The second student paper addresses negotiation in China.  The author, Justin Shain, lived in China for a period.  What makes this paper so appealing is the ease and authority with which various strains of the robust Chinese culture are woven into a clear and useful piece of guidance for the business person and counsel.

How to Successfully Negotiate in an Ever-changing Chinese Business Culture

 Justin Shain

INTRODUCTION

As the ancient Chinese military general and strategist, Sun Tzu, wisely coined, “He who knows his enemy and himself well will not be defeated easily.”[1]  This proverb has stood the test of time.  For example, this saying continues to apply to many negotiators today—specifically, negotiators finding themselves in the middle of cross-cultural business dealings between Chinese companies and companies from the West.  In order to be successful in these negotiations, western negotiators have extensively studied Chinese business culture.  Likewise, the Chinese are increasingly sending their youth to be educated by western business schools.[2]  First, this paper will explore the widely accepted Chinese business culture framework, called the “Ping Pong Model,” in order to establish a better understanding of the Chinese negotiator, followed by how, in practice, these widely accepted generalizations of the Chinese business culture framework do not always hold true because of changes in attitudes among China’s younger generations.  The essay concludes by providing a guide on how to apply negotiating to this evolving Chinese business culture.

THE “PING PONG MODEL”

            In 1999, Tony Fang established a framework for Chinese business culture called the “Ping Pong Model.”[3]  This model is now widely accepted by academics and business people alike.[4]  It is also widely accepted that China is, as Hofstede theorized in a 1980 study, a “high context culture,” meaning that there is more focus on the group rather than individual interests.[5]  The “Ping Pong Model,” which is a model that supports China being characterized as a high context, establishes an explanation of Chinese business culture.  This Chinese business culture consists of three main components: (1) the concept of guo qing or the PRC Condition; (2) Religion; and (3) Sun Tze’s 36 Chinese stratagems.[6]  These three components should help us better understand a Chinese negotiator’s way of thinking.

Guo Qing

Regarding the first component, guo qing is the concept of China’s cultural heritage as a result of rapid political, economic and social change during the 20th century.[7]  In other words, guo qing is a contemporary social and institutional factor influencing China today.[8]  Guo qing can be broken down into eight distinct variables.  (1) Politics.  As a socialist state, politics plays an influential role on every aspect of Chinese life.  Thus, business and politics cannot be separated.  (2) Economic planning.  Chinese enterprises are not independent, private economic entities.  The Chinese economy is quite centralized, and hence, there is strong government control.  (3) Legal framework.  China’s legal system is still unstable.  Therefore, it is unwise to rely on the law to solve business disputes.  (4) Technology.  China wants advanced western technologies.  (5) Great size.  China’s state policy is to exchange China’s large market (1.3 billion plus population) for advanced foreign technologies.  (6) Backwardness.  China is still relatively poor, with 300 million people living below the UN poverty level.  Furthermore, the disparity of wealth is alarming, with most of the wealth falling only into the hands of the very rich.  (7) Rapid change.  Today, Maoist and traditional Chinese cultural values are forced to coexist with western ideas and lifestyles.  (8) Bureaucracy.  There is red tape for everything.  Negotiators must comply with Chinese government policies in order to plan their business.[9]

Religion

The second component, religion, is a combination of the three major “religions” or philosophical foundations that influence Chinese thought: Confucianism, Daoism, and Buddhism.  It is well settled that there are six core values of Confucianism from the perspective of negotiation: moral cultivation; importance of interpersonal relationships; family orientation; respect for seniority and hierarchy; pursuit of harmony and avoidance of conflict; and the concept of face.[10]  In addition to these six core Confucian values, the three philosophical foundations together provide for two other cultural elements that contribute to Chinese negotiation styles: being thrifty; and enduring to the end and being relentless.[11]

Starting with the six core Confucian values, the first is (1) Moral cultivation.  This value deems trust and sincerity among the most important qualities of being human, and it expects that a ruler govern his or her state by means of moral persuasion instead of law.[12]  The second value, (2) Guanxi, is one of the most influential factors.  Guanxi is this idea of the need for interpersonal relationships.  Guanxi roughly translated is relationships, connections, contacts.[13]  Guanxi derives from the cultural necessity of living in self-supporting communities.[14]  In China, it’s all about who you know, and developing these relationships can happen anywhere from attending school with someone, to knowing the family, to business networking.[15]  The third value is (3) Family orientation (Zhengti guannian).  This involves thinking about the whole country and not the individual business, or individual person.[16]  Eastern cultures think more about the community, while western cultures emphasize the importance of the individual.  The next core value is (4) Respect for seniority and hierarchy (Shehui Dengji).  This is the simple concept of showing great respect for one’s superiors; casual business relationships do not fare well in China.[17]  (5) Pursuit of harmony and avoidance of conflict (Renji Hexie) make up the fifth core Confucian value.  This involves the need for interpersonal harmony by being charismatic and easy-going.[18]  The last core value is (6) The preservation of “face” or mianzi.  This is the preservation of composure and lack of embarrassment.[19]

Two additional elements contribute to Chinese negotiation style, as well.  These are the concepts of jiejian and chiku nailao.  Jiejian means thrift.  It has been embedded in Chinese culture because China was once a very poor nation where families had little belongings.  In fact, the Chinese save almost four times as much as the typical American.  This means that the Chinese often leave more negotiation room in their offers than Americans.  Chiku nailao means enduring to the end and being relentless.  This is evidenced by the work ethic of the Chinese.  The Chinese tend to be very diligent, tenacious and persistent.[20]

Chinese Stratagems

The last major component that makes up Chinese business culture derives from Sun Tzu’s treatise, The Art of War.  In this treatise on military strategy, Sun Tzu lists 36 stratagems for gaining material and psychological advantage over one’s adversary.[21]  It is important to note that this method of negotiation is usually invoked only when trust between the parties is low.[22]  The use of these stratagems is used to handle hostile opponents or outsiders.[23]  Keeping all of this in mind, it is important to be cognizant of these stratagems in the event one is confronted with this negotiation style.

The main idea behind these 36 stratagems is how to “subdue the enemy without fighting.”[24]  The Chinese negotiator will employ these tactics to psychologically wrestle his opponent to create a favorable situation to manipulate his counterpart into doing business his way.[25]  To do this the Chinese negotiator will try to manipulate the western side through cooperation, flattery, and deception, among other things.[26]  For example, Stratagem 10 is “hide a knife in a smile,” meaning manipulation of friendship and hospitality, and Stratagem 3 is “kill with a borrowed knife,” meaning to play the competitors against each other.[27]

Although western negotiators may consider these tactics as “tricky” or unethical, things like diverting attention, misrepresenting information, and making false promises is not considered unethical within negotiations.[28]  In eastern societies, in which ethical duties are viewed as contextual, the motives for it and existing relationships can sometimes render deception virtuous.[29]  For example, Chinese negotiators might be under considerable pressure from their superiors to deceive the other side in order to advance the interest of the company.[30]

This Chinese business culture framework suggests that Chinese negotiators have a three-in-one negotiation style: that of being a “bureaucrat” (guo qing); that of being a “gentleman” (Confucianism); and that of being a “strategist” (Sun Tzu’s Chinese stratagems).[31]  Trust will determine what role the Chinese negotiator is going to play.  When mutual trust is high, Chinese negotiators will negotiate as “gentlemen,” and when trust is low, they will negotiate as “strategists.”  When politics is heavily involved, they will negotiate as “bureaucrats.”[32]  Thus, keeping all three concepts of this cultural framework in mind will only help the western negotiator understand their Chinese counterparts.

CHANGES IN CHINESE BUSINESS CULTURE

            On the one hand, the “Ping Pong Model” certainly provides western negotiators with a thorough guide on the way many Chinese negotiators operate.  On the other hand, there is no way the “Ping Pong Model” can apply to every single Chinese businessperson. This is particularly noticeable amongst today’s younger Chinese generations.  Ever since Deng Xiaoping’s “Open Door Policy” with the West, China has become flooded with western ideas and concepts.  In particular, many aspects of western business culture have left their footprint on China.[33]  The West has influenced Chinese business culture in three ways: (1) as China moves closer to a capitalist economic structure, the Chinese government has responded by decentralizing many enterprises; (2) Today’s Chinese have a more materialistic world view; and (3) The younger generations are becoming more and more aware of international business rules and cultural differences.

Before discussing these three western influences, I think it is important to point out that it is the younger generations who are particularly affected by these western influences. Within this business culture context, there is a generational distinction between older and younger Chinese.[34]  The younger generations are not as responsive to Chinese custom as their elders, and their ambition is western focused.[35]

Decentralization

Concerning the first western influence, China has seen rapid economic growth once it joined the world economy.  With that, China has adopted some western business practices—most notably Chinese enterprises are working under and increasingly capitalist-oriented Chinese government.  PRC policy now allows for limited decentralization.[36]  Cities like Shanghai, Shenzhen, and Guangzhou have been designated as Special Economic Zones where private industries there are given greater latitude and flexibility in the management and operation of their businesses.[37]  As such, these economic policies are at odds with the guo qing or “PRC Condition” discussed earlier.  The Chinese government has less control in some industries.  Therefore, there may be less red tape involved and less government control in closing a business deal within these Special Economic Zones.

Materialistic Worldview

The second western influence affects today’s Chinese worldview.  Today’s Chinese are more capitalist and less ideology-oriented that the Chinese under Mao’s time.[38]  It’s this drive to get rich by whatever means necessary.[39]  “Foreigners are often stuck by the spread of a grasping, money-seeking mentality that was a far cry from the ‘serve the people’ sloganeering of the pervious period, or even what passes for normal, competitive business ethics in the West.”[40]  Furthermore, there is a gross inequality of the distribution of wealth in China, and this will challenge the political stability of the country as the rich get richer and the poor get poorer.[41]

This money-hungry mentality is quite contrary to the components laid out in the “Ping Pong Model,” in two ways.  First, this shifting mentality is contrary to Chinese philosophical foundations of Confucianism, Daoism, and Buddhism.  Second, this mentality, which is causing more instability within the once very stable Chinese Communist Party, is altering our assumptions about guo qing.

Getting rich by whatever means necessary has caused the younger generations to stray from some Confucian core values.  For example, the Confucian principle of family orientation is fading.  This communal mindset seems to be diminishing in favor of an individualistic mindset of gaining more wealth for oneself.  Additionally, as the rich continue to get richer, the Chinese Communist Party is becoming less stable as frustration grows amongst China’s poor.  With an unstable government comes an unpredictable business landscape.  For example, guo qing tells us that the CCP has tight economic planning.  However, that assumption will change if the CCP becomes upended by an unstable domestic situation.

