Dealing with Disputes in Difficult Times

October 28, 2009

For a number of industry sectors, 2009 is proving to be the dreadful year that many expected it would be. Whilst some are heralding the signs of a recovery, many are less optimistic. For the resources sector in particular, 2009 has produced something of a mixed bag: sustained declines in shares and commodity prices in the first two quarters, followed more recently by significant gains.
 
While most businesses are looking for ways to cut expenditure and reduce their exposure to risk, one of the few things you can be certain of in these otherwise uncertain times is a sharp rise in the number of commercial disputes – whether with customers, suppliers, employees, unions, third parties or anyone else you may come into contact with in the course of business. In such a climate, it is important for businesses to ensure that they have done all that they reasonably can to minimise the risk of a dispute arising. Equally important is knowing what action to take if a dispute arises.
 
Before A Dispute Arises  
With disputes, as with many things in life, prevention is better than cure. The problem is that it is extremely difficult for businesses to anticipate where a dispute will come from and what or whom it will involve. That makes it almost impossible to devise measures aimed specifically at dispute prevention.  
 
There are, however, a number of steps a business can take to strengthen its position. The most effective weapon a business has for minimising the risk and impact of disputes is good housekeeping. This will mean different things for different businesses, but for most it comes down to putting in place proper systems and procedures, ensuring that they are properly observed, and keeping them under regular review.
 
The list of possible steps one could take is endless and trying to implement them all would be costly and probably futile. However, as a number of recent high profile disputes have revealed, certain management ‘oversights’ have a tendency to feature in litigation far more than others. Below is a list of some of the more important housekeeping questions that every prudent business in the resources sector should be asking in these difficult times.      
 
Customers and Suppliers

  • Do you have written terms of agreement with your customers and suppliers and have they been signed by all parties?  Are the goods or services adequately described?
  • Are the existing terms still appropriate? For example, in difficult trading conditions where there is an increased risk of default and/or insolvency, should you introduce new terms dealing with advance payment, liquidated damages or retention of title
  • Do these contracts make appropriate provision for resolving disputes, such as which law will apply to the contract, whether a particular dispute resolution mechanism will be used or whether the courts of a particular country will have jurisdiction?

Employees

  • Do all of your employees have written employment contracts, and do you have a signed copy of each on file?
  • Have the employment contracts been reviewed recently to ensure that they reflect employees’ current role and status?
  • If you employ foreign workers, have you complied with all necessary immigration requirements, and have you ensured that their immigration status is still valid?

 
Health And Safety

  • Do you have a policy on health and safety and is it on display in the office?
  • Have staff received training on health and safety risks?
  • Do you regularly undertake health and safety audits of your premises?

Compliance and Fraud

  • Is your business regulated by an industry body or is it subject to a code of conduct? If so, has there been continued compliance with the relevant rules?
  • Do you have in place policies and controls to counteract the risk of fraud (both internal and external)?
  • Do you have in place appropriate policies and controls to counteract the risk of bribery (e.g. a code of conduct relating to client gifts and hospitality) and has relevant training been provided?  

 
Insurance and Business Continuity

  • Do you have adequate insurance to cover all the risks of your business activities?
  • Do you have separate Directors and Officers’ insurance and/or insurance to cover legal expenses in the event of a dispute arising?
  • Do you have cover for business interruption? Do you have a business continuity policy that can be implemented immediately in the event of serious disruption to your business?

 
Document and Information Protection

  • Do you have a policy for retaining paper and electronic documents?
  • Are all confidential and/or sensitive electronic documents password protected and are they kept in a secure location?
  • Are all trademarks, registered designs and patents valid? Do you monitor the market to ensure that your intellectual property rights are not being infringed?

International Aspects

  • Do you have any offices or activities abroad? If so, have you complied with all the relevant rules and regulations?
  • Do your contracts with employees, customers/clients and suppliers comply with local laws?
  • Do you have local lawyers and accountants?

There are of course many more detailed questions you can ask, depending on the nature of your business.
 
When A Dispute Arises
Unfortunately, even the most carefully managed businesses are not immune from disputes. Although disputes involve diverse subject matter, most commercial disputes have a number of aspects in common. The following issues should be given careful consideration by any business faced with a new dispute.  
 
What is your objective?

Whether you are pursing a claim or defending it, the first and most important question to ask yourself is: what do you ultimately hope to achieve? This may seem an obvious and straightforward question, to which the answer should simply be “to win the case as quickly and cheaply as possible”. However, realistic, pragmatic objectives are rarely as simple as that.
 
The first point to bear in mind is that the vast majority of commercial disputes settle before they reach a court or a tribunal, making an outright victory very unlikely. That means the strong likelihood is that you will have to compromise on your ‘ideal objective’ to some extent. Therefore, when formulating objectives, it is better to think in terms of parameters (limits, constraints, deal-breakers) rather than fixed outcomes. In other words, work out what your business can and cannot afford to spend in terms of time and money, which problems or interruptions it can and cannot tolerate, and make sure these are appropriately accommodated. All of this calls for consideration of what your business’ needs are at present, and what they are likely to be during the expected lifetime of the dispute (bearing in mind that major disputes can last a number of years).   
 
As with most business decisions, the decision to become embroiled in a dispute should be commercially driven. In other words, one needs to keep a close and constant eye on the figures involved and the risks attached to them. These usually change as a dispute develops. First there are the direct costs, such as legal fees and a possible liability for damages. All of these should be accounted for in a cost/benefit analysis. Then there are indirect costs, such as employee downtime, reduced productivity and temporary unavailability of business assets and resources, all of which can lead to a loss of revenue. Added to this are increased expenses such as higher insurance premiums in the future. And then there are the so-called ‘hidden costs’, such as damage to reputation and lowered employee morale.
 
