ABA Section of Business Law
ABA Section of Business Law
Business Law Today
March / April 2000
ADR lands in Britain: New rules move disputes along and encourage arbitration
By SANDRA McDONALD and CHARLES BROWN
A new era has begun. Bear with us as we look back for a second: Victoria is Queen of England, Empress of India and presides over a vast British Empire. She and the rest of the nation mourn the death of Charles Dickens. On the other side of the Atlantic, and seven days journey away by steamship, the last Confederate states have re-joined the Union. Memories of the American Civil War are still fresh in every mind.
That is a snapshot of our two countries in 1870 — the time of the last fundamental reforms to the English civil justice system. We live in a world that the Victorians could not have imagined, yet it was only in 1999 that the English system has again received an overhaul as fundamental as that of the 1870s.
It’s time for an overview of the new litigation landscape in England. First, from the perspective of how the new procedural rules are designed to guide businesses toward settlement rather than litigation and then looking at the options available to businesses for creative dispute resolution through ADR and arbitration.
Litigation is the traditional way of resolving commercial disputes. On April 26, 1999, the Civil Procedure Rules (CPR) came into force in England and Wales. They codify litigation practice and sweep away more than 100 years of case law.
The reforms were prompted by perceived public dissatisfaction with the delay, expense, complexity and uncertainty of pursuing cases through the civil courts. Accordingly, the new rules are designed to streamline the litigation procedure and to give the court both the power and duty to be flexible.
In applying them, the court must always be guided by the overriding objective of dealing with cases justly. The rules state that dealing with a case justly includes, so far as practicable:
• ensuring that the parties are on an equal footing;
• saving expense;
• dealing with the case in ways that are proportionate to the amount of money involved, to the importance of the case, to the complexity of the issues and to the financial position of each party;
• ensuring that it is dealt with expeditiously and fairly; and
• allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases.
For English litigation lawyers, this signals a major cultural change. Prior to the changes, every case — irrespective of size or importance to the parties — had the same Rolls Royce treatment from the courts.
In order to implement the overriding objective, a further radical change was introduced: active case management by the courts. This includes:
• encouraging the parties to co-operate with each other in the conduct of the proceedings;
• identifying the issues at an early stage and deciding which need full investigation and which can be dealt with summarily;
• encouraging the parties to use an alternative dispute resolution procedure if appropriate;
• helping the parties to settle the case through other means;
• fixing timetables and controlling the progress of the case;
• considering whether the likely benefits of taking a particular step justify the cost of taking it.
Through active case management, the courts will ensure that the length and cost of litigation is proportionate with the claim and that litigation can still be a cost-effective means of resolving disputes. Lawyers and their clients have a positive duty to assist the court in implementing the overriding objective through co-operation and efficient case management.
The new rules encourage early settlement in a number of different ways:
• The rules require early and more detailed case preparation, thereby front loading legal costs and encouraging a realistic attitude to the merits of the claim and thus to settlement;
• Pre-action protocols have been implemented. These are detailed statements of the best pre-action conduct and require the parties to co-operate in the exchange of information about potential claims in order to pre-empt litigation;
• There is active encouragement at key stages of the litigation process for the parties to consider whether ADR could prevent the need for litigation;
• The court has discretion to make cost orders that do not merely reward the ultimate victor in the litigation, but take into account the reasonableness of their conduct during the litigation.
• A formal code has been introduced governing offers to settle by both parties with sanctions if the offer is not "beaten" at trial.
Looking at these issues in more detail, we turn to early case preparation.
The old regime allowed the parties almost unlimited scope for agreeing to extensions of the time limits set out in the rules and a claimant was under little or no pressure (other than from a keen opponent) to move along a claim.
The new rules aim to prevent this with a court-imposed structure and timetable that the parties have only limited power to vary.
In order to comply with this timetable, prudent lawyers acting for claimants are doing as much preparation of documents and witness interviews as possible before issuing the claim. This requirement for front loading will effectively eliminate the issue of claims as bargaining tactics. In cases where there is a genuine claim, it will provide the basis for an early realistic assessment of the merits and value of a claim that in turn may help bring early settlement.
Once a case has been prepared and litigation is contemplated, the parties must ensure that they comply with any specific pre-action protocol affecting the subject matter of the dispute. There are currently two specific protocols in force (relating to personal injury and clinical negligence) although more will follow.
The protocols set out very detailed guidelines as to what constitutes the best pre-action practice. Specimen claim letters are given, as well as rules about the time allowed for response and if necessary the instruction of joint medical experts. The objectives of the protocols are:
• to encourage the exchange of early and full information about the prospective legal claim;
• to enable parties to avoid litigation by agreeing to a settlement of the claim before the start of proceedings;
• to support the efficient management of proceedings when litigation cannot be avoided.