Conforming to International Business Rules

            In order to join the WTO, Chinese businesses were forced to make adjustments needed to gain a competitive advantage under international business rules.[42]  Having to adjust, the Chinese have become more aware of and have been utilizing western business practices.  This has been accomplished by the Chinese becoming increasingly exposed to international practices through studying abroad and being educated in western universities.[43]  As a result, Chinese negotiators have become more dynamic, which can be evidenced by the following three examples: (1) Western education has produced the Chinese “technocrat”; (2) Guanxi is less important than it was before; and (3) China is now characterized as a less “high context” culture.

Chinese business people, as they are getting better at communicating in English and as they continue to be educated by western business schools, are more receptive to “arms-length” negotiations, especially among technocrats, or technically competent officials.[44]  These technocrats are attaching greater importance to economic performance; so non-personal factors such as products, technology, and financing are becoming more important than personal or cultural factors like Guanxi.[45]

This leads me to my next point—that Guanxi is not as important as it was in the past.  Guanxi relies on the principle that deals grow out of relationships.[46]  Today, these relationships are still present, but not necessarily “superior” to Chinese local law.[47]  Contracts, for example, are still the basis for running a business.[48]  Guanxi is also changing because, with the insertion of western business ethics into the international community, the Chinese are becoming more cognizant of Guanxi’s negative impacts, such as Guanxi causing unfair competition, or the implications of ignoring corruption committed by someone in your Guanxi network.[49] A study in the Journal for International Business Studies found that “no support was found for the proposition that Chinese care more about relationships because those relationships, in turn, provide payoff in terms of Guanxi, favors, or the potential to be treated as an outsider if the relationship is damaged.”[50]  Thus, Guanxi may not be as important for Chinese business deals as the “Ping Pong Model” may suggest.

As stated earlier, it is widely accepted that China is characterized as a “high context culture,” which means that the culture emphasizes group interests above individual interests. However, in a 2009 study by Clyde A. Warden and Judy F. Chen, China was characterized as less “high context” than its Asian neighbors, such as Japan.[51]  With the growing presence of western business ideas in China, Chinese negotiators are increasingly accommodating western culture in their negotiations. The study showed that the Chinese respondents exhibited increased cultural accommodation when the counterpart’s culture was more distant (e.g. United States)—paying more attention to sacrificing self-interest and saving face for the other side.[52]

Although many western negotiators rely on the widely supported “Ping Pong Model” when negotiating with Chinese negotiator, it should not be the only source to rely on when studying Chinese business culture.  In fact, Chinese negotiators are learning western techniques, and hence, the Chinese business culture is evolving.  Chinese business culture, instead, should be seen as a combination of modern western ideas and traditional Chinese values.[53]

APPLYING THE “PING PONG MODEL” AND THE CHANGING CHINESE BUSINESS CULTURE TO NEGOTIATION

            So, how then do we apply what we just learned about Chinese negotiators?  Well to start, the first thing a western negotiator must recognize is that you may dealing with, on one extreme, a Chinese negotiator who believes that they are really predestined by heaven to rule above the barbarian horde, on the other extreme, a Chinese negotiator who believes the West surpassed them long ago and that western methods are genuinely better, or a Chinese negotiator that falls in the middle of these two extremes.[54]  Once the western negotiator realizes this, we can begin to analyze how to succeed in negotiating with a Chinese firm.  If negotiating with a person of traditional Chinese values, it would be wise to review the “Ping Pong Model” extensively.  If negotiating with a person who follows modern western ideas, be prepared for the Chinese negotiator to employ methods similar to your western methods.  However, you are most likely going to be in a room with several business people.  Everyone is unique in his or her own way.  Thus, they may very well all retain different negotiation tactics.  Therefore, one should be prepared to apply, not just the “Ping Pong Model” to their negotiation, but also the western negotiation tactics we, as westerners, are already familiar with, noting that you may have to use a combination of both the “Chinese” and “Western” models.

            I stress the need to be prepared for both a traditional Chinese negotiation style and a modern western negotiation style because Chinese business culture is always changing.  As Andrew Hupert states, “if the wind blows from the West, they’ll do their best to follow the conventions and role models of the US (when it comes to business).  If China is ascendant, they become super-nationalists.  (Ask an old-timer who was in Hong Kong when it was handed over from British control to China).  Both impulses are always present.”[55]  We can never predict how political and economic factors will affect someone’s mindset in the future.  We can only be prepared for both scenarios.  Moreover, there are conflicting reports on the current state of Sino-American business relations.  On the one end, the China Daily reports that Chinese firms in the US are upbeat, promoting how successful Chinese firms are there and espousing how easy it is to invest in the US.[56]  At the other end, the ChinaLawBlog.com submits that American companies are the ones adjusting to do business in China, but the Chinese companies refuse to do the same in the US.  An interviewee continues, “I am treated as suspect when I try to point out how things should be done in the United States, as though my believing there might be a better, non-Chinese way of doing something makes me anti-China.”[57]  In addition, in an article written by Maria Lai-Ling Lam, she explains that most Chinese expatriate interviewees “expect Americans to have a better understanding of the Chinese way of doing things,” and that “it’s much easier to educate the Americans than for the Chinese to change.”[58]  Given all of this, it only makes sense for the American negotiator to be educated in this subject.  One will never know what kind of negotiator he or she will be up against or what kind of environment one will find him or herself in.

Because this paper is geared towards the western negotiator, I will not address strategies for negotiating the western way.  Instead, I will provide a brief guide to applying negotiating strategies to the “Ping Pong Model.”  I will give advice in the order I laid out the “Ping Pong Model” above: addressing guo qing first, followed by religion, and then the Chinese stratagems.

To recall, Guo qing is China’s social and institutional factor.  Very generally, this means that the Chinese government is most likely involved with the Chinese enterprise you are negotiating with.  Since this is likely the case, one of the most important things the western negotiators should do is lobby before Chinese government authorities.  You will broker a successful deal with the Chinese firm if you can first show the government you are worth investing in.  You must convince the Chinese government that you are financially stable; that you have cutting-edge technologies; and that you are in it for the long haul.[59]  Additionally, part of guo qing is the recognition of the rapid change and backwardness of China, today.  Be cognizant, as mentioned previously, that the money-grabbing, nouveau-riche may utilize a more western-style, pragmatic, results-driven approach to business negotiations.[60]

The next component of the “Ping Pong Model” is religion.  Specifically, I will address how to conduct negotiations with regard to the six core values of Confucianism: moral cultivation, guanxi, family orientation, respect for seniority, pursuit of harmony/avoidance of conflict, and the preservation of “face.”

First, moral cultivation requires trust and sincerity.  Thus, trust building is essential.  Doing something like inviting a Chinese delegation to view your U.S. factories or inviting your Chinese counterparts to a concert or sporting event are appreciated ways of building trust.[61]  Also, a part of moral cultivation is the aversion to law.  Problems are better solved when you have a conversation as opposed to threatening legal action.[62]  This also applies to written contracts.  Elaborate written contracts and “aggressive, classical contracting” are considered rude and distasteful to Confucian ethical sensibilities.[63]

Second, Guanxi, despite recent trends, is still an important cultural influence on Chinese society.  Guanxi is this idea of having close relationships and connections with the people you do business with.  To do this, you continue the trust building, as set forth in the paragraph above.  You will get deals from relationships in China, rather than getting relationships out of deals.[64]  Moreover, continue to convince your Chinese partners of your goodwill and good intent, and you should be golden.[65]  Guanxi is also a concept of reciprocity.  The Chinese will expect you to make concession for concession.[66]  So, do not enter a negotiation without being prepared to concede something.

Third, the Chinese have a group/family orientation.  Negotiating there is a team sport.  There will be any associates around the negotiating table.  Do not be intimidated.  Simply be prepared for a large group of constituents.  The key, however, is to identify the real decision maker.[67]  This family orientation also applies to the Chinese way of thinking.  While westerners like to break everything down into individual elements and discuss them one at a time, Chinese people jump all over the place and ask many questions.[68]  It is their way discussing the big picture all at once.

Fourth, the Chinese have a great respect for their seniors and for hierarchy.  Americans tend to be adversarial and rude in negotiations.[69]  You must check this attitude at the door.  The senior business associates will not take kindly to this attitude.  Be polite and respectful.

Fifth is the concept of the pursuit of harmony and avoidance of conflict.  This also relates to Americans being adversarial.  Having a direct approach, to the Chinese, damages relationships.[70]  Therefore, when confronting conflicts, the Chinese seek to avoid the conflict in order to seek continued harmony.  Western negotiation styles will appear confrontational, competitive, and combative, which does not fare well amongst Chinese negotiators.[71]

Last is the preservation of “face.”  This is a concept of preventing embarrassment or loss of reputation.  By embarrassing a Chinese businessperson or tainting their reputation, would result in the “loss of face.”  This means westerns should avoid “constructive criticism.”[72]  Also, try and avoid saying “no” as this, too, can embarrass your Chinese counterpart.[73]  Furthermore, the display of negative emotions may be considered a “loss of face,” so keep a poker face.[74]

One last philosophical foundation in China is the need to be thrifty.  This means that negotiating a price will be a delicate subject.  One cannot ask for too high a price because it will insult the Chinese on the other side of the table.  Also note that because the Chinese are thrifty, they will most likely leave more wiggle room in price negotiations.  That means, come with multiple offers.[75]

The final component of the “Ping Pong Model” is Sun Tzu’s 36 Chinese stratagems.  Instead of going through each stratagem, one by one, I will provide a general analysis of the entire concept of these stratagems.  As you may recall, the Chinese stratagems are strategies for gaining material and psychological advantage over one’s adversary.[76]  If confronted with a negotiator using these stratagems, it is important to be firm on your offer and build credibility.[77]  Do not be fooled by their attempts to woo you with flattery.  Recognize these are just tactics and stay strong.  To leverage yourself over the Chinese party, you can use techniques such as “being indifferent” because indifference can preserve your leverage in any relationship.[78]  Another tactic would be to build relationships with other Chinese companies, so that if you need to walk away from a disagreeable company, you can fall back onto another company.  This would enable you to be self-sufficient.[79]

These suggestions are in no way exhaustive.  This paper is simply intended to be a brief guide on what a western negotiator can expect when negotiating with a Chinese entity, and what strategies or techniques can be employed in order to negotiate successfully in China.  The Chinese business culture I described is also not meant to be universally applicable to all the Chinese people.  Obviously, the Chinese are not all the same.  Like any other nation, there are people with many different types of personalities and character traits.[80]   There is no right or wrong way to negotiate in China.  It is all about studying your Chinese counterpart and determining which negotiation style or styles he or she will apply.  Your Chinese counterpart may be an older generation who relies on traditional Chinese values.  Your Chinese client might be of the younger generation and would prefer do away with the Chinese way of doing things.  This task of determining the proper method of approaching a Chinese negotiator is difficult but not impossible.

