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Module 6Commercial Dispute Resolution

Winter 2008

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This presentation and Copyright therein is the property of Maureen Noonan and is prepared for the benefit of students enrolled in the Commercial Transactions course conducted by the Law Extension Committee and is available for their individual study. Any other use or reproduction, including reproduction by those students for sale without consent is prohibited.

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Is this new topic examinable?

Yes, it is examinable in Summer 2007-08, in a general way only.

Any direct questions in the examination would be contained in Q6 and the appropriate answer would be descriptive. This contrasts with the problem questions 1-5.

Material can be relevant to a problem question indirectly. E.g. How might this problem have been avoided?

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Disputes

Valuable things at risk, such as:• Time • Money for expenses incurred trying to resolve

dispute, lost earnings• Business relationship and future earnings• Loss of market to competition• Loss of reputation• Freedom if a criminal offence and dispute is with

authorities/society.• Political issues between states and countries

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Methods of dispute resolution

Prevent the dispute by risk managementAvoid some disputes by drafting contracts wellNegotiationCapitulationMediation and conciliationExpert determinationArbitrationLitigationOther: e.g. Toss a coin, force etc

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Role of the lawyer

Policy and community attitudes to cost etc of traditional dispute resolution

Courts overworked and congested

Repositioning of a narrow profession

Opportunities to use diverse skills instead of purely “legal” skills

Important to choose most appropriate method for particular issue/dispute

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Risk Management

Identify legal risk

Monitor risk

Identify AppropriateManagement Technique

for each risk and plan

for overall management

Apply Management

Technique

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Legal role in Risk Management

• Objective is to avoid dispute or minimise damage resulting from a dispute

• Must understand business

• Conduct due diligence to ascertain main areas where dispute/legal liability likely to arise

• Appreciate bargaining position and opportunities/limitations

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Some Exporter Legal Risks

Customer does not pay-unpaid seller

Unable to recover /enforce rights in foreign country

Product liability-wrong item, quality, quantity, unsafe, late, incomplete

Unable to produce/acquire-breach contract

Loss in transit-who bears loss?

Competition cheaper-buyer defaults so they can take advantage of cheaper opportunity

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Some importer legal risks

Goods or services inappropriate, not what was ordered-claim for compensation available?

Supply does not meet local standards/lawsCrime –bribing foreign officialsTax, customs issuesUnfamiliar with particular free trade treaty

provisionsUnable to enforce rights /recover money in a

foreign countryUnable to sell items purchasedVulnerability to local customers for problems

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Some manufacturing risks

Raw material problemsMachineryFinanceDeliveryQuality/quantity issuesDamage to othersFailure to sell productsTitle issues

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Alternative dispute Resolution (ADR)

Defined by ADRA (Australian Dispute Resolution Association Inc.) as:

Dispute resolution by processes which encourage disputants to reach their own solution and in which the primary role of the third party neutral is to facilitate the disputants to do so.

Generally includes negotiation, independent expert appraisal and mediation, but not arbitration; which is an adjudicative process where the parties agree that the decision of the third party is binding.

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ADRA

www.adra.net.auFormed 1987 with objectives:• To promote and encourage ADR in Australia• To encourage exchange of ideas and information re ADR• Providing and supporting education, research• Printing, publishing and circulating ADR info• Enhancing professional skills of ADR practitioners• Represent ADRA members• Cooperate with others to achieve objectives

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Early dispute Resolution (EDR)

Reference: Law Society Task Force Report on Early Dispute Resolution and Law Society Dispute Resolution Committee.

EDR is concept and process of intervention in the formal dispute process to resolve that dispute early, effectively and legitimately

To enable EDR, need for changes in attitude by profession, clients, the litigation process and an increase in ADR initiatives

Complexity and inefficiency of legal system in part due to Commonwealth/State division

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Institutionalised EDR / ADR

The Administrative Decisions Tribunal NSW (ADT)See Judge Kevin O’Connor AM, President ADT, address to ADRA Conference 2007 on ADRA website: Institutionalised Dispute ResolutionADT deals with state tax appeals, FOI merit reviews, professional discipline of legal profession and others, retail leases.

