The Case for Alternative Dispute Resolution to Settle International Business Disputes
By Robert M. Tessier
Thomas Friedman in his groundbreaking book "The World is Flat" has proven Columbus wrong for our century. Rather than focusing upon vertical command and control structure in business, Friedman has refocused the vision of business to the horizontal. In the horizontal world, American financial power allies with Indian technicians and Chinese labor to create products not contemplated only twenty years ago. Corporations in the European Union now create strategic alliances with former colonies, not for exploitation, but for collaboration. Former political enemies become collaborative partners, and in so doing open vast markets.
Economic necessity tears down old hatred and resentments, and with it forces the abandonment of old ways of viewing the world. The model in which one business brings a product from concept to completion under one corporate roof is heading for the Smithsonian.
The Age of Imperialism and the philosophy of protectionism have given way to the Age of Collaboration and the philosophy of free trade. The ability to instantly communicate and transfer data under the seas and into the heavens has shrunk the world. As wondrous as this world appears, this reality, which is upon us, will prove taxing on our institutions, both political and legal. Will nations and their legal systems be able to appropriately respond to this challenge? As the poet Walt Whitman mused, "The real war will never get into the books." The real war will be fought in the minds of us all to imagine this world heaping benefit to the entire world, and making the leap of faith to embrace the wisdom of this course. The Age of Collaboration will shake deeply held core beliefs for some, and awaken new creativity to solve age old problems for others.
"Patriotism is when love of your own people comes first; nationalism,
when the hate for people other than your own comes first."
Charles De Gaulle, Life, May 9, 1969
Political organization within nations, and indeed nationalism itself, has at its core the protection of industry and the providing of safety to allow business to thrive. There is a darker side however. Empires and nations throughout history that adopt a protectionist stance, both through ethnic prejudice and national economic preference have not thrived. Protectionism coupled with exploitation will spell doom to a nation. So will it be in the Age of Collaboration.
Fully developed nations hand wring about losing jobs to "outsourcing" and rising trade deficits. One proposed answer is protectionism. And while it is true that change is inevitable, history teaches that each nation that adapts to change, and embraces it, thrives. Protectionism may have a surface appeal through jingoistic exhortations, especially for those whose livelihood involve more fungible occupations. But leaders of Nations, and our core institutions, must adapt so that, at a minimum, they do not hinder collaboration.
Likewise, developing economies and nations have tremendous opportunity to avoid the struggles of battles already fought in America and Western Europe. Just as telephone poles and wires will be unnecessary because of the technologically driven leap frog over such antiquainted devices, how will the developing world structure a legal system to seamlessly connect to the world as an entirety?
"Every new time will give its law."
Maxim Gorky, The Lower Depths 1903
What is the law that the Age of Collaboration will give? For those in the Anglo-American countries, it is important to remember that the existing legal structure is based upon the adversarial process. This is by no means the only structure in operation. The whole of Europe, with the exception of Great Britain, continues with the civil law system, created by the Romans and later refined by Napoleon. This system has also been adopted by Latin America. The civil law process is considered "inquisitorial" rather than adversarial, and the differences in practice are quite marked.
The core of the adversarial process fosters competition, and discourages collaboration. Once disputes arise, whether it is in criminal court, a case involving personal injury, divorce, or breach of contract, each side hires a lawyer. The lawyer is chosen for his or her ability to zealously represent the client. Each side wants to select the "best" lawyer to be found. The measure of the "best" lawyer often is described as "tenacious, aggressive, or zealous". Such qualities are required to survive and thrive in the adversarial system. That is because litigation is like war with paper, words and a PC instead of tanks, guns and bombs. Each side, in a tug of war, argues and spins the facts in an effort to persuade not one another so much as the neutral fact finder. Through this obviously non-collaborative effort is born the truth.
The search for the truth in the adversarial process is very costly. Each side spends capital, be it money, emotional energy, and/or opportunity cost, fighting over the facts and legal issues. Ultimately, the vast majority of cases will settle, often as a result of fatigue, expense, or surrender, when litigation is costly and time consuming. Settlement is often achieved at mediation on the eve of trial, or perhaps earlier in the litigation process. In the United States, only a small fraction of cases filed are tried before a judge and jury. Yet each case is litigated as though it will be tried, with the attendant costs and delay.