[1] Sun Tzu translated and annotated by Lionel Giles (2005). The Art of War by Sun Tzu – Special Edition. El Paso Norte Press.

[2] Andrew Hupert (2012). “Negotiating to Win in China,” available at <http://www.chinesenegotiation.com/2012/10 /negotiating-to-win-in-china-part-3-sources-of-power/>.

[3] Tony Fang (1999). Chinese Business Negotiating Style. Sage: Thousand Oaks, CA.

[4] Pervez Ghauri & Tony Fang (2001). “Negotiating with the Chinese: A Socio-Cultural Analysis,” Journal of World Business 303-325 (Vol. 36, Issue 3).

[5] Asuman Akgunes & Robert Culpepper (2012). “Negotiations Between Chinese and Americans: Examining the Cultural Context and Salient Factors,” Journal of International Management Studies 191-200 (Vol. 7).

[6] Ghauri & Fang, supra note 4, at 308.

[7] James K. Sebenius & Cheng Qian (2008). “Cultural Notes on Chinese Negotiating Behavior,” Harvard Business School Working Paper Series 1-10. available at <http://www.hbs.edu/faculty/Publication%20Files/09-076.pdf>.

[8] Ghauri & Fang, supra note 4, at 308.

[9] Id. (this citation is for the entire paragraph from note 8 onwards).

[10] Sebenius & Cheng, supra note 7, at 2.

[11] Akgunes & Culpepper, supra note 5, at 195.

[12] Ghauri & Fang, supra note 4, at 309.

[13] Id.

[14] E. Allen Buttery & T.K.P. Leung (1998). “The Difference between Chinese and Western Negotiations,” European Journal of Marketing 379-389.

[15] Akgunes & Culpepper, supra note 5, at 194.

[16] Id.

[17] John L. Graham & N. Mark Lam (2003). “The Chinese Negotiation,” Harvard Business Review 82-91.

[18] Id.

[19] Id.

[20] Akgunes & Culpepper, supra note 5, at 194 (this footnote is for the entire paragraph).

[21] Ghauri & Fang, supra note 4, at 310.

[22] Ghuari & Fang, supra note 4, at 312.

[23] Sebenius & Cheng, supra note 7, at 5.

[24] Chiao Chen (1981). “Chinese Strategic Behaviours: A Preliminary List,” Proceedings of the International Conference on Sinology. Academia Sinica: Taipei 429-440.

[25] Ghuari & Fang, supra note 4, at 312.

[26] Id. at 311-312.

[27] Id. at 312.

[28] Cheryl Rivers & Roger Volkema (2012). “East-West Differences in ‘Tricky’ Tactics: A Comparison of the Tactical Preferences of Chinese and Australian Negotiatiors,” Journal of Business Ethics.

[29] Sebenius & Cheng, supra note 7, at 5.

[30] Id.

[31] Ghuari & Fang, supra note 4, at 312.

[32] Id.

[33] Sebenius & Cheng, supra note 7, at 7.

[34] F. Peter Phillips (2009). “Commercial Mediation in China: Challenge of Shifting Paradigms,” Contemporary Issues in International Arbitration and Mediation: The 2008 Fordham Papers 321-331.

[35] Id. at 329.

[36] Sebenius & Cheng, supra note 7, at 7.

[37] Id.

[38] Id. at 8.

[39] Id.

[40] J. Frankenstein (1993). “Towards the Year 2000 Some Strategic Speculations About International Business in China,” International Business in China 1-28, Routledge: London.

[41] Phillips, supra note 34, at 330.

[42] Sebenius & Cheng, supra note 7, at 8.

[43] Id.

[44] Id.

[45] Fang, supra note 3, at 100.

[46] Heidi von Weltzien Hoivik (2007). “East Meets West: Tacit Messages about Business Ethics in Stories Told by Chinese Managers,” Journal of Business Ethics (Vol. 74) 457-469.

[47] Id. at 461.

[48] Id.

[49] Id. at 463.

[50] Ray Friedman, Shu-Cheng Chi & Leigh Ann Liu (2006). “An Expectancy Model of Chinese-American Differences in Conflict-Avoiding,” Journal of International Business Studies (Vol. 37) 76-91.

[51] Clyde A. Warden & Judy F. Chen (2009). “Chinese Negotiators’ Subjective Variations in Intercultural Negotiations,” Journal of Business Ethics 529-537.

[52] Id. at 529.

[53] Sebenius & Cheng, supra note 7, at 9.

[54] Hupert, supra note 2.

[55] Id.

[56] Chen Weihua & Li Jiabao (Feb. 23, 2013). “Chinese Firms in US Upbeat,” China Daily, available at <http://www .chinadaily.com.cn/cndy/2013-02/23/content_16250226.htm>.

[57] Dan Harris (May 23, 2012). “Will Chinese Firms Ever be ‘International’?,” China Law Blog, available at <http:// www.chinalawblog.com/2012/05/will-chinese-companies-ever-be-international.html>.

[58] Maria Lai-Ling Lam (2000). Working with Chinese Expatriates in Business Negotiations: Portraits, Issues, and Applications. Quorum Books: Westport, CT.

[59] Ghuari & Fang, supra note 4, at 312. (footnote is for the paragraph)

[60] Sebenius & Cheng, supra note 7, at 8.

[61] Ghuari & Fang, supra note 4, at 314. (footnote is for the paragraph)

[62] Akgunes & Culpepper, supra note 5, at 198.

[63] Rashmi Prasad & Yong Cao (2012). “Improving Negotiation Outcomes between American and Chinese Partners: A Framwork for Practice,” Journal of Applied Business Research (Vol. 28) 1-8.

[64] Hoivik, supra note 46, at 460.

[65] Prasad & Cao, supra note 63, at 5.

[66] Akgunes & Culpepper, supra note 5, at 197.

[67] Jack Perkowski (2011). “Negotiating in China: 10 Rules for Success,” Forbes.com, available at <http://www.for bes.com/sites/jackperkowski/2011/03/28/negotiating-in-china-10-rules-for-success/>.

[68] Akgunes & Culpepper, supra note 5, at 197.

[69] Hupert, supra note 2.

[70] Friedman, Chi & Liu, supra note 50, at 78.

[71] Prasad & Cao, supra note 64, at 4.

[72] Sebenius & Cheng, supra note 7, at 4.

[73] Akgunes & Culpepper, supra note 5, at 199.

[74] Prasad & Cao, supra note 64, at 4.

[75] Akgunes & Culpepper, supra note 5, at 198. (footnote for entire paragraph)

[76] Ghuari & Fang, supra note 4, at 310.

[77] Ghuari & Fang, supra note 4, at 316.

[78] Perkowski, supra note 67.

[79] Hupert, supra note 2.

[80] Duncan Freeman (1994). The Life and Death of a Joint Venture in China. Asia Law and Practice Ltd.: Hong Kong. at 10.

Once again I have had the privilege of teaching the excellent students at New York Law School in International Commercial Dispute Resolution, and once again it has resulted in some superb pieces of written research.  Here is the work of Somya Kaushik, who will be graduating in a few weeks and, clearly, has a promising future in front of her.

 

Arbitration in India: The Internal Challenges, India as an International Arbitration Destination, and the Risk Analysis for Foreign Investors

Introduction:

In this research paper I will analyze and comment on India’s arbitration and jurisprudence from pre-colonization to post-colonization in 1947. In Part I, I will briefly discuss the goal and purpose of arbitration, for those who are unfamiliar with them, and I will delve into the history of India’s arbitration, including the major legislative acts and arbitration institutions. In Part II I will analyze and comment on the challenges that arbitration in India faces, as well as create. This section will illustrate some of the key issues in Indian arbitration, such as time efficiency, costliness, advantages and disadvantages of ad hoc arbitration in India, difficulties in award enforcements, and issues with public policy as a ground for appeal. Part III will move on to discuss India as an international arbitration destination, considering the strengths and weaknesses that come with Indian arbitration. Lastly, Part IV will provide a risk analysis guide for foreign investors seeking to invest in India’s market. This section will bring awareness to certain issues that may be easily overlooked regarding the judicial process in India and it will also consider the advantages of arbitration in India for foreign investors.

 Part I: Introduction to Arbitration and Arbitration in India

What is International Arbitration?

As defined by Michael McIlwrath in International Arbitration and Mediation: A Practical Guide, “arbitration is a process by which parties agree to the binding resolution of their disputes by adjudicators, known as arbitrators, who are selected by the parties, either directly or indirectly via a mechanism chosen by the parties.”

Arbitration is different from litigation because the arbitrators are chosen by the parties, depending on the rules or the type of arbitration used (ad hoc or institutional). Further, arbitration is a product of the parties in dispute and is agreed upon, usually, through an arbitration clause in an agreement between the parties. Lastly, arbitration awards are binding, unlike other forms of alternative dispute resolutions (ADR), such as mediation. The New York Convention of 1958, which constitutes 140 nations, facilitates the enforcement of international arbitral awards across borders. One of the signatory nations to the New York Convention is India.

What are the Main Arbitration Institutions in India?

            India’s main arbitration institutes consists of The Chambers of Commerce, which is organized by either a region or a trade, the Indian Council of Arbitration (ICA), The Federation of Indian Chambers of Commerce and Industry (FICCI), The International Centre for Alternative Dispute Resolution (ICADR), and The Indian Institute of Arbitration and Mediation (IIAM). A survey conducted by Ernst & Young showed that 34% of respondents preferred the London Court of International Arbitration (LCIA), India for their Indian arbitration institute.[1]

            These institutes help facilitate the arbitration process throughout the country for both nationals and corporations. Having these arbitration institutes in India has helped the nation build its foreign investor security, allowing foreign investors to feel safe and protected when investing in the Indian market. Despite having several developed arbitration institutions in India, the option for parties to choose ad hoc arbitration is quiet common. Ad hoc arbitration differs vastly from institutionalized arbitration, as discussed in Part II.

