01 Apr 2020

Disputes in a time of COVID-19

By GREG WILLIAMS,KATE MADGWICK AND SIMON AGNELLO

The unprecedented disruption caused by COVID-19 poses significant challenges for business: not least, counterparties need to be able to negotiate (or renegotiate) effectively and expediently and resolve disputes without recourse to the Courts.

As we brave the unchartered waters of a global pandemic, with borders closed and businesses shuttered, traditional mechanisms for dispute resolution have also been disrupted. Court hearings are postponed and any not postponed are occurring by video-link. The situation is evolving daily, and it is not known for how long the interruption to Court programming will continue. What we do know is that when those operations return to "normal", the Courts are likely to have a significant backlog of cases and associated delays.

Here we provide an outline of alternate mechanisms which are available to parties to try to resolve disputes (and preserve relationships). Some of these might also offer "out of the box" solutions for parties looking for alternative or more effective ways to advance and finalise commercial negotiations.

These resolution processes are not mutually exclusive, and parties should consider whether it would be beneficial to pursue a number of strategies, either simultaneously or sequentially, including litigation through the Courts. Ultimately, there is no "one size fits all" approach, and parties will need to reflect on their objectives and the characteristics of any dispute in order to identify which process is right for them (if any). Expert advice can assist parties to ensure that the chosen strategy is structured to avoid an unintentional waiver of rights.

Arbitration

Arbitration can deliver a fast and binding, yet confidential, determination, with the parties being free to agree procedures consistent with current travel restrictions and Government advice as to social distancing, for example. 

Arbitration is similar to litigation:

  • it is adversarial;
  • it involves a hearing on the merits of the case;
  • it is binding: subject to limited exceptions, the parties are bound by the determination of the arbitrator and the arbitration award is enforceable much like a judgment; and
  • parties can obtain urgent interlocutory relief such as freezing orders, if needed.

But there are some important differences:

  • the parties can agree upon the procedure to be followed by the arbitrator and do not have to follow Court processes;
  • the parties can expedite the hearing by agreement;
  • arbitration is usually private and confidential (although this may be subject to other disclosure obligations); and
  • for some jurisdictions, international arbitral awards may be more easily enforced than Court orders.

Often parties will agree in a dispute resolution clause to resolve claims by arbitration but there is nothing to prevent parties agreeing later to go to arbitration, including where the parties have already commenced litigation. Most modern civil litigation legislation permits the Courts to order parties to arbitration, although up until now, this power has been infrequently employed by judges.

Expert determination

Expert determination can be a particularly quick, cheap and effective way of resolving technical disputes or differences.

Expert determination is a process where parties to a dispute present arguments and evidence to an independent third party, who is an expert on the subject matter of the dispute. It allows for a private determination in a similar way to arbitration but because the process is usually simpler, and the question for determination relatively narrow, it is regarded generally as a quicker, more cost effective alternative to arbitration.

It is common in construction and other industries for contracts to include expert determination as part of a dispute resolution process but parties can agree to refer particular questions for expert determination at any time as a means of resolving a dispute or moving past a deadlock in negotiations.

Care must be taken when formulating the scope of the issue to be decided by the expert: for example, it must be clear whether parties agreed to be bound by the expert's determination both on the construction of the contract, as well as on the matter involving discretion or opinion. Expert determination may not be the best method of resolving complex factual disputes or ones which hinge on issues of credit, for example. It is also important that the process for choosing the expert be fair to all parties. Note that expert determinations may be challenged in Court, and so may not avoid entirely the risk of litigation, among other drawbacks.

Early Neutral Evaluation (ENE)

ENE can be used to clarify issues in dispute and help parties to understand limitations in their case with a view to progressing and informing settlement (or commercial) negotiations. ENE may be particularly useful in the current environment, where "ordinary" commercial considerations and expectations need to be tested.

With ENE, an independent dispute resolution practitioner (usually a former judge, or a barrister or senior solicitor) appointed by the parties considers evidence and arguments provided by the parties and then prepares a non-binding evaluation of the case (in effect, a "judgment").

Of course, ENE may not be appropriate in all cases, particularly those involving complex technical or factual questions, and can lead to counter-productive outcomes, such as entrenching the position of the party to whom the evaluation is most favourable and discouraging meritorious litigants from pursuing their rights to their detriment (and similarly may encourage "bad bargains" to be agreed in a commercial context). 

Mediation

Mediation does not produce a binding determination, rather it is a process that can assist parties to come to an agreement by negotiation. This may have a number of benefits, such as preserving the commercial relationship between the parties or assisting the parties to come to a bespoke settlement arrangement that gives all parties a "win".

Mediation is a structured negotiation process in which an independent third party (usually a technical expert or an experienced legal practitioner) assists parties to identify and assess options and negotiate an agreement to resolve their dispute. Some of the benefits of mediation include its flexibility, cost (compared to other processes such as arbitration), and speed.

The mediator does not make any determination as to the merits of the positions taken by the parties however an experienced mediator will ordinarily seek to assist the parties to see the weaknesses in their arguments, for example, with a view to assisting the parties to move beyond entrenched positions. Experienced mediators will urge the parties to explore various forms of commercial resolution and will work to narrow and clarify the issues.  Because the success of mediation depends on being able to build consensus between the parties, the choice of mediator can hugely influence the success of the process.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.