For businesses collaborating internationally in profit making ventures, the opportunity cost associated with this exercise in the adversarial system can be staggering. Not only is damage done between partners, but also competitors can seize opportunity to gain strategic advantage. Delay stifles innovation. Initiative gives way to a siege mentality.
In the United States, California has by far the largest court system. There were a staggering 1,480,346 filings of civil cases for 2003-2004. Business vs. business disputes are categorized as "other civil complaints and petitions". This category demonstrated a significant rise in 1999-2000, perhaps due to the "dot-com" bust or other economic factors. This trend has continued to the present.
Most significantly, however, is the fact that only 0.8% of all these cases are decided by judge and jury. Dispositions of personal injury claims is double this figure, and disposition of felony criminal filings is four times higher. See, Judicial Council of California, 2005 Court Statistics Report:
There are two ways to view these statistics. One, that the adversarial system reveals the truth and the parties are then positioned to resolve their dispute by way of settlement. Two, that the adversarial system is simply the only repository for business vs. business cases, which would be better suited for an alternative system which would yield the same favorable result with greater speed, and less cost.
Lawyers and lawmakers must consider, if for no other reason than to help ensure American businesses remain competitive, whether the adversarial system is appropriate for businesses in the Age of Collaboration. How does the Anglo-American adversarial system compare to the laws of other nations?
"No law is quite appropriate for all."
Nulla lex satis commoda omnibus est. Livy Ab Urbe Condita ca. 29 B.C.
Other nations have cultural traditions and responsive legislatures which recognize the value in alternative dispute. The developed world has adopted negotiation and mediation to address a problem of delayed access to the jury trial, not as a cultural norm. Older civilizations, in contrast, have long-standing traditions that embrace alternative dispute more readily.
In India, The Arbitration and Conciliation Act of 1996 controls arbitration procedures. Courts have ceded power to private tribunals to convene and resolve business disputes with only minimal judicial intervention and supervision when an arbitration agreement is in writing and clearly manifests the intent of the parties. An arbitration clause in a contract will suffice to establish intent, as the court will defer to intention of the parties.
A nascent form of ADR known as "ODRM" which is conducted on-line is gaining popularity. This format will permit prompt communication and help to overcome the physical and logistical concerns of convening alternative dispute proceedings when participants are located around the world. The parties may also select what law will apply.
In Pakistan, the Arbitration Act of 1940 permits convening of arbitration both before and after the filing of a civil claim, and reflects the struggle taking place within the Muslim world. Sharia (shuh REE uh), an Arabic word meaning "the right path", refers to traditional Islamic law. The Sharia comes from the Koran, the sacred book of Islam, which Muslims consider the actual word of God. In the 19th century, many Muslim countries came under the control or influence of Western colonial powers. As a result, Western-style laws, courts, and punishments began to appear within the Sharia. Modern legislation along with Muslim legal scholars who are attempting to relate the will of Allah to the 20th century has reopened the door to interpreting the Sharia.
Nevertheless, multi-national companies conducting business in or with the countries in the Islamic world are not very familiar with their applicable laws and the operation of the judicial systems. Because of this lack of knowledge of the laws, and a lack of confidence in the impartiality of the judiciary and the efficiency of the judicial system, foreign contracting parties prefer to provide for arbitration as a means of resolving disputes. Most of the countries in the Area began to accept the concept of local arbitration conducted under the auspices of the local chambers of commerce rather than international arbitration with organizations such as the International Chamber of Commerce (ICC).
In China, mediation has been a national tradition with long history and nation-wide use given an ancient cultural bias toward conciliation. China, throughout its history, has cultivated a national system of institutional mediation, featuring not only systematic administrative and judicial mediation practice, but also the world's largest uniform semi-administrative mediation network, especially the PRC's people's mediation system. It is promising that alternative dispute resolution with western nations will be seamlessly weaved into the fabric of the Chinese business culture.
The U.S. Department of Commerce advises that most contracts with Chinese business contain a clause requiring negotiation prior to instituting litigation. There are two Chinese government-sponsored arbitration bodies for handling cases involving at least one foreign party: China International Economic and Trade Arbitration Commission (CIETAC) and, for maritime disputes, China Maritime Arbitration Commission (CMAC). Contracts involving foreign companies doing business in China often provide for CIETAC arbitration. CIETAC distinguishes between two kinds of dispute resolution, foreign-related and domestic. For a dispute to be classified as foreign-related, one of the companies must be a foreign entity without a major production facility or investment in China.