The History of Arbitration in India

            In the 1770s and 1780s, India enacted the Bengal Regulation Act 1772 and 1781, which provided the disputing parties with an option to submit the dispute to an arbitrator. The arbitrator would be chosen after the parties mutually agreed, a procedure still used in arbitration around the world today. Further, the arbitration awards would be binding on both parties. This pre-colonial arbitration legislation illustrates that arbitration in India has been prevalent and a legal option for more than a hundred years.[2]

            In 1940, India enacted the Arbitration Act of 1940, which only dealt with domestic arbitration. Under the 1940 Act, judicial intervention was required in all three stages of arbitration: before referring the dispute to the arbitral tribunal, during the proceedings, and after the award was passed. The judicial court was required to determine whether a dispute existed and whether it could be resolved through arbitration. Further, before the arbitral award could be enforced, it was required to be made the rule of court.[3]

            In 1996 India’s legislature enacted the Arbitration and Conciliation Act of 1996. The 1996 Act was modeled after the UNCITRAL Model Law. As Ashok Bhan stated in his inaugural speech during the “Dispute Prevention and Dispute Resolution” conference in India in 2005, the 1996 Acts’ “primary purpose was to encourage arbitration as a cost-effective and quick mechanism for the settlement of commercial disputes.” The Act is broken down into two parts: Part I of the Act governs domestic and international commercial arbitration that takes place in India and Part II governs foreign arbitration that is conducted outside of India. The enforcement of foreign arbitral awards in India is highly influenced and guided by the New York Convention.[4] The 1996 Act, Section 5 particularly, refuses judicial intervention in arbitration proceedings, diametrically opposed to the 1940 Act.

            Up until the 1980s, India “still saw arbitration as a foreign judicial institution imposed on them.”[5] This perception of arbitration as a foreign imposition may have been, and still may be, why India’s judicial courts are hesitant to give absolute arbitral freedom. Thus, judicial intervention in arbitration proceedings may be a way for India to protect its legal system from a “legal colonization.” Although the 1996 Act has prohibited judicial intervention, it is still evident and prevalent in both domestic and foreign arbitration in India today. However, India has slowly developed its arbitration legislation and has attempted to strengthen its arbitration practice with minimal judicial intervention, as I will discuss in greater detail later. Regardless of the improvements India has seen in its arbitration practice, there are significant challenges and issues that come with arbitration in India.

 Part II: Challenges to International Arbitration in India

Ad Hoc Arbitration in India versus Institutional Arbitration in India

            In Ad hoc arbitration there is no arbitration institution to govern the proceedings, hearings and procedures. Ad Hoc arbitration allows the disputing parties to create their own agreed upon rules. These rules include, the process of picking arbitrators, the process of adjudicating during arbitration, the type of award sought, the rule of law used during the arbitration and the venue for the arbitration. There are no time limits imposed by an institution in order to speed up the process and the fees are unregulated. Further, there is no specialized panel to choose arbitrators from. There are no removal sanctions for non-compliance with the agreed upon rules, therefore issues of candor and ethics will often arise. Further, there are no substitute arbitrators, therefore, if necessary, the parties must agree on a newly appointed arbitrator in the middle of the arbitration, increasing the time drastically. Finally, there is no pre-award scrutiny. Therefore, appeals are likely.

            On the other hand, in institutional arbitrations the chosen institution sets forth the rules that will govern the arbitration. The institution provides an arbitrator panel for the parties to choose from (allowing for timely proceedings), the institution has a facility for the hearings (less costly than finding an expensive venue in ad hoc), the fees are regulated, there are removal sanctions for non-compliance, there is a pre-award scrutiny (limiting appeals and time consuming procedures), and substitute arbitrators are available (cost and time efficient service).

            Given these major differences, Ernst & Young’s survey recorded that 24% of the respondents have undertaken Indian ad hoc arbitration.

Major Hurdles in Indian Arbitration

            Time and Judicial Intervention: Arbitration in India is known to be a timely and lengthy alternative to litigation. The backlog of cases in the Indian court system does not help the arbitration practice, despite their “independence” under Section 5 of the Arbitration and Conciliation Act of 1996. Judicial intervention prolongs the arbitration proceeding, especially because Indian courts are looked to for adjournments during the proceedings. Enforcements of awards and appeals to an award are also extremely time consuming and lengthy processes that deter parties from using arbitration. Both enforcements and appeals will be discussed later in this section. According to Ernst & Young’s study, 50% of respondents believe that Indian arbitration does not provide timely resolutions.

            Cost: Cost effectiveness will vary depending on the dispute at hand and/or the type of arbitration used (ad hoc or institutional). In both types of arbitration, varying in degree, arbitrators and party representatives will be paid high fees. In ad hoc arbitration, the parties will have to pay for expensive venues, often times expensive hotels. In institutional arbitration, the parties will have to pay administrative fees for administering the arbitration. In many countries, arbitration is a cost-effective alternative to litigation. However, in India, arbitration is costly because of the lengthy arbitration practice as described above. Ernst & Young’s survey identified that 46% of respondents believe that Indian arbitration is not cost effective.

            Enforcement: Enforcement of foreign arbitral awards in India are largely guided by the New York Convention of 1958, which is incorporated in parts I and II of the 1996 Act. Domestic awards are guided by §36 of the 1996 Act, which states that “an arbitral award is enforceable as a decree of the court, and could be executed like a decree in a suit under the provisions of the Civil Procedure Code, 1908.”[6] In India, an enforcement of an award that would usually take six months in an international institution, may take up to eight years.[7] Further, “a New York Convention state may also refuse to recognize or enforce arbitral awards if, according to its own national law, the subject matter of the dispute is not capable of settlement by arbitration, or where such recognition or enforcement is contrary to the individual state’s notions of public policy.”[8] “Public policy” has become a broad and ever-expanding term in Indian arbitration, predominantly seen in regard to appeals. Enforcement delays are a big hurdle in Indian arbitration, deterring foreign investors from engaging in Indian companies.

            Appeals: Under Section 34(2)(b)(ii) of the 1996 Act, a party to an arbitration may appeal an award when: 1) the party is under some incapacity, 2) the arbitration agreement is invalid, 3) the party is unable to present the case and is not given proper notice 4) the award is beyond the terms of reference and 5) the award is in conflict with public policy. The term “public policy” has yet to be defined by Indian courts, creating a subjective ground for arbitral appeals, determined on a case-by-case basis. This increases the length and cost of arbitration. It also lessens the predictability of outcomes, failing to give foreign investors a sense of security in the Indian arbitration process.

            In Renusagar Power Co. v. General Electric Co., the Court held that an arbitral award is contrary to the public policy of India if it is contrary to: (1) a fundamental policy of Indian law, (2) the interest of India, or (3) justice or morality.[9] This holding broadens the scope of the term “public policy” and does not help arbitrators and officials in interpreting the legislation, creating room for unpredictability and inconsistent precedent. The subjectivity of the term allows for every party to attempt to appeal on the grounds of “public policy,” adding to the already backlogged court system.

            All of these major hurdles in Indian arbitration have led the international community to believe that India is not a preferred international arbitration destination. However, India is continuously attempting to overcome these hurdles and follow legislation accordingly, without any loopholes and with less subjectivity.

 Part III: India as an International Arbitration Destination

India is Not a Preferred International Arbitration Destination

            Arbitration is generally seen as an “alternative dispute resolution,” one that is considered to be more cost-effective and time-effective than litigation. As discussed in Part II, India is not a preferred international arbitration destination because of time, extreme judicial intervention, costliness, difficulty in enforcing both domestic and international awards, and the subjective grounds for appeals based on public policy. These are major issues that deter foreign investors and parties from choosing India as an international arbitration destination.

            Aside from the hurdles mentioned in Part II, India’s arbitration has also circumvented the rules established by legislature, creating an unpredictable process for parties. Section 5 of the 1996 Act specifically prohibits judicial intervention in Indian arbitration. Despite this legislation, Indian courts have repeatedly intervened with arbitrations, from adjournments to appeals. This circumvention around the proscribed rule of law has and will rightfully deter parties from choosing India as an arbitration destination. Research and preparation is required for arbitrations. However, if the courts are going to circumvent the explicit rule stated in the legislation, no one will be attracted to this type of arbitration. Unfortunately the prohibited judicial intervention in Indian arbitration has “come to constitute a distinct branch of law, i.e. the ‘law of arbitration’. This trend clearly frustrates the foundational aim of providing for arbitration clauses – which is to ensure speedy and efficient dispute-resolution in the commercial context.”[10]

Nevertheless, India has the potential to become an international arbitration destination if these issues can be regulated.

Potential for India to Become a Preferred International Arbitration Destination

            India has attempted to curtail the major hurdles to its arbitration process by creating new systems and divisions of arbitration. One way India has tried to improve the quality of its arbitration process is through its “fast-track” arbitration. Fast-track arbitration applies only to disputes regarding trademark, intellectual property, construction, and licensing contract issues. It is a time-bound arbitration with stricter procedural rules, allowing for time efficient and cost effective arbitration. The fast-track arbitration provides parties with predictability and time boundaries, sometimes requiring an award to be issued within six months. If India could implement the fast-track arbitration rules and time limit to regular commercial arbitrations in India, many more parties would comfortably choose Indian arbitration.

Suggested Ways to Make Indian Arbitration Preferred

            In India, ad hoc arbitration is commonly used. Ad hoc arbitration, as discussed earlier, is an inefficient and costly method of resolving international disputes. The common use of ad hoc arbitration allows for errors in justice, failure in procedures and unpredictability of outcome. However, if the Indian government invests in the development of institutional arbitration in India, more arbitration institutions can be set up. This will help regulate the arbitration process, allow more people to use institutional arbitration, increase predictability of outcomes, regulate judicial intervention and make arbitration cost effective and time efficient. This has already begun “with the recent launch of the Delhi High Court Arbitration Centre (DAC) in November 2009.”[11] The more established arbitration institutions there are, the more likely India will become a preferred international arbitration destination.

