The claims that got away

December 2021 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

December 2021 Issue

At a time when many businesses are forced to explore innovative ways to save money, the idea of writing off amounts which are legitimately owed to them, purely because the cost of recovery is too high, appears particularly abhorrent.

Unfortunately, the reality is that in some instances, the cost of legal representation renders the recovery of certain debts unviable. The COVID-19 pandemic has only exacerbated this problem, with the number of defaulting creditors on the rise at the same time as legal budgets are being reduced. A further complexity is added in cross-border disputes where often, currency fluctuations alone make the recovery of certain amounts unviable. The knowledge that certain claims are unlikely to be enforced does not encourage compliance by the defaulting party.

The old adage ‘a bad settlement is often better than a good win’ appears particularly apposite. But that does not mean that companies must accept that this is simply the cost of doing business. There are mechanisms available which may assist with the recovery of smaller amounts; however, it may require a bit of creative thinking and dedication to make them work. For what follows, we limit the discussion to matters where an actual dispute surrounding the debt exists (which is distinguishable from simple debt recovery).

The legal merit of a particular claim is but one of the factors considered by a company when deciding on legal redress. Before looking at the prospects of success, regard is often paid to two other metrics – time and money. Is a particular dispute time sensitive and what is the risk/reward ratio? Either of these factors may dictate that a claim be abandoned, regardless of the strength of the claim in law which often only plays a secondary role.

Ordinarily, arbitration proceedings take time, court proceedings take even longer and both are costly. More cost and time efficient mechanisms have been developed with varying degrees of success. However, today there is no widely accepted solution to the problem of having to abandon smaller, meritorious claims – the abandonment issue.

Mediation

Mediation is undoubtedly one of the most effective ways of resolving disputes, both large and small, and it usually delivers an efficient and cost-effective solution to the problem. However, mediation is not always cheap and there is always a risk that it might fail, leaving the parties in the same position they were in at the commencement of the mediation. Importantly, mediation will only deliver results if both parties are willing to compromise their positions in some way. For this reason, mediation is not always an appropriate solution.

It is a well-known fact that mediation is particularly valuable where an ongoing relationship between the disputing parties exists, but the motivation to mediate is somewhat reduced when the relationship between the parties has come to an end.

Often, in the absence of the threat of a formal process, such as arbitration or litigation for example, there is less motivation to mediate a dispute.

For this reason, parties often commence formal processes, by filing a request for arbitration or issuing a claim through a court, before inviting the other party to mediate. While this often motivates the other party to agree to mediate, it certainly increases the cost of having the dispute resolved. This is therefore not an answer to the abandonment issue.

Court proceedings vs arbitration

Both court and arbitration proceedings cost money. The extent of the cost varies between courts, regions, institutions and the type of claim. Court proceedings usually do not require the parties to cover the cost of the adjudicator, but usually take longer than arbitration proceedings. This often negates the cost saving on the arbitrator or institution fees.

Unfortunately, however, neither court processes nor ordinary arbitration deliver a sustainable and universal solution to the abandonment issue.

Many jurisdictions offer forms of small claims courts or expedited court procedures catering for smaller disputes. Some of these are more effective than others, but not many are suited for cross-border disputes. While such processes may provide an answer to the abandonment issue, that solution is usually region specific, such as catering for purely domestic disputes.

Expedited arbitrations

Acknowledging the need to provide more efficient and cost-effective solutions to users, many arbitral institutions have launched rules and procedures offering a form of ‘expedited’ arbitral proceedings. These rules are aimed at resolving smaller disputes with separate, and arguably more appropriate, fee structures in a more efficient manner.

Expedited proceedings may very well present an answer to the abandonment issue, but support for such proceedings is not universal. Furthermore, notwithstanding the revised cost structures, these expedited proceedings may still be too expensive to solve the problem, particularly when dealing with parties sensitive to currency fluctuations.

The main problem here appears to be the institutional costs associated with such proceedings. Enter the concept of ad-hoc proceedings.

UNCITRAL Expedited Rules

Ad-hoc arbitration proceedings are administered by the parties themselves, without the support and guidance of an established arbitral institution. The most obvious benefit to ad-hoc proceedings is the saving on institutional fees, but this saving usually comes at a price. In particular, additional responsibility is placed upon the parties (and the arbitrator) who are then responsible for the organisation of the entire process. In addition, the ultimate award often lacks the credibility which comes with an award produced under the supervision of an established body.

The main problem with ad-hoc arbitration seems to be the absence of an independent body (other than the arbitrator themselves) to manage compliance with time periods, including the period for issuing the award by the arbitrator. For this reason, ad-hoc arbitrations are often less efficient than institutional arbitrations which can result in increased costs. This may therefore not present the best solution to the abandonment issue.

Most ad-hoc arbitrations are administered in accordance with a set of established (often institutional) rules, duly amended where appropriate or necessary. It is not common (nor is it advisable) for parties to write an entire body of procedural rules for a particular dispute.

The United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules are undoubtedly the most widely accepted ad-hoc arbitration rules available. For this reason, the recent publication of the UNCITRAL Expedited Arbitration Rules (2021) was met with significant interest. These new rules present a unique opportunity to take advantage of the benefits of ad-hoc proceedings, on an expedited basis.

The Expedited Rules are aligned with international best practice and are designed to present an efficient and cost-effective mechanism for the resolution of disputes. On the face of it, the adoption of the Expedited Rules may present a viable alternative to the existing mechanisms available, for the resolution of smaller disputes, particularly in a cross-border context.

The Expedited Rules do, however, still envisage a formal legal process, and as such, companies may still want to brief external lawyers to run the process. However, these rules present the perfect opportunity for companies to develop their in-house arbitration capability, thereby reducing the need for external legal support to recover amounts which would otherwise have been written-off.

There is one potential problem with this solution, however: not all jurisdictions will easily recognise and enforce awards issued by an ad-hoc tribunal. That said, any award issued by a tribunal in accordance with the Expedited Rules should be easily enforced in accordance within the New York Convention framework.

Conclusions

In our view, the Expedited Rules may provide a viable solution to the abandonment issue. In addition, and from a more altruistic perspective, the use of the Expedited Rules for smaller disputes is likely to present new opportunities to young arbitrators to obtain valuable experience in matters which carry lower risk. This will certainly benefit the broader arbitration community, particularly in jurisdictions where arbitration is still developing.

With more focus being placed on recovering losses, and maximising efficiencies, as the world emerges from the COVID-19 pandemic and the financial difficulties which it has caused, companies will need to be more creative with the manner in which they resolve their disputes. Luckily, the advances made in the alternative dispute resolution space means that there are tools at their disposal. This may, however, require companies to put more thought into the mechanisms which are being built into their agreements and to adopt a more ‘forward-thinking’ approach.

Jonathan Ripley-Evans is a director and Fiorella Noriega Del Valle is a senior associate at Herbert Smith Freehills LLP. Mr Ripley-Evans can be contacted on +27 10 500 2690 or by email: jonathan.ripley-evans@hsf.com. Ms Noriega can be contacted on +27 10 500 2691 or by email: fiorella.noriega@hsf.com.

Jonathan Ripley-Evan and Fiorella Noriega Del Valle

Herbert Smith Freehills LLP