Chapter 6 of Administrative Decisions Tribunal Act 1997 empowers Tribunal to engage in 2 forms of ADR-mediation and neutral evaluation and Tribunal can determine its own procedures. It can engage assessors, conduct preliminary conferences and can dispense with hearing and determine matter on the papers.Mediation means a structured negotiation process in which mediator as neutral and independent party assists parties to achieve their own resolution. It is voluntary and mediators are encouraged to adopt uniform practice.Neutral evaluation means a process in which neutral evaluator seeks to identify and reduce the issues of fact and law in dispute. The role includes assessing relative strengths and weaknesses of each party’s case and offering an opinion as to the likely outcome of proceedings.Assessors can be very helpful where special knowledge or experience is required e.g. veterinary surgical techniquesNot always appropriate? e.g. occupational licensing, professional discipline and tax appeals. Once a public decision has been made e.g. to suspend a licence Judge O’Connor is of the view the process should remain public and open.

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Industry based dispute resolution

Banking and Financial Services Ombudsman

We have a look at this in a later module

Insurance Ombudsman

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Negotiation

Win/win mentality means both parties must come out of the negotiation with an improvement in their situation. Skill lies in formulating such an outcome.

Win/loss means that one side is better off and one worse off. May resolve immediate dispute, but might lead to loss of relationship, or retaliation later.

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Win/win examples

Deliver later at higher price…buyer gets timing required and vendor is compensated for storage/delay of receipt

Pay earlier at cheaper price

Long term contract in return for fixed price

Return unsold items in return for prime display position

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The Negotiation process

• Prepare-Formulate desired outcome, research possible solutions

• Choose diplomatic/respectful language• Refrain from adversarial, bullying language.• Consider position of the other side and any

cultural issues relevant such as importance of saving face

• Avoid insults, name calling, emotional abuse• Meet personally on “without prejudice” basis-at

lower level first / higher level first, neutral ground• Exchange of emails, telephone, correspondence

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Capitulation

Sometimes there is no better alternative

e.g. in the wrong

No gain/point in spending time/money

No chance of success

Better use for resources

Best to preserve relationship for now and do something about it later.

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Mediation

• Parties appoint a person who assists them to reach a negotiated resolution.

• Often a person with skills to work out win/win solution to particular issue

• Puts someone in between warring parties and can dilute poisonous atmosphere to enable productive consideration of issues

• Not binding on parties unless reflected in a formal settlement agreement

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Mediation process

• Usually mediator conducts separate sessions with each party to ascertain points at issue and respective positions

• Mediator reflects on those sessions and formulates possible solutions

• Mediator explains likely outcomes if dispute continues (if adequate skills to do latter) to both parties separately

• Mediator presents possible solutions at joint session. (Sometimes further separate sessions beforehand).

• If settlement reached, mediator formulates basic agreement terms for lawyer to translate into agreement or, if a lawyer, drafts settlement agreement.

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Domestic ADR

The Australian Commercial Dispute Centre Ltd formed in 1986 by AG and Sir Laurence Street. Established to introduce and encourage non adversarial dispute resolution into Australia. Works with ACICA and 2003 Memorandum of Understanding means ACICA focuses on international disputes and ACDC on domestic disputes and mediation.

Compulsory mediation has been introduced into many disputes in the regular court system.

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Expert Determination

• Sometimes resolution of a single issue at base of dispute can resolve dispute

• E.g. specification/qualities/existence of a substance or state of affairs, a legal/accounting/scientific opinion on a particular matter

• Parties nominate an expert or panel to give opinion on that single matter

• Can agree on “papers only” or independent tests, as appropriate.

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Expert determination in court system

Judges may refer questions to assessors or special referees.

For example, in a building dispute, questions for the architect or engineer.

Family court-family report after interviews of family members

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ARBITRATION

• Parties agree to resolve disputes by arbitration in accordance with nominated Rules.

