Is Commercial Litigation an Endangered Species?

01 June 2006

Martin Bernet, Schellenberg Wittmer

Without going into the subtleties of terminology (which varies considerably from country to country), the various methods of dispute resolution other than traditional litigation fall in essence into two categories:

• non-binding dispute resolution with mediation as its most important form; and

• binding dispute resolution with arbitration as the alternative to litigation.

With regard to mediation, there is no doubt that it has its merits. In many cases, it allows the parties to reach a quick and amicable settlement of their dispute and, ideally, to preserve valuable business relations. Mediation does therefore have its place in any system for the resolution of commercial disputes. It is interesting to note, however, that the growth rate and success of mediation is considerably higher in systems such as in the US where litigation is notoriously expensive and where the courts traditionally refrain from any attempt to promote a settlement between the parties. In Switzerland, for example, mediation of commercial disputes before professional mediators has so far played only a marginal role; there is a long-standing tradition in the Swiss courts of helping the parties to settle their disputes. In the face of the success and popularity of mediation, it is almost heretical to express criticism, but certain trends in mediation are at odds with its very essence, its voluntariness. For example, the concept of court-ordered or other forms of compelled mediation, where a party that has not consented is compelled to engage in a mediation process, is a problematic approach; where it exists, it should be used with care. Another cause for concern is the tendency of certain courts to threaten parties with adverse consequences – even if it is just a question of cost orders against them – if they wish to have their day in court. The voluntary nature of mediation should always be respected, and any system of dispute resolution using mediation should strike the right balance between the goal of avoiding unnecessary litigation and the fundamental right of parties to have their day in court. If this balance is not achieved, many parties will be unhappy, and there will be an increase of pre-litigation costs as the only effect of mediation. With or without mediation, there are, and will always be, cases that call for binding dispute resolution, such as litigation or arbitration. Many litigators see arbitration as a threat to traditional litigation, and there is no question that arbitration has grown in importance over the last decade or so, taking many cases away from the realm of traditional litigation, particularly cross-border disputes. I do not think that this should be seen as a threat to litigation, but rather as a sign of an increasingly sophisticated system of dispute resolution. Arbitral tribunals are better suited to decide certain cases, whereas other cases are more appropriately resolved by the courts. The question is therefore what the appropriate areas of arbitration and of litigation are. Arbitration, except in investor–state cases, requires a contractual agreement to arbitrate and is therefore, in essence, limited to contractual disputes. There is much to be said for arbitration as the appropriate dispute resolution method, particularly in crossborder contractual disputes. The arguments in its favour are well-known; they include: a neutral forum, control by the parties over the tribunal’s composition and the procedure applied, procedure in an agreed language, no appeals, no burdensome pre-trial discovery and worldwide enforceability of the decision. But, this still leaves large areas of commercial disputes to traditional court litigation, such as, for example, all noncontractual disputes, such as shareholder suits, disputes concerning the validity or the infringement of intellectual property rights, commercial fraud cases, and generally all disputes concerning class actions. Even in the area of contractual disputes, however, litigation has its place. It is still the most common method in the vast majority of national (local) disputes and is perfectly suited for this purpose. In addition there are entire sectors of the economy where traditional litigation is the preferred method of binding dispute resolution, not only in local but also in international agreements, such as, for instance, in many areas of the banking and insurance industries. Finally, in recent times, the number of complaints about the judicialisation of arbitration has grown. Many clients feel that arbitration is frequently conducted with much the same formalism as proceedings in state courts and that they would in the end be better off using traditional litigation. It would be an exaggeration to speak of a movement back to litigation; the dissatisfaction of clients, however, is certainly an issue worth keeping an eye on. Today, a discussion of the relation between litigation and arbitration would not be complete without mentioning the Convention on Choice of Court Agreements, the Hague Judgments Convention, adopted by the Hague Conference on Private International Law on 30 June 2005 after many years of discussion. According to the Dogauchi/Hartley preliminary report, the hope is that the convention will do for choice of court clauses what the 1958 New York Convention did for arbitration clauses. The convention is in fact designed to provide litigation of cross-border contractual disputes on a global scale with two of the main advantages of international arbitration: the possibility to choose a neutral forum and the international enforceability of decisions. As far as litigating in a neutral forum is concerned, it will be possible under the convention for the parties to choose the courts of a third state for the resolution of their disputes, and the chosen court will, in principle, have to hear the case; it may not rely on the doctrine of forum non conveniens to decline jurisdiction. However, since the contracting states have the right to opt out of the obligation of their courts to adjudicate cases with no link to the jurisdiction except for the choice of court clause, we will have to wait for the signature and ratification process before it is possible to say whether state court litigation in a neutral forum will play a role in practice. In Europe, the possibility has existed for quite some time under the Brussels–Lugano regime, but it does not seem to have been widely used. The linguistic diversity of Europe may have been a significant obstacle within Europe; choosing the courts of a third state almost always means choosing to proceed in a foreign language. The global reach of the Hague Judgments Convention might eventually change this; if the convention is adopted by significant numbers of states with a common language, for instance English, the option of having a cross-border contractual dispute resolved by a court in a neutral third state might become more attractive. With regard to the enforcement of judgments internationally, the new convention introduces a system similar to the New York Convention. Contracting state courts will be required to enforce a judgment rendered by the court of another party to the convention, provided that this judgment is enforceable in the country of origin and subject only to a limited number of grounds for denial, as listed in the convention. In conclusion, the system of dispute resolution has become more sophisticated. Although litigation today is just one of many methods for solving disputes, it still occupies a stong position. Thanks to the variety of options, only those cases for which litigation is best suited will end up in court. Litigation is not an endangered species, but its habitat has undeniably shrunk.

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