The majority of cases, whether in court or arbitration, are settled. Parties weigh a variety of factors from the start of the dispute to the award, constantly performing a cost-benefit analysis. Generally speaking, issues such as principle and precedent may preclude a settlement. Parties will refuse to consider a good settlement if it violates an internal principle (such as “no payment, even nominal, in the absence of liability”), or if it creates a bad precedent (such as a payment to a fired employee that exceeds statutory severance requirements). Another major factor is always market and business strategy. For years, many Chinese parties elected not to participate in offshore arbitration, reasoning that they were not interested in developing offshore business. The costs of litigation must always be considered. In today’s global economy, companies may face suits in multiple jurisdictions (e.g. the British Virgin Islands, Hong Kong and the PRC) involving similar facts and related parties. Multi-jurisdiction litigation is costly and may drive the parties toward settlement. This article seeks to provide some tips to consider in seeking settlement before and during arbitration.
Five tips for pre-arbitration settlement
1. Know your adversary
Suing a company without assets is fruitless. Always perform an asset check which is as thorough as you can afford based on the amount in contention. If the jurisdiction of the adversary allows fraudulent conveyance, consider immediately bringing a local action to preserve assets. This action will give you leverage in negotiation. No company wants to have its assets encumbered. Be aware, however, that in most jurisdictions, you may be required to post security in the form of a bond or letter of credit in order to obtain such injunctive relief.
2. Face-to-face meetings versus “letter wars”
“Letter wars” should be reserved for disputes that are likely to be arbitrated. If a cost-benefit analysis is dictating that you settle a case, then sit down across a table, and discuss the situation. Email and correspondence are never as effective as face-to-face meetings, and are likely to cost more in the long run.
3. Consider using an intermediary
Often, both parties have a relationship with an individual who might serve as an intermediary. The individual must be devoid of any interest in the outcome of the dispute and must understand any cultural differences between the involved parties. Each party will selectively advise the intermediary of its position and ask the intermediary to serve as a go-between.
4. Consider formal mediation
Mediation, before or after the initiation of an arbitral demand, can be useful if you select the right mediator. Look for someone with knowledge not only of the law but also the industry and/or the cultures involved.
5. Know your adversary’s pressure points
You should know your adversary’s business plan as well as your own. Are they considering an IPO or fund raising? Have they recently changed the management team? Do they have end-of-year reporting requirements? When do they formulate the budget? What level of authority is required for the settlement you hope to achieve? What other lawsuits are they engaged in? Are they planning to bring a new product to market? Are they involved in any M&A activities? Understanding your adversary’s situation is a key factor in winning your ideal settlement.
Five tips for settlement during arbitration
1. Filing on all fronts
In the global marketplace, there are more options than simply filing arbitration in one jurisdiction. More often than not, there are a web of agreements and companies with multiple dispute resolution clauses that will allow for litigation in more than one jurisdiction at a time. Seizing assets in China and the BVI, while filing for arbitration in Hong Kong, can increase the pressure on the respondent to seek a settlement. While this approach is costly, it can lead to an earlier resolution and thereby ultimately save cost.
2. Initial strategies
On the first day of the arbitration, before your opening statements, be sure to remind your adversary of their case’s weak points. This will put your opponent on the defensive. If the first day of argument goes well, revisit the reactions of the panel and the first day with the opposing counsel and highlight their deficiencies. Don’t be afraid to propose settlement discussions if the first day of argument seemed favourable. Proposing a settlement discussion is not always a sign of weakness, particularly if you maintain a hard line in negotiations.
3. Enlisting the panel
In many venues, such as CIETAC, the arbitrators actively encourage settlement. Parties must consider whether they are prepared to allow arbitrators also to act as mediators. If this seems too risky, the parties can always enlist assistance from the arbitration organization or the help of a third party mediator in resuming settlement discussions. Arbitration panels are generally willing, within reason, to allow the parties additional time to negotiate.
4. Analysing change and being flexible
Arbitrations typically take a year or more to resolve from filing of the request to award. The parties’ motivations and strategy, and global economic circumstances, can change greatly over a one year period. Adversaries may be expanding into new jurisdictions, or retrenching. Avenues of enforcement may be available that previously did not exist. A previously attractive target defendant may now be less attractive. Your settlement threshold may change based on these events. Don’t be static in your approach to the case; do not simply rely on your preliminary assessment.
5. Be relentless
Do not give up. Putting pressure on the opposition will encourage settlement by increasing both the risk of losing and the costs associated with litigation.
Post-award tactics
The battle is rarely won by the issuance of a favourable award. Enforcement continues to be a significant hurdle against defendants domiciled in countries where the rule of law is still developing. The defendant may have an advantage at the time of enforcement because enforcement typically occurs in the defendant’s country. This circumstance often allows the defendant to make a cost-of-money argument in favour of settlement, relying on the uncertainty of enforcement and the certainty of delay in enforcement. An astute claimant will have already assessed the enforcement landscape and taken measures in advance of the award to facilitate enforcement. If enforcement is unavoidable, a respondent will be more motivated to settle.
Meg Utterback is a partner in the Shanghai office of King & Wood. She specializes in dispute resolution, construction and foreign investment. For enquiries relating to dispute resolution, please contact her on +86 21 2412 6000 or by email at meg.utterback@kingandwood.com