The Department of Commerce urges the use of ADR, as the court system in China is not up to international standards. For instance, according to the Department of Commerce, most judges have minimal or no legal training, and observers have stated those poorly trained court officials are susceptible to corruption and regional protectionism.
"The law must be stable, but it must not stand still."
Roscoe Pound, Introduction to the Philosophy of Law, 1922
How will the adversarial legal system, the method by which order is maintained and sensible rules are enforced, adapt to the changing world? Historically, the legal system has moved as the tortoise compared to the technological hare. The system is specifically designed to function in this way. The ancient notion of stare decisis ensures that judges refer to previously decided cases, and heretofore determined issues to render a just decision. Procedure is governed by statute, the backbone of which dates back to the Magna Carta of 1215. Clause 40 of the Magna Carta states "To none will we sell, to none deny or delay, right or justice." Those businesses involved in the current system to settle disputes have more than once considered whether the lofty goals of the greatest document of its day are satisfied.
In the developed world, radical change to the system is extremely unlikely. Business can not expect that the legal system will adapt with sufficient speed, or breadth of change, to satisfy the interests of business operating across international borders. Business can be satisfied that the court system and rule of law will provide a time-tested enforcement mechanism for satisfying judgments. This model must be accepted world-wide for commerce to function effectively across international borders.
For example, in China, many observers have noted that it is often difficult for parties to enforce and obtain payment on court judgments and arbitration awards in China. While courts are required to receive approval from the Supreme People's Court prior to refusing to enforce a foreign arbitration awards, courts have occasionally circumvented this requirement by employing delaying tactics when local interests are adversely affected by the arbitration rulings. To address this problem the Supreme People's Court has issued new guidance to limit the ability of local courts to delay enforcement and this appears to have had a positive effect
Certainly delay and protectionism are anathema to the Age of Collaboration. The answer for business must be found outside of the box. That is, the answer is found outside of the existing legal framework, while still maintaining the laudable goals underpinning the legal system-access to and the dispensing of, swift and fair resolution of disputes and a reliable mechanism to enforce awards. Collaborative partners may choose not to engage in the adversarial legal system to settle dispute between each other. Even competitors may decide to define the parameters of conflict and rules of engagement outside of existing judicial systems. In the future, it is likely that industries will create their own rules and laws and tribunals that will function without political borders. There is mutuality of interest in making this choice. There is wisdom in stepping into this breech.
The advantages of choosing this option are cost, speed, and flexibility. An examination of the problems businesses now face explains why there is strategic advantage in creating this private international legal system for business.
Governments and local laws do not lose their relevance, however. The court system must be available to provide a prompt and efficient enforcement mechanism for arbitrator's decisions. Clearly the moves made by governments around the world to not only permit, but also encourage, businesses to utilize alternative dispute signals a trend which will continue into the foreseeable future.
"Laws and institutions must go hand in hand with the progress of the human mind." Thomas Jefferson, letter to Samuel Kercheval July 12, 1816
Lawyers are the staunch advocates of the adversarial system, and are handsomely compensated for their services in this arena. As has been previously stated, there are some disputes which must be convened in the adversarial forum due to their nature. With all that is at stake between collaborators when disputes develop, one must seriously question the wisdom of a process that requires lengthy discovery, delays and high cost as a first step in the process.
In the flattening world, business must grapple with the difficult questions of conflict of laws and enforcement of judgments. While these problems pose thorny questions for law professors and philosophers, the parties to contract have the elegant solution at their fingertips. Collaborators may choose their laws and their forum. They may choose to adopt a cooperative process in resolving the inevitable disputes.
Competitors, and those who would pirate intellectual property, must be held accountable in order to protect important property rights. Laws in the developing world are changing to afford more such protection, but much more must be done. It would not be surprising to many observers if a world conference of influential businesses convened in the near future to create universally accepted laws to resolve business disputes. Like The Hague Convention for litigation and jurisdiction, the end product of such work could be a voluntary system of business dispute resolution, with collaborative and cooperative efforts encouraged and mandated prior to judgment or award.
The progress of the human mind that is the underpinning of the Age of Collaboration requires consideration of novel changes. Perhaps the developed world can learn from the cultural bias of developing nations toward negotiation as a primary vehicle for dispute resolution, while the developing world can borrow the stability and protection of the rule of law that is at the heart of the western legal system to forge an alloy beneficial to all.