Even if there is no protocol relating to a specific practice area, the rules state that the court expects the parties in all claims to act in accordance with the overriding objective and to act reasonably in exchanging information and documents relevant to the claim and generally in trying to avoid the necessity for the start of proceedings.
Failure to comply with a relevant protocol that results in unnecessary litigation or its inefficient conduct can be recognized by depriving a successful claimant of interest on damages or of some part of the legal costs that would otherwise have been recovered. If the defendant is at fault, he or she can be ordered to pay a higher rate of interest on damages and the claimant’s legal costs on a higher scale than usual.
If litigation has begun, the parties are still encouraged to look for solutions outside the court process. After the parties have exchanged written summaries of their cases, one or both may ask for a temporary stay of proceedings in order to try and settle the dispute, whether by ADR or other means. In addition, the rules expressly provide that the court itself may direct a stay on its own initiative if it considers that appropriate.
Given the consensual nature of most ADR processes, on its face such an initiative seems doomed to failure. Surprisingly, though, anecdotal evidence suggests that it may work. Before the introduction of the new rules, one section of the High Court introduced a pilot scheme that compelled the parties to take a three-month cooling-off period in the hope that they would attempt ADR. Only a quarter of the litigants returned to court. Whether the cases settled through informal negotiation or through formal ADR is not known, but it provides support for the court to order a form of compulsory ADR.
In order to enforce the requirement that litigation be conducted reasonably and in a spirit of co-operation, the rules give the courts persuasive monetary sanctions. The basic rule in English litigation remains that costs follow the event: The party who succeeds at trial can expect to have the majority of his or her costs paid by his opponent. However, the new rules state that the court has discretion to vary the usual rule, particularly to take account of the conduct of the parties. This includes the power to penalize parties who have failed to comply with a pre-action protocol or who have unreasonably refused to participate in ADR.
During the course of litigation, the parties are given incentives to make formal offers to settle. If such an offer is refused and the ultimate outcome of a trial is less advantageous than the offer, a claimant who has refused will normally have to pay the defendant’s legal fees from the last date on which the offer was open. If a defendant refuses a claimant’s offer and the claimant does better than that offer at trial, the defendant may be ordered to pay extra interest on the amount awarded and to pay costs on a higher scale.
Although the rules have been in operation for only a matter of months, the experience so far is that these formal offers to settle are proving very effective. A party who receives one must take it seriously. If the offer is pitched at a sensible level, few will be prepared to take the gamble of going to trial to recover a small additional amount with the risk of the penalties for not beating the offer.
Is the pro-settlement initiative working? Figures released by the courts show a massive decline in the number of claims issued in the High Court since the new rules came into force. For example, the drop in claims from May-August 1998 to the same period in 1999 was 85 percent. While it is too early to draw definite conclusions, the current downward trend is unmistakably sharp.
The parallel to formal litigation is of course alternative dispute resolution.
ADR is familiar to U.S. lawyers, but it caused much excitement in the UK in the early 1990s; there was a rush to set up organizations to train mediators and to provide ADR services. Most lawyers would agree that although everyone was talking about the benefits of ADR, in those days few were actually experiencing them. That situation is now changing on a daily basis in the wake of the new rules.
The construction and engineering industry has been at the forefront of the development of ADR in the UK. Most major civil-engineering projects, including notably the Channel Tunnel between England and France, have a contractual term requiring that any dispute should be referred to a dispute board (composed of technical experts) before it can proceed either to arbitration or litigation. On the Channel Tunnel project, only two disputes were ever litigated beyond that board.
A skilled mediator who has won the trust of the parties can invite them to look beyond the narrow confines of the dispute itself and to focus the search for a solution on the longer term commercial relationship between the two disputing parties. For this reason, as well as its complete confidentiality and nonadversarial atmosphere, it is ideally suited to resolving disputes between business partners who need and want to continue working together. It is also far quicker than either litigation or arbitration; only the most complex mediations will normally take longer than a day or two.
The fundamental requirement for achieving a successful outcome in a mediation is having parties who genuinely want to settle their dispute. As we have seen, the rules aim to create an environment in which settlement is encouraged. There are early indications that this is happening; one of the largest ADR service providers reports that the number of mediations referred to it since the reforms came into effect has doubled.
Though ADR is still a relative newcomer to English dispute resolution, in commercial disputes — particularly those with a technical background arising out of the terms and conditions of contractual relationships — arbitration has been the preferred formal method of dispute resolution for many decades.
The advantages of arbitration are:
• the privacy the proceedings enjoy
• the ability of the parties to have the dispute determined by an impartial third party who has technical expertise relevant to the dispute
• the ability of the parties to agree and control the procedure.