Many of these costs are difficult to identify or predict and some are impossible to quantify. In fact it is probably fair to say that the true cost of a dispute is rarely, if ever, known. Despite these difficulties, decisions still need to be made, and they can only be made on the basis of the best information available. The point to remember is not to oversimplify the assessment.
 
Finally, it is worth bearing in mind that sometimes the most prudent objectives have less to do with winning the case and more to do with preserving the long term prosperity of the business. This is especially true in industry sectors where most of the major players are familiar with one another and depend to some extent on a level of co-operation. In these circumstances preserving good relationships and avoiding damage to reputation can be of greater long term value than any of the figures cited in a particular dispute.
 
How and where will the dispute be fought?
The location of a dispute, the type of forum in which it will be conducted (e.g. court, arbitration or other tribunal), the law that will govern it and the language in which it will be conducted are all very important issues that, if determined appropriately, can confer a distinct advantage on one party over another. This is particularly important for resource companies with operations in more than one country. Being unwittingly saddled with complex legal proceedings in a foreign country and in a foreign language can be very difficult to manage, not to mention extremely costly.
 
Although these matters are often agreed between contracting parties at the outset, before any disputes arise, this is not always the case, and even when they are agreed that is not necessarily the end of the matter. Complex questions of fact and law can come into play when the position is disputed or is not entirely clear.  Where there is any doubt, it is usually a good idea for a concerned party to take some form of pre-emptive action – for example by issuing legal proceedings in its preferred country to try to establish jurisdiction. Such action will provide no guarantee, however, as disputes about jurisdiction are notoriously unpredictable.
 
The dispute resolution mechanism by which a dispute will be resolved also merits careful consideration. The common options are: proceedings in the civil courts, private arbitration, mediation, negotiation, expert determination, as well as certain combinations of these.  Each has its advantages and disadvantages which need to be carefully weighed in each case. For many disputes in the resources sector where a resolution is required in fairly short order, court and arbitration proceedings can be too slow and speedier mechanisms such as expert determination are to be preferred.
 
Who is going to manage it?
This question is frequently not given the attention is deserves. For larger companies, there are in-house legal teams that are responsible for managing business disputes, possibly with external assistance. However, for companies that do not have a dedicated legal team (and for some that do), appointing an individual to manage the dispute internally, to its conclusion, will help to ensure that the case is run smoothly and cost-effectively.
 
Many businesses make the mistake of assuming that a senior member of staff will be best for the job because they have authority to give instructions and make decisions. However, managing a dispute day to day - particularly the larger ones – has less to do with authority than with knowing the detail of a case and being readily available to deal with issues at short notice. Senior staff members are amongst the worst placed for this.
 
In deciding who to appoint to manage a dispute, the following factors should be considered:  

  • Does the individual have any legal knowledge? Although this is not essential (most businesses will engage the services of a law firm), there are a number of issues that will be better handled by someone with a basic legal knowledge. For example, document preparation and retention is subject to complex legal rules which, if not adhered to, can have disastrous consequences.
  • Do they have a god understanding of the issues in dispute? This is particularly important in disputes of a more technical nature where some knowledge of the subject matter is extremely helpful.
  • Do they know and understand the business’s broader values and objectives? Although major decisions will be taken in consultation with senior management, there will be many other day to day decisions that cannot be referred back to management but which nonetheless require a sound appreciation of what the broader objectives are.
  • Do they have appropriate authority? This refers not only to executive authority (i.e. being able to give instructions and enforce deadlines) but also to a degree of moral authority for garnering support and resolving internal conflicts.  
  • What is their relationship with the individuals who are directly involved in the dispute? Tensions between a case manager and key witnesses or decision makers can seriously impede progress and even affect the outcome of a dispute. Consideration should also be given to whether the dispute itself might cause new tensions to arise. At the same time, a close relationship between the case manager and others involved can lead to a conflict of interest.
  • Will they be available day-to-day, and will they be around for the duration of the dispute?  Certain stages of disputes require intensive work, and larger disputes can take years to resolve. Substituting a case manager midway through a case is disruptive and costly. Individuals who spend prolonged periods away from the office, ‘on site’ or abroad, or who are unlikely to remain with the business for long, will not be appropriate.

This list is by no means exhaustive and no single issue should be regarded as determinative. It is unlikely that there will ever be the perfect candidate, but where the role involves a big commitment it should be given due consideration.
 
How will you pay for it?

The first point to consider in relation to funding a dispute is whether you are entitled to receive funding from another party, for example under existing insurance policies or another form of contractual indemnity.  
 
If there is no such entitlement, or if it is insufficient, there are other options to explore. For example, it is becoming increasingly common for parties (particularly claimants) to manage their exposure to legal costs through ‘after the event’ insurance, or to fund the dispute by means of third party funding and/or special fee arrangements with their lawyers. Part-funding can be used as a means of  ‘selling-off’ to a third party some of the dispute risk.
 
Different jurisdictions have different options and different rules governing them, but many insurers and funders operate internationally and will consider disputes of a diverse nature, including commercial contract and negligence disputes that frequently arise in the resources sector.
 
The decision as to whether any of the funding options will actually be of benefit in a particular case is not straightforward and will need to be made with professional guidance. It is nonetheless an important factor which should be considered early on. Appropriately handled, it can make the difference between a good result and bad one.
 
Conclusion
No-one wants to think about disputes unless and until they have one. However, most disputes are damaging and costly to all concerned.  In difficult times, not only are disputes more likely, they are also more difficult to resource. Even a small dispute can have a significant impact on profitability, whilst a large dispute can be disastrous, particularly if it is poorly managed. It is therefore important for businesses to consider from time to time where they might be vulnerable, and what action they will take if a dispute threatens.


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