            More institutions will also allow for stricter sanctions for non-compliance with arbitral rules. This will help create a credible arbitration practice and allow for ethical issues to be resolved fairly and efficiently. Stricter sanctions for non-compliance should be implemented regardless of the government’s investment in arbitration institutions. Additionally, strict restrictions on judicial intervention should be upheld. As noted before, section 5 of the 1996 Act has repeatedly been circumvented, undermining the legal process and the legislation of India as a nation.

            Additionally, more specialized sectors for arbitrations will increase the overall efficiency associated with arbitration. Currently, India’s arbitration sectors include construction disputes, maritime activities and goods and services trade. However, if India branches out to create more specialized sectors, such as intellectual property, corporate law, and consumer law, arbitration in India would be more effective and attractive.  

            Lastly, India should consider amending the 1996 Act in order to accommodate foreign and domestic arbitrations separately. Currently, the 1996 Act applies the Model Law to both foreign and domestic arbitration and “applying the Model Law to both domestic and international arbitrations has created confusion and disorder.”[12] Further, the “UNCITRAL Model Law was not designed for the ad hoc domestic arbitrations that are prevalent in India and because the dual regimes invite conflation of jurisprudence between Parts I and II of the Act.”[13]

            If Indian legislation and the government can implement such changes as suggested, India has the potential to become a preferred international arbitration destination.

 Part IV: Risk Analysis Guide for Foreign Investors

India as a Foreign Investment Destination

            The New Industrial Policy (NIP) fundamentally changed foreign investments in India. The NIP relaxed regulations on foreign investments in India, provided tax incentives for foreign investors and privatized many sectors of the Indian economy.[14] The effects of the NIP are illustrated starting from 1991 where “foreign investment in India totaled approximately $100 million” and “by 2006, foreign investment totaled over $15.6 billion and continues to increase steadily.”[15] This steadfast growth and desire to invest in the Indian market has increased commercial transactions, inevitably increasing commercial disputes. Thus, foreign investors should be made aware of the risks associated with investing in the Indian market, not only economically but legally as well.

Foreign Investor Guide to the Loopholes and Benefits of Indian Arbitration

            1. Be Aware of the “Spirit” of the Law: In Bhatia International v. Bulk Trading S.A., “the bench of three judges relied on what they described as the “spirit” of the 1996 Act when granting an interim measure of protection to the foreign party, invoking Section 9 in Part I (interim measures of protection by the court in pending arbitrations)—even though Part I did not apply, and was not intended to apply to foreign arbitrations.”[16] As discussed above, Section 5, restricting judicial intervention, has also been highly disregarded. Foreign investors should be aware of this “spirit of the law” doctrine that the courts use because it provides for unpredictability of the outcome. Further, the unpredictability of outcome may lead to inconsistent arbitration precedent. Be aware that judicial intervention is possible and other sections may be read differently according to the “spirit of the law.” This is something foreign investors should highly consider before entering into an arbitration agreement.

            2. Be Aware of the “Public Policy” Ground for Appeal: As discussed above, public policy has become a broader and more subjective term than before. This can be used to the foreign investors advantage, if they want to appeal a case. However, it can also be something the foreign investor has close to no control over if the opposing side chooses to use this for an appeal. Further, the what lies within “public policy” will constantly be changing with time. Therefore, long-time investments should be carefully assessed. This is a risk that the investor will have to consider before entering into any arbitration agreement. This is also something the parties will not be able to contract around.

            3. Be Aware of the Lengthy Award Enforcement: As discussed above in detail, both domestic and foreign awards are guided by different legislation in India. Enforcement of awards can be lengthy, sometimes taking years to enforce. The “Venture Global holding allows parties to ask an Indian court to set aside a foreign arbitral award, in addition to the option to request that the Indian court refuse to enforce the award.”[17] This can be used in favor of the foreign investor as well as the opposing Indian party.

            4. Be Aware of the Indian Courts’ View of Domestic Awards: A “peculiar feature of a domestic award in India is that its finality is not respected by the parties nor looked upon too seriously by courts: for over fifty years (from 1940 to 1996) courts in India had become accustomed to supervising arbitral awards, and setting them aside for errors apparent on their face.”[18] This is important because after years of arbitration, an award can be set aside easily. Further, judicial intervention is still highly prevalent in Indian arbitration, even over appeals and enforcement judgments. This is important for the foreign investor because large investments may be at stake and large awards should be enforced if legally valid.

            5.  Know that Arbitral Bias is Uncommon but Not Gone: “The foreign party loses or wins as often as the local. In fact, statistics show that in the last fifty-five years, amongst the important arbitration cases that ultimately reached the Supreme Court of India, foreign parties have succeeded over Indian parties in a preponderating majority of cases.”[19] This is important for the foreign investor to know because bias is possible in ad hoc arbitrations as well as institutional arbitrations. This favors investing in India and can be an advantage for the foreign investor. However, bias can never truly be eliminated.

            6. Know that Indian Arbitration is Designed to Attract Foreign Investors: Since the 1990s Indian arbitration has been modeled to increase and attract foreign investors, possibly creating a bias toward foreign investors. This is important to remember because, although the foreign party loses or wins as often as the local party, there is a need for the developing nation to attract foreign investors. This shift can be beneficial to the foreign investor. Additionally, “there is a point at which policies become so favorable to foreign investors as to sacrifice fairness to the party with inferior bargaining power in contract negotiations.” [20] However, as India’s market is developing rapidly, the desperate need for foreign investors, as seen in the 1990s, may downsize and narrow its focus on certain sectors. Therefore, it would be beneficial to invest in the emerging Indian markets, where foreign investors are needed.

            7. Know That There are Increase Legal Costs and Loss of Finality: “Increased legal costs and loss of finality associated with India’s arbitration system are factored into investors’ negotiated contracts with Indian parties as a risk premium, which may be a price that India is willing to pay in exchange for assurance that fairness and justice cannot be completely contracted around through an arbitration agreement.”[21] Legal costs are extremely high in Indian arbitration, as noted above, and may not be a better alternative to a negotiated settlement or litigation. This factor is important to realize before entering into an arbitration agreement.

 Part V: Conclusion:

            Having discussed the history of India’s arbitration practice, ranging from the 1770s to the 1990s, it is evident that arbitration is a common alternative dispute resolution in India. However, Indian arbitration has come across major issues stemming from post-colonial fears of foreign imposition, judicial intervention, and the desperate need for foreign investors during its economic boom in the 1990s. These major hurdles have created monetary and timely issues for international parties, keeping India from being a preferred international arbitration destination. Further, unpredictability and inconsistent precedent have undermined the arbitration process in India.

            Nonetheless, India has continuously tried to amend its legislation regarding arbitration to meet the nations’ needs and its growing market. If India implements these changes to regulate these major issues, it can be a preferred international arbitration destination. Though such changes are already underway and may take years to fully develop, they are worth the effort and time. These changes will create more interest in India as a country, both economically and financially. Further, it will increase India’s legal credibility, something that has always been under strict scrutiny and criticism.

            Foreign investors face heavy risks in investing in the Indian market. But as I have suggested, there are certain issues that can weigh in the foreign investors favor. Nonetheless, it is important for foreign investors to remember that India’s arbitration practice is continuously developing based on the developing economy and market. Foreign investors should look to emerging markets and sectors, giving investors the greatest chance of a favorable outcome. As for efficiency, investors should look to highly established sectors in India, giving India the benefit of efficiency and experience. Overall, India’s market will always attract foreign investors. It is this risk analysis that will help analyze when to invest, why they should invest and how much to invest.

 

 

[1] Arpinder, Singh. Ernst & Young Survey. Changing Face of Arbitration in India: A study by Fraud Investigation and Dispute Services. (2011), available at http://WWW.EY.COM/PUBLICATION/VWLUASSETS/CHANGING_FACE_OF_ARBITRATION_IN_INDIA/$FILE/CHANGING_FACE_OF_ARBITRATION_IN_INDIA.PDF

[2]Krishna, Sarma et al., Development and Practice of Arbitration in India—Has it Evolved as an Effective Legal Institution (Stanford Ctr. on Democracy, Dev., and the Rule of Law, Working Paper No. 103, 2009), available at http://IIS-DB.STANFORD.EDU/PUBS/22693/NO_103_SARMA_INDIA_ARBITRATION_INDIA_509.PDF

[3] Id. at 3

[4]  Fali S. Nariman, India and International Arbitration, 41 Geo. Wash. Int’l. L. Rev. 372 (2009).

[5] Id. at 368

[6] supra, Krishna, Sarma et al., at 21

[7] supra, Arpinder, Singh at 12

[8] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3

[9] Renusagar Power Co. v. General Electric Co., (1994) 1S.C.R.22 (India).

[10] supra, Krishna, Sarma et al., at 34

[11]Amelia C. Rendeiro, Indian Arbitration and “Public Policy,” 89 Tex. L. Rev. 726 (2011).

[12] supra, Krishna, Sarma et al., at 378

[13] Law Comm’n of India, One Hundred and Seventy-Sixth Report on the Arbitration and Conciliation (Amendment) Bill, 2001, at 2 (2001).

[14] supra, Amelia C. Rendeiro, at 701

[15] Id. at 702

[16] supra, Krishna, Sarma et al., at 375

[17] supra, Amelia C. Renderio, at 721

[18] supra, Krishna, Sarma et al., 378

[19] Id. at 376

[20]  supra, Amelia C. Renderio, at 706

[21] Id. at 708

Perhaps the single least recognized, most effective strategy for managing streams of commercial disputes is early intervention.  The bundle of skills implicated by this strategy include Planned Early Negotiation, Early Case Assessment, Risk Analysis, and Decision Tree Analysis.  But the objective of all of these tools is the same:  To place the decision-maker within the client in a position to make an informed choice on how the matter will proceed, driven by business — not legal – objectives.

The ABA Dispute Resolution Section recently hosted a Task Force on Planned Early Negotiation, chaired by Prof. John Lande.  More recently, the Dispute Resolution Committee of the ABA Business Law Section offered a trenchant panel of experts on the topic, headed by Duff & Phelps’ John Levitske.  Much wisdom was offered.

Kathy Bryan, President of CPR Institute and former head of litigation for Motorola, conceded at the outset that it was easier for in-house counsel to perform an Early Case Assessment than for outside counsel to do so.  At the very opening of her remarks she reminded us that business, not legal, interests fuel the management and inform the outcome of business disputes — a theme to which many spoeakers reverted over the course of the discussion.  Because the dispute itself is not profitable to the company, but rather the outcome of the dispute, then reducing transaction costs, defining the risk of unknowns, and reaching an early and valuable outcome are of premium importance to business dispute managers.  She cited abundant evidence that early outcomes not only are cheaper than later ones, but produce better commercial outcomes.

