have a reasonable chance of settlement.
Russia lacks a culture favouring ADR. This is partly because of the lack of transparency in the Russian arbitration process, which makes it unpredictable. That said, disputes may be settled amicably at any stage of the litigation process.
In the US, litigation costs continue to rise and clients continue to focus on the effective management of costs and exposure. A major factor affecting costs is the burdensome requirement of e-disclosure. Legal advisers need to take a sophisticated approach to this to improve efficiency. Non-US parties are tending to include international arbitration clauses in their contracts with US corporates. This also helps avoid costs and some of the uncertainties of jury trial.
US courts have shown a growing willingness to expand the extraterritorial reach of US laws, particularly in the areas of human rights and alleged corrupt financial practices. There is also cooperation between the US government and foreign authorities to investigate and prosecute alleged corruption.
While still not the norm, ADR is being employed more frequently to settle complex cases. It is most successful where both parties have an incentive to settle and mediators are sophisticated both legally and commercially.
Settlement often takes place during or after discovery and often after the courts rule on important motions, such as motions to dismiss or summary judgment. More than 90 per cent of civil cases filed in state and federal court are settled before reaching trial.
Christopher Grierson, Mark Lin and Edward Schorr are partners and Yevgeny Perkunov a Russian associate at Lovells