• Parties appoint Arbitrator or panel

• Arbitration conducted

• Decision made by Arbitrator

• Binding on the parties

• Enforceable in approx 142 countries

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Arbitration process

• Can be similar to a court process• Can be informal• Can be remote• Can be on “papers” only, i.e. written materials and no

oral hearing• Parties can choose an arbitrator with expertise in their

business• Usual to choose 1 or 3 arbitrators so no deadlock

possible• Usually confidential, so limited precedent bank to consult

/ research.• Important elements are a process, rules defining how

that works, and a timetable to keep it moving along.

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Framework for Domestic Arbitration

States have Commercial Arbitration Acts-largely uniform and regulate domestic arbitrations

Supreme Court has power of overall supervision.Public policy prevents parties from agreeing to

oust jurisdiction courts. Scott v Avery clauses seek to get around that by making arbitration a condition precedent to legal proceedings. So, not ousting, just delaying or not primary method. However, Commercial Arbitration legislation prohibits any clause trying to make it a condition precedent.

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Powers of the Court

Under s. 53 Commercial Arbitration Act 1984 (NSW) and Supreme Court Rules court has power to refer a matter to arbitration on application of a party or its own motion.

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Qantas Airways Ltd v. Dillingham Corporation (1985) 4 NSWLR113,122

Construction of Qantas Centre. Q brought legal proceedings against D claiming that because D found the building contract onerous, it was attempting to force Q to renegotiate by wrongful means such as delay, inducing labour unrest, conspiracy to hinder work and fraudulently misrepresenting that design problems made work impracticable. D applied for a court order to send it for arbitration by an architect and a builder or by an arbitrator mutually appointed as set out in the Scott v. Avery clause in the contract.

The court agreed with D and stayed proceedings effectively giving effect to arbitration clause and noted that “It is now more fully appreciated that used to be the case that arbitration is an important and useful tool in dispute resolution. The former judicial hostility to arbitration needs to be discarded and a hospitable climate for arbitral resolution of disputes created”

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International Disputes

Advantages of arbitration

• Neutrality

• Flexibility

• Efficiency

• Confidentiality

• Enforceability

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Global Survey –International Arbitration- large corporates- PWC 2007 – See: www.pwc.com

• 73% corporations prefer it to transnational litigation• Advantages outweigh disadvantages• Clear dispute resolution policy an important strategic asset. 65 % of

respondents had one. Minimised escalation and costs.• Arbitration clause in contract can give a tactical advantage• More than 75% arbitrations conducted under the auspices of an

arbitration institution such as ICC and London Court of International Arbitration; with regional centres growing

• Legal consequences most important for choice of venue• 91% liked finality and rejected idea of appeals• Concern that experienced arbitrators scarce. 90% wanted arbitrator

with established reputation in their field and region.• Corporations retain specialist arbitration counsel rather than usual

litigation lawyers to assist• 91% in house counsel well informed about international arbitration

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International Arbitral Institutions• International Court of Arbitration and ICC in Paris• London Court of International Arbitration• Swiss Chambers of Commerce and Industry• Arbitration and Institute of Stockholm Chamber of Commerce• American Arbitration Association• HK International Arbitration Centre• Singapore International Arbitration Centre• China International Economic and Trade Arbitration Commission• Kuala Lumpur Regional Centre for Arbitration• The Australian Centre for International Commercial Arbitration• International Centre for the Setttlement of Investment Disputes

Asia Pacific Regional Arbitration Group (APRAG) is association of 17 regional arbitral institutions in our area. See www.aprag.org

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Framework for International Arbitration

UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (The New York Convention)

When local court faced with dispute covered by an arbitration agreement, it must stay proceedings and recognise and enforce arbitral awards.

Incorporated into Australian law via International Arbitration Act 1974(Cth)

Australian Centre for International Commercial Arbitration. See www.acica.org.au

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ACICA

The Australian Centre for International Commercial Arbitration is a non profit organisation formed in 1985 to provide a framework for international commercial arbitration and to foster Sydney as a centre for such arbitrations

See www.acica.org.au

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Arbitration Clause

ACICA recommends:“Any dispute, controversy or claim arising out of, relating to or in connection with this contract, including any question regarding its existence, validity or termination, shall be resolved by arbitration in accordance with the ACICA arbitration rules. The seat of arbitration shall be (location). The language of the arbitration shall be (language). The number of arbitrators shall be (1,3 or Article 8 of rules).”Note also need for choice of law clause.