However, during the 1980s, dissatisfaction with the arbitration process developed. Why?
Arbitration was intended to be a simple, speedy and cost-effective means of resolving disputes between contracting parties. The arbitrator would apply the basic rules of natural justice but would not be strictly bound by the procedural rules of the court system. Unfortunately, the parties increasingly chose to hire advisers or arbitrators whose training and instinct was to introduce formal rules of procedure since many were lawyers. The result was delay and expense.
Arbitrators who resisted these procedures found both their awards on the merits and their handling of procedural issues reviewed by the court.
The arbitrator did not have the power to rule on his or her own jurisdiction and had to be referred to the courts. Courts were increasingly willing to allow disputes to be litigated through the courts even where contracts contained clear and binding arbitration agreements.
Reform was needed. It came in the 1996 Arbitration Act. The key features:
• Arbitrators now have the power to determine their own jurisdiction.
• The court has a very limited right to interfere in the arbitration process or to review an award.
• The court will support the arbitration process by refusing to allow parallel litigation and by enforcing arbitration awards.
• Arbitrators have a wide discretion in relation to costs.
• Arbitrators have wide discretion to limit the scope of disclosure of documents.
The simple objective of the act is to give effect to the contract between the parties in which they agreed to settle disputes by arbitration. It will almost always refuse to allow a party to such a contract to bring court proceedings for a dispute arising from the contract.
The courts are also discouraged from interference in the procedural conduct of the arbitration. Also, the grounds on which a substantive award can be challenged are now extremely limited. Only the most serious misconduct by an arbitrator or issues of public policy merit interference by the courts.
The act includes a number of measures which, compared to the courts, are innovative — even revolutionary. For example, unless the parties otherwise agree, the arbitrator may direct that the recoverable costs of the arbitration, or any part of them, shall be limited to a specified amount. The cap is entirely discretionary and will reflect the arbitrator’s views on the resources that should properly be devoted to the dispute. Any such cap does not prevent a party from spending as much as it likes, but it restricts the extent to which such costs can be recovered from the unsuccessful party.
It is hoped that by making use of this power, arbitrators will significantly improve the speed and economy of the arbitral process.
Another feature of the 1996 Act that is designed to speed and streamline the process is the discretion to limit the production of documents. Until 1990, English arbitrators were effectively required to order the parties to give discovery of documents on the same basis as the courts, that is, to produce all documents in their power, possession or control that were relevant to the proceedings.
That was an onerous and expensive obligation and an active discouragement to arbitration in England and Wales.
In exercising this discretion, the arbitrator must continue to balance the requirements for procedural fairness and the need for cost-effective justice. An arbitrator who now defines the key issues early in a dispute and strictly limits documentary production can make the procedure far quicker and cost effective.
One of the most far-reaching developments in dispute resolution may be the emergence of adjudication. ADR is a fundamentally consensual process, but the process of adjudication is emerging as a hybrid creature — a form of compulsory ADR. So far, it is limited to the parties to a "construction contract" performing "construction operations" (both of which are widely defined).
Its key features are that:
• The adjudicator is nominated by the parties or by a professional or other interested body.
• Its use is optional but one party cannot by contract exclude the right of the other party to use it.
• Its procedure is flexible and informal and can be invoked at any time during the contract.
• It is swift: The process must be completed within 28 days,
• The adjudicator’s decision is binding unless and until the dispute is finally determined by litigation or arbitration.
• Failure to comply with the decision is deemed to be a breach of contract.
After receiving written summaries of both parties’ cases, the adjudicator has virtually unlimited power to call for documents, question witnesses with or without the other party being present, and allow or refuse oral hearings. Statutory adjudication has more in common with an examining magistrate in continental Europe than the workings of an English court.
The scheme became effective on May 1, 1998, and during the first year, only a handful of adjudications took place. The mere threat apparently was sufficient to produce a resolution of the dispute. In the last six months, however, there have been hundreds of adjudications with all of the major professional bodies offering a nominating service reporting a steady flow of applications.
An adjudicator’s decision is binding on the parties and a failure to comply is a breach of contract. Early indications suggest that courts appear determined to reject any attempt to revise or otherwise review the adjudicator’s decision on substantive issues.
There is a much quoted (but possibly apocryphal) ancient Chinese curse: May you live in interesting times. It is certainly an interesting time to be practicing as a dispute-resolution expert in England.
The choice of processes for achieving settlements of commercial disputes has never been better. If settlement is not possible, then litigants coming to court under the new Civil Procedure Rules can be confident that the judges have the intention and the means of tailoring the litigation process to achieve a final decision in an acceptable timeframe, at proportionate cost and with the appropriate amount of litigant and court time devoted to it.
Both authors practice with Titmuss Sainer Dechert, London.