Bryan offered a ten-step process by way of a template of managers:

1.  Gather information

2.  Review the facts giving rise to the dispute

3.  Raise the business interests immediately and define a successful outcome in business terms

4.  Perform the same analysis from the counterparty’s perspective

5.  Perform risk management and decision tree analysis

6.  Perform a legal analysis

7.  Determine the cost/benefit of best, worst and likely outcomes

8.  Set a settlement value

9.  Create a preliminary litigation plan

10.  Devise a mechanism for feedback and modification of the analysis over time

Ben Picker reluctantly offered that, based on his years of experience helping parties settle lawsuits, litigators prefer a later closure and clients prefer an earlier one.  Business relationships are continually negotiated, so clients are not unfamiliar with the process of negotiating problems or conflicts.  The dispute is “owned” by the business person at first, and slowly gets taken over by the lawyer; the result is that business objectives often get more and more remote.  As time passes positions become fixed, resources get invested, and the effects of cognitive dissonace become more pronounced, with parties and counsel increasingly unwilling — even unable — to entertain data that is inconsistent with their (by this time well-formed) opinions and conclusions.

Jim McGuire gave a stirring talk on his decision to develop a practice as settlement counsel.  He said he just stopped litigating and spent two years or so studying why, how and when disputes settled, in the hope of being the best at settling them.  And, by cracky, he is.  His materials distributed at the session are available on the ABA Business Law website and are superb.

David Burt, in-house counsel at E.I. DuPont, reflected many of the themes of the other speakers.  He spoke of what he has experienced as the “Golden Hour,”  when the client comes to his office and explains a prpoblem that he thinks may be headed for formal litigation.  During this conversation, said Burt, the client will describe a business deal, or an engineering joint venture, or a rocky business relationship, with a narrative cogency that will never again be duplicated.  One verifies the details with others promptly, but it needs to be done early.  Later, the story is tinged with self-protection, or becomes stale, or is couched in a particular way.  At the early “Golden Hour,” the lawyer gets the best chance to understand what the business problem really is, and to serve the client.

The materials (Item #67) and the audio of the panel (Item #68) can be found here.

At the recent ABA Business Law Section Meeting in Washington, the Dispute Resolution Committee offered an interesting program titled “Who Gets What?”  The panel discussed how one designs compensation schemes that address the needs of victims of mass disasters.  Some of these events might be natural (i.e., storms) and others man-made (i.e. bombings, mass killings, environmental disasters), but the design of victim compensation procedures seems to be similar regardless of the nature of the incident giving rise to it.

The speakers were Kenneth Feinberg and Deborah Greenspan.

The speakers, who have vast experience both in designing and implementing these projects, define four types of victim compensation schemes:

1.  The legal umbrella — class actions in which a settlement fund is established and funded, and a process is created to distribute the funds to the class.  Example: Agent Orange.

2.  The non-judicial but nevertheless public fund created by act of the legislature.  A no-fault statutory program which takes the place of the legal tort system and compensates injured victims either with or without a “cap” on total compensation paid, but requiring waiver of judicial action.  Example: September 11 Victims Compensation Fund

2a.  The non-judicial fund that is privately established, and also offering compensation without the finding of legal liability.  A voluntary claims program that is implemented by an administrator independent of the entity establishing the fund, but requiring that recipients waive judicial action.  Example:  BP oil spill fund.

3.  Private gifts that are amalgamated into a pools of charitable funds without any legal ramification of either the party liable or the party receiving compensation.  Example: Virginia Tech, Newtown CT.

4.  Compensation schemes that are designed to accelerate, but not replace or enhance, existing compensation processes.  Claims facilities that are designed to get the right money to the right people faster than might otherwise take place.  Example: programs established by private insurance companies in the wake of Katrina and Sandy.

The panel pointed out that numbers 1, 3 and 4 were not controversial.  And in category 2, only two instances have arisen: September 11 and the BP oil spill.  These two gestures were prompted by patriotism, by sentiment, by political pressure or by private reputational interests, but don’t raise a serious challenge to conventional tort systems.  Why victims of the Pentagon in 9/11 were compensated while victims of the Oklahoma City bombing were not, or why the Gulf Oil Spill victims were compensated but the Exxon Valdiz victims were not, is a proper subject for political science, suggested the panel, but not for law.

In designing any of these types of compensation schemes, the questions raised are six:

• Who is eligible for compensation and who is not?
• How is the extent of compensible injury to be determined?
• What proofs of compensible injury will be required?
• What process will be adopted so that each claimant is treated in a uniform, fair and equitable manner, with an opportunity to present proofs and to impeach evidence?
• What pool of money is to be distributed? (In the original 9/11 Fund, Feinberg had no limit at all.  He could give away as much money as he thought appropriate.  In the second stage of that fund, Greenspan has a limited and capped amount that may not be exceeded in distributions to injured first-responders and others whose injuries were latent.)
• What waiver or release will be sought from those who accept compensation through the fund?

Both Greenspan and Feinberg regretted recent Supreme Court decisions that raise obstacles to class action certification.  They both agreed that, at this point, procedures in bankruptcy may be the best forum to aggregate claimants, determine due process protocols, and justly distribute capped pools of funds to large numbers of similarly situated injured claimants.

The audio of this program, and the robust materials prepared it (including model compensation programs for Virginia Tech, Aurora CO, and others) are available at the Business Law Section Website (materials at item 100, audio at item 101).

 

The New Jersey Law Journal has published — in both hard copy and e-book formats — the New Jersey Arbitration Handbook, written with assurance and clarity by Hon. William A. Dreier.  It is the single authoritative resource for arbitration practitioners in that jurisdiction.

Judge Dreier combines mastery of the statutory basis for enforceable arbitration with an ease that comes from decades of practice in the field.  He can take both the 30,000-foot view of history and public policy, and also the particular challenges of modern arbitration such as demands for expensive e-discovery and assertions of privilege.

Should witnesses be sequestered in every instance, and if not on what basis should they be permitted to attend?  What is an independent expert, and what makes her independent?  In considering adjournments, what does the arbitrator owe the parties and what does she owe the process itself?  What is the role of the arbitrator in encouraging settlement?

The author is particularly impressive in bringing forward the pliability of arbitration.  Prof. Stipanowich and other leading scholars have frequently bemoaned parties’ reluctance to “customize” this contractually-based process to suit the needs of their particular clients.  What about bounded arbitration?  Advisory arbitration (or Early Neutral Evaluation)? Baseball arbitration?

And what role does arbitration have in non-merchant disputes?  Judge Dreier admirably tackles some cutting-edge issues in New Jersey such as arbitration of matrimonial, probate, custody variance or partition disputes.  He also addresses New Jersey’s peculiar court-annexed arbitration program, though he treats it in a purely informative rather than evaluative manner.  These are areas that cry out for the kind of critical analysis that Judge Dreier is uniquely equipped to provide.

The bar is under pressure to use arbitration in an efficient and professional manner, in order that clients receive the promises of speed, reduced cost and commercial rationality that litigation often denies them.  For attorneys in New Jersey –whether drafting an arbitration clause or executing one — this book is an essential resource.

The Marie L. Garibaldi American Inn of Court for ADR is the first (and so far the only) Inn of Court devoted expressly to the practice of arbitration, mediation and other non-judicial means of dispute resolution.  Located in New Jersey, it gathers, on a monthly basis, the upper echelon of retired and active judges, client representatives, and leading arbitrators and mediators to share experiences and insights, to stay abreast of recent case developments, and to hone instincts and skills as dispute resolution specialists.

Members Robert Lenrow and Hanan Issacs recently prepared a program that offered certain scenarios  implicating ethical challenges that may arise during mediation.  The sources for guidance in confronting these challenges (where they could be definitively found) were the Uniform Mediation Act and certain judicially-promulgated rules.  But whether or not your jurisdiction has a statutory basis for resolution of these situations, they are very well-framed and (with the authors’ permission) I offer some here:

The manager of your condo complex is a party to a dispute unrelated to the condo.  The relationship has been disclosed and the parties agree to your service.  But you remain concerned that, despite the approval, the other party my develop doubts about your impartiality, particularly as you meet in private caucus to persuade the parties.  Do you proceed?

A mediation terminates with the lawyers’ agreeing to terms and also agreeing to write up the agreement for later signature.  A week later, one of the lawyers advises that the other denies having made the agreement.  She asks the mediator to prepare a certification, and to testify if necessary, that an agreement was reached, but not as to the terms of that agreement.  Do you agree to make the certification?

A party agrees to settle an admitted financial obligation on the basis of twenty monthly payments.  While the claimant’s counsel is out of the room, the debtor mentions to you, “It doesn’t matter to me because I’m planning to file bankruptcy in a few weeks, and this guy will never see more than a dime on the dollar.  But don’t tell them that.”  Do you tell them that?

The claimant agrees to the payment of an amount equal to 10% of the debt, having been persuaded that the debtor can afford no more.  While the claimant is out of the room preparing settlement papers, the debtor shows you pictures of his mini-mansion in Malibu and the house he is building on the shore in Carmel.  Do you say or do anything?

In a mediation over property damage to rented property, Landlord states in everyone’s presence that he has no property insurance covering this damage.  While privately showing the mediator other documents, Landlord inadvertently displays a property insurance on the premises.  Do you say or do anything?

In a caucus session after five hours of mediation, one of the participants says to the mediator, “I am very impressed by you as a mediator.  I am involved in a number of other cases.  Would you be interested in mediating them?”  What if anything to you say to this party?  What if anything to you disclose to the other party?

Counsel for one party consistently relies upon case law that she insists is dispositive and that you know has been overruled.  Do you say so to her?  Do you say so to everyone?  What if the claims are clearly time-barred but the defendant seems unaware of that defense?

During the course of the mediation, plaintiff has been quiet, unassertive and detached.  Plaintiff’s counsel has become aware of weaknesses in the claim and has agreed on a resolution.  When counsel explains the proposed terms to the plaintiff, you note that the plaintiff seems not to understand the process and is unhappy with the proposed result, but that counsel, in your presence, pressures the plaintiff.  Do you do or say anything?

This is a mere selection of several good, trenchant and realistic ethics scenarios that were subject to the scrutiny of highly qualified participants.  I commend them to you.