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Arbitration Rules

Arbitrations are conducted in accordance with rules chosen.

See for example ACICA Arbitration rules at www.acica.org.au. Selections follow.

Procedural as with civil/criminal procedure court system rules.

For other rules, see appropriate organisation

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ACICA Rules

4. Party initiating gives ACICA a Notice of Arbitration which covers a demand for arbitration, contact details, copy of A clause, general nature of claim and remedy sought and proposal re number of arbitrators.

Notice can include detailed Statement of Claim or that can come later

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ACICA Rules

5. Within 30 days of receipt of Notice, Respondents submit Answer which includes contact details, any plea disputing jurisdiction, comments on particulars in notice and answer to relief/remedy sought.

It may also include Defence to Statement of claim, but this may come later.

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ACICA Rules

6. Parties may be represented8-16 Appointment of arbitrators17-31 Arbitral proceedings. Tribunal may

conduct arbitration as it sees appropriate provided that it treats parties equally and each is given opportunity to present their case.

Usually held in private21 Contents of statement of claim

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What does it all cost?

Appendix A to ACICA rules

Notice of Arbitration Registration fee $2,500

Admin fee

$1-$500,000 1% of amount in dispute

And upwards

Over $100m $39,000 plus 0.02% of amount in dispute above $100m up to maximum $60,000.

PLUS costs of representation, presenting case.

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Attitude of our courts

Mainly support

Care must be taken when drafting to avoid multi-party, multi-contract and multi-venue disputes.

If arbitration clause too narrow, it may limit range of disputes that can be settled by arbitration

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Example

Australian company entering JV with Malaysian company to build infrastructure in Phillipines. You negotiate a clause submitting disputes to Australian courts.

However, judgement may not be enforceable (no reciprocal enforcement treaty with Malaysia), dispute very public, and judge may have no expertise.

Arbitral award would be enforceable (Malaysia and Australia both signatories to NY Convention), and can choose arbitrator(s) with expertise

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Another example

Importer of ginger from China. No choice of law clause. No arbitration clause. Ginger rotten.

Bring proceedings in China? Or Australia?

Vienna convention applies to sale?

Chinese law has closest connection?

Chinese law very different to ours. E.g. limitation periods, no precedent value

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International Treaty obligations

Specialist Dispute Resolution bodies and rules

WTO

WIPO-Domain name disputes-cybersquatting

UNCITRAL Model Arbitration law

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WTO dispute settlement understanding (DSU)

Came out of Uruguay Round

Clearly defined rules and timetables

Parties/countries first discuss.

First WTO stage is good offices, conciliation.

Then a panel and endorsed (or rejected) by WTO membership.

Appeals on points of law are possible.

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DSU timetables

60 daysConsultation, mediation

45 daysPanel set up, appointments

6 mths Panel hears dispute and reports

3 wks Panel reports to WTO members

60 daysDispute Settlement Body adopts report (if no appeal) TOTAL 1 year

60-90 days Appeals report

30 daysDispute Settlement Body adopts appeals report. TOTAL 1.25 years

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How the panels work

• Each side presents case in writing to panel• First hearing-complaining country and

responding country present case• Rebuttals-written and oral• Experts, if appropriate• Draft panel report given to both sides• Interim report to both sides• Review for two weeks• Final report given to both sides and 3 weeks

later to all WTO members

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Remedies?

• Obligation on parties to respect ruling• Trade sanctions possible• Limited discussion in this course• Reading some cases is useful

e.g. See www.wto.org and go to Case Studies Thailand: Conciliating a Dispute on Tuna Exports to the EC

Dispute Settlement between Developing Countries-Argentina and Chilean Price Bands

Pakistan’s Dispute Settlement with the US on Combed Cotton Yarn exports.