Two panels at the upcoming meeting of the ABA Business Law Section in Washington, DC, will be of interest to business lawyers concerned with conflict management.

• The first, on Friday April 5 at 8:00 a.m., addresses Early Negotiation and Dispute Management and features David Burt of DuPont, Kathy Bryan of CPR, Ben Picker of Stradley Ronan, and Jim McGuire of JAMS.  The Moderator is Committee member John Levitske of Duff & Phelps.
• The second, also on Friday at 10:30 a.m., is on Designing and Implementing Mass Disaster Programs, and features Ken Feinberg of Feinberg Rosen and Deborah Greenspan of Dickstein Shapiro.  Committee member John McCall of Frost Brown Todd will act as Moderator.

ABA Section members attending the conference are encouraged to attend.

Anecdote One:  The Bach St. Matthew Passion begins with a piece of music that is scored for two orchestras and two choirs, who ask and answer questions antiphonally.  From time to time a boy’s choir singes over the assembled masses a melody that is a chorale — a familiar melody to the congregants at the Thomaskirche in Leipzig for whom the piece was written.  Both in this opening number and in the other chorales that are featured in the Passion, it is assumed that the congregation would join and sing as these familiar melodies appeared.  What a remarkable sound that must have been: Both choirs, both orchestras, the treble choir and all the people, joining in an event both new and deeply familiar.

Query One:  Is there a melody that an American audience could hear, that they would all recognize, and could all sing together?

Anecdote Two:  A Chinese friend of more than ten years’ duration was walking with me down Fifth Avenue a few summers ago during the lunch break.  Dodging bikes and kids and hustlers and shoppers and tourists and delivery guys she asked me, “Peter, when you are on the street in New York, do you know who is an American and who is not?”  No, I said, people who are visiting America and people who are Americans look the same.  ”That would make me uncomfortable,” she said.  ”In Beijing you know who on the street is Chinese and who is not.”

Query Two:  Does it matter that Americans can’t recognize each other?

The Point:  Negotiators at the table might have completely different interests and no shared ground as to the law or the facts; they can nevertheless contribute to a productive mediation because they are there.  They share the dispute itself, and they share at least an interest in resolving the dispute in their clients’ favor.  They share a recognition of the process, and a willingness to make themselves heard.

By contrast, the negotiator who has no interest in investigating terms to resolve the case, the one with instructions to use the process to find ways to further hurt the counter-party, the one who is there because the court said he had to be, the one who has not yet billed enough to justify terminating the representation at this point….

I’ve presided over such mediations.  It’s like an un-shared melody, or an indistinguishable crowd.  There is no purchase, no traction.  In a private dispute, is there anything a facilitator can do to transform this waste?

And, writ large, are we Americans at risk, in our public discourse, of retreating into this regrettable condition?

The current issue of IBA Global Insight (Feb/March 2013) features an excellent article by Rebecca Lowe that, on first glance, studies the defenses to liability under the Alien Tort Claims Act as presented by the U.S. Supreme Court’s consideration of Kiobel v. Royal Dutch Petroleum.  The article, however, is both broader and deeper, questioning whether the legal arguments in the Kiobel case implicate the UN Guiding Principles on Business and Human Rights, recently promulgated by UN Secretary General’s Special Representative for Business and Human Rights, John Ruggie.

The problem is neatly articulated by Ruggie, and the problem has a lot to do with lawyers: Are a legal advisor’s responsibilities confined to litigation strategy in a particular case, or is it also the lawyer’s job to assist the client to confront ”the entire range of risks” including not merely business reputation but also ”collateral damage to a wide range of third parties?”

The Guiding Principles were endorsed by the UN in 2011 and have been absorbed into the OECD Guidelines for Multinational Enterprises, the ISO guidelines, and the work of the European Commission in this area.  The Principles call on (i) governments to protect human rights from encroachment; (ii) companies to respect human rights in areas in which they operate; and (iii) all stakeholders to ensure the availability of grievance mechanisms for claims sounding in human rights.

The article asks whether leading international law firms — notoriously conservative and slow to adopt change — might be drags rather than leaders in this field as they discount (or, worse, remain ignorant of) their clients’ responsibilities to act consistent with broadly recognized standards of socially responsible behavior.  While no one argues that law firms should be moral arbiters, at the same time most would (presumably) concede that moral considerations, and norms of international law, ought to inform legal advice if that advice is to be deemed comprehensive.

Moreover, global law firms are themselves actors on the world economic stage.  In addition to the professional and ethical commitments they owe to their clients, don’t they also owe independent obligations to the communities effected by their own conduct?  “With the 100 largest firms taking a total revenue of $74bn in 2010, their influence cannot be understated,” writes Lowe, adding: “lawyers’ ability to shun the spotlight may be on the wane.”

Corporate activity and human rights is no longer an esoteric field, a favorite of NGOs and the soft-hearted.  Thanks to the ever-widening acceptance of the Ruggie Principles, lawyers who advise their global clients on tax and corporate structure may soon be obligated to advise them on their responsibility to the communities in which they do business.

However effective and broadly adopted the Convention and Rules of the International Centre for Settlement of Investment Disputes (ICSID) have been, the ICSID Conciliation Rules have enjoyed very little respect and have seldom been used.

This is especially to be regretted, because ICSID arbitrations, though relatively few in number, are often time-consuming, recondite, expensive and magnets for ancillary proceedings.  It has also been observed that the outcomes of ICSID arbitrations are less predictable than ordinary international arbitrations, based on a shallow pool of precedent to assist adjudication of fundamental concepts.

Yet the ICSID Conciliation Rules, last amended in 2002, evidence fundamental misunderstandings of the mediation process as practiced by global companies.  They call for a Commission of Conciliators qualified by virtue of their “high moral character and recognized competence in the fields of law, industry or finance,” and making decisions by a majority vote.  Sessions of the Commission resemble hearings, with evidence taken.  Witnesses and experts are heard, and a report is prepared and filed with the Secretary-General of the Centre.

Good tidings, then, that the International Bar Association has promulgated modern, informed, responsive rules for mediation of investor-state disputes that reflect not only the peculiar attributes of those conflicts but also best practices of modern mediation.  Co-Chairs Anna Joubin-Bret and Barton Legum are to be congratulated, along with the members of the committees responsible for an excellent result.

Under the IBA Rules, a mediation is initiated by a party sending a written request to mediation to both the other party and to the mediation institution that the parties have agreed will administer the mediation. (Art. 2)  An impartial and independent mediator is designated jointly by the parties within 21 days, and failing that designation by the institution they have agreed upon, in accordance with a procedure set forth as an appendix to the Rules.  (Art. 3-4) Unless otherwise agreed, the mediator takes on no other role in the dispute, and in consultation with the parties makes determinations with respect to the procedures to be observed.  (Art. 7)

In conducting the mediation, no information is conveyed to any party without the originating party’s consent, and the mediator assists the parties in making their own decisions.  If requested, the mediator may make recommendations concerning an appropriate resolution.  (Art. 8)  In recognition of the delicate nature of negotiations with a sovereign state, the Rules provide that each party shall either designate a representative with authority to settle the matter “or describe the process necessary for a settlement to be authorized.”  (Art. 9)  Information exchanged may not be used by a receiving party for any purpose other than the mediation, “including, in particular, in legal proceedings,” and the privacy and confidentiality provisions extend to “every person participating in the mediation” — an improvement upon the analogous provisions of the ADR Directive of the European Union.  (Art. 10)  Costs and fees are to be equally divided. (Art. 12)

Investor-State disputes are growing in number.  One hopes that counsel who strategically advise the parties to these complicated and high-value conflicts will find that the IBA Rules for Mediation present an opportunity to explore resolution of these claims in a commercially rational manner, benefiting all of the parties in the process.

Last year, a survey was conducted among senior in-house counsel of the Fortune 1000, to follow-up on the findings of the influential 1997 Cornell survey.  Thomas J. Stipanowich of Pepperdine and J. Ryan Lamare of Penn State have now prepared an analysis of that new survey, and in an important article they have made trenchant conclusions with respect to trends in commercial dispute resolution.

         

They find, among other things, that more corporations have embraced mediation as a management tool and foresee its continuing use — as well as other informal approaches top early resolution of conflicts — in a wide spectrum of disputes.  By contrast, arbitration has “reached its tipping point,” as fewer major companies use it to resolve many kinds of disputes and question its future use.

The article, available to be downloaded here, describes both the findings and the methodology of  a landmark survey co-sponsored by the Cornell University’s Scheinman Institute on Conflict Resolution, the Straus Institute for Dispute Resolution at Pepperdine University School of Law, and the International Institute for Conflict Prevention and Resolution.  The authors conclude that, analyzed in light of the 1997 Cornell survey and the 2011 Rand report, the survey:

presents dramatically contrasting pictures of the evolution of the two primary ADR choices, mediation and arbitration.  While mediation appears to be even more widely used than in 1997 and is today virtually ubiquitous among major companies, the survey indicates a dramatic fall-off in the use of arbitration in most types of dispute: commercial, employment, environmental, IP, real estate and construction…. At the same time, the survey offers tangible evidence of corporations’ growing sophistication and increasing emphasis on control of the process of managing conflict, including neutral evaluation and early case assessment, approaches aimed at deliberate management of conflict in the early stages, as well as control over the selection of third-party neutrals and increasing sophistication in the use of ADR.

The authors offer a comprehensive (and necessarily subjective) narrative of the growth of ADR and the concerns of ADR end-users from the mid-1980′s through what they term the “Quiet Revolution,” including growing distrust of arbitration as a commercially rational alternative to court adjudication.  They also note the rise of early case assessment analysis and systematic approaches to management of conflict in the workplace during this period.  One might characterize the entire evolution as a shift from reactive to proactive management.

They also note certain flaws in the methodology, including a more narrow response rate than the earlier survey and certain structural obstacles to making strict comparisons between the results of the current survey and the 1997 predecessor.

However, certain findings seem beyond dispute:

• More companies identify their policies as using litigation only selectively, and using ADR for all others
• More than half indicated that the predominant trigger for the use of ADR in corporate/commercial disputes was a contractual provision
• Companies used ADR in order to save time and money — often as a way of avoiding or limiting American-style discovery expense and delay
• 98% of the responding companies had used mediation in the prior three years, and 66% had used early case assessment
• Arbitration usage dropped — in some cases precipitously — for most catagories of disputes
• More companies reported using mediation for nearly all kinds of disputes; however, significantly fewer companies reported arbitrating in key categories

Thus, the authors conclude, “the statistics signal very different trends in mediation and arbitration.  Mediation usage is expanding and arbitration usage contracting in most conflict settings…. [Moreover, while] almost eighty-six percent of respondents said their company was “likely” or “very likely” to use mediation instead of litigation for future corporate/commercial disputes, … respondents were almost evenly split as to whether their companies were likely or unlikely to use arbitration instead of litigation in future corporate/commercial disputes.”

One of the most attractive features of these findings is that they are not based on reports from service providers, nor are they distinguished by region.  Instead, we are talking about the 1000 largest companies, regardless of where they do business or the legal jurisdictions in which they operate.

And, although the authors do not note a distinction, it must be assumed that most cross-border contracts call for arbitration in order to provide for an award that is enforceable internationally pursuant to the New York Convention, as mediated agreements or court judgments are not.  Thus, if international arbitration’s share in these usage statistics were to be discounted, companies’ disenchantment with arbitration to adjudicate domestic conflicts must be even more precipitous.

The article will, one assumes, soon be in wide circulation.  It shows a compelling new world of corporate conflict management practices that attorneys and ADR practitioners would be well advised to take very seriously indeed.

Recent events in American politics illustrate the risks of negotiation strategies that rely on disincentives — that is, when negotiators plant “poison pills” or “time bombs” to encourage their counter-parties to avoid failure of the process.  And the lesson is, be careful the disincentive you choose; it may not be all that undesirable to your adversary.

 

In 2011, President Obama and the Republicans in the House agreed that, in the event they were unable to reach agreement by March 1, 2013, a series of indiscriminate spending cuts would take place, purportedly to reduce the federal deficit.  The source of these cuts would be from every aspect of government spending except the source of the deficit itself — entitlement programs — but they would not distinguish among military and non-military discretionary spending, and thus would be (presumably) politically unpalatable.  This was proposed by President Obama, apparently, in an effort to prompt Republicans to engage in negotiation with some “skin in the game” rather than simply obstructing the negotiations, as he perceived they had in the past.

In creating this disincentive, however, the President seems to have forgotten that the stated interests of his adversaries was to cut government spending.  Thus, were the “poison pill” to be triggered, the outcome would be consistent with the Republicans’ underlying interest and inimical to his own.

So the Republicans were confronted, during January and February, with a choice between negotiating with the President for a mix of increased revenues and targeted spending cuts, or a BATNA of the spending cuts they had always advocated.  Guess which they chose?

Thus, it can be argued, the less powerful party in the negotiation got far closer to its interest than the more powerful party, because of the latter’s own strategic error.

When I was a young boy I was taken into Philadelphia to see a movie in a grand movie palace.  It was Disney’s Song of the South.  And one of the stories was of the rabbit who, caught by the fox and bear, willingly offered himself for supper, insisting he would rather be eaten than thrown into the sharp, thorny, nettled brier patch.  It took a few repetitions, but the fox eventually realized what the rabbit was saying, and calculated that it would be more enjoyable for him to subject the rabbit to excruciating torture than to eat him.  In went the rabbit, landing in his own home.  He lived in the brier patch, you see:

I’m born and bred in the brier patch.  Don’t mind the thorns, ’cause they don’t prick.  I fooled ya ’cause I’m mighty slick.

The scene from the movie can be relived here.  The scene from the negotiation lesson is located along Interstate 95, near where the highway crosses the Potomac River.

It has long been broadly agreed that the most effective target for education and training in ADR is the lawyers who draft the deals.  Drafting a dispute resolution clause as an elegant risk allocation is surely the Holy Grail of commercial deals.  Model clauses are promulgated by many ADR organizations, but inept and hoary arbitration and forum selection provisions continue to be cut-and-pasted, to the dismay of litigators and the chagrin of their clients, who realize too late, once the train has hit them, what a mess their inattention caused.

The American Arbitration Association has done us all a great service in launching ClauseBuilder.org.  This tool presents the contract drafter with the same considerations that ADR professionals have urged for years, but in an electronic environment that results in an easy-to-use, easy-to-draft dispute resolution provisions.

After presenting the standard AAA arbitration clause, the web site takes the user through all the essential choices, soliciting responses that fit the particular deal being papered and modifying the clause as we go.  These questions include:  Mediation before arbitration?  Confidentiality?  Number of arbitrators?  Qualifications for neutrals?  Governing law?  Limits on discovery?  Hearings or documents-only? Place of hearing?  Assessment of fees?  Appeal?  Consequences of failure to make payments when due?

And at the end we have a neat and tidy stepped dispute management clause that the parties have agreed addresses the deal at issue in a manner that allocates the risks of the consequences of breach.

When I joined CPR in 1998 the cool thing was to send out to our members floppy disks (remember them?) containing model clauses that could be imported into documents.  The AAA is to be congratulated for this elegant product, brilliantly set forth, quite simple, and urgently needed.  Bring this to the attention of your transactional brethren and you will be adding value to all concerned.

One doesn’t ordinarily look to California for exceptions to the broad scope of mediator confidentiality, but in Neighborhood Assistance Corporation v. First One Lending Corporation (C.D. Cal. Jan. 29, 2013) we have one.

The claim alleged violations of the Lanham Act by the defendant corporation, which was alleged to have misrepresented its affiliation with plaintiff and damaged both plaintiff and its clients.  An issue arose as to the relationship of an individual defendant, Vescera, to the corporate defendant, with allegations of breach of the corporate form and use of corporate assets for personal purposes.  Vescera asserted that not he but another individual, Mariner, was the head of the corporation.

In support of his defense, Vescera sought to introduce evidence that Mariner attended a mediation in the matter and introduced himself to those present as “Vice-President of Operations.”  Vescera argued that this statement was discoverable because it was not a “mediation communication.”   Plaintiff objected on the ground that, by the plain reading of the relevant general order, “anything that happened or was said” at the mediation is confidential.

Not so, said the court.  The full language of Section 9.1 of the General Order of the Court controlling the question protects anything that is said “relating to the subject matter of the case in mediation.”  Introducing yourself does not relate to the subject matter of the mediation, held the court, and the statement is discoverable.

(Mind you, if it didn’t relate to the subject matter of the mediation, why are the parties so adamantly arguing over it?)

In any event, next time you ask for pasta when lunch orders are taken at the mediation, think about its ramifications….

From the CPR Institute:

CPR’s Patent Mediation Task Force released its Effective Practices Protocol today endorsing the use of alternative dispute resolution (ADR) in patent disputes, an area in which the cost of litigation expenses have become astronomical.

In 2010, the International Institute for Conflict Prevention and Resolution (CPR), the only independent non-profit organization whose mission is to help global business and their lawyers resolve complex commercial disputes more cost effectively and efficiently, formed the Patent Mediation Task Force to analyze methods and solutions for improving the use and efficiency of mediation in patent disputes. The Chair of the Task Force is Manny W. Schecter, IBM Chief Patent Counsel.

The Task Force formed three subcommittees to examine mediation best practices from each of five stakeholder perspectives: in house-counsel/business people, outside counsel, mediators, judges, and provider organizations. Each subcommittee focused its evaluation on one of three distinct topics: pre-mediation, mediation, and unique issues in patent cases. The subcommittees consolidated their findings into the newly promulgated report that highly recommends the use of mediation in patent cases.

The Subcommittee members are:

Pre-Mediation
Harrie Samaras (Chair)
Jason Burwell
Robert F. Copple
Anne B. Kiernan
Russell E. Levine
Richard Rainey
Jay Stewart
S.I. Strong
Phillip C. Swain Mediation
Kevin Casey (Chair)
Kenneth R. Adamo
Hon. Edward N. Cahn
Dennis Crouch
Mark Edwards
Hon. John S. Martin
Peter Michaelson
Robert T. Tobin Unique Issues in Patent Cases
John M. Delehanty (Chair)
Bruce G. Bernstein
M. Scott Donahey
Don W. Martens
Hon. Paul R. Michel
Steven W. Miller
Maxim (Mac) H. Waldbaum
John K. Williamson
Thomas F. Fleming

According to Kathleen A. Bryan, President and CEO of the CPR Institute, “The CPR Institute has been a pioneer in seeking improvements to private resolution in disputes involving intellectual property and patents.  This new protocol has the potential to find solutions to earlier resolution of patent disputes, which are the most costly cases for many companies.” Mr. Schecter of IBM agreed, saying, “The Task Force’s Report is groundbreaking and will help the industry overcome barriers to mediation of patent disputes that will save businesses from wasteful litigation costs.”

 

Michael Leathes gave a characteristically provocative and inspirational address at the 4th ICC International Mediation Conference in Paris on February 7, 2013.  Former in-house counsel and a founder and director of the International Mediation Institute, Leathes has posted his speech and the amusing slides that accompany it on the IMI web site.

Leathes argues that there are times in history that call for the ability to intersect one technology or skill-set with another seemingly unrelated one.  Apple, says Leathes, is testimony to the intersection of art, technology, entertainment and business.  ”Geek” intersected with “chic.”  This is what Leathes calls the “Medici Effect” (citing the book of that name by Frans Johansson).

The postulate, says Leathes, is that “being positioned at the INTERSECTION of disciplines and practices creates an explosion of ideas and new solutions.”  (excesses in original)  And mediation, says Leathes, is exactly such a phenomenon.

Mediation sits at many intersections: conflict and consensus; litigation and negotiation; problem and solution; public policy and private process; art and science; and others.  Mediation is both a practice and a theory, cutting across negotiation and justice, practicality and academia, and needs and demands.  Good mediators must be polymaths at the INTERSECTION of neuroscience, cultures and processes, as well as consequences at human, social, ethical and legal levels.

Leathes also cites Frank Sander’s observation that the greatest obstacle to broad adoption of mediation is its call to do things differently — what Sander called “the deadening drag of status quoism.”  Yet Leathes cites various surveys on corporate use of mediation, and relates them to a study of P/E ratios of companies, to conclude that “the P/E ratios for the most dispute-wise companies were 28% higher than the average for all the public companies in [an AAA] survey, and 68% higher than the average for all companies in the least dispute-wise category.”

Leathes thus argues that companies’ systematic use of facilitated negotiation to address problems yields more economically efficient outcomes, and therefore more valuable enterprises.  Thus conflict management systems yield value, and “intersections” of collaborative problem-solving and litigation are critical to obtaining competitive financial results for enterprises.

Finally, Leathes reminds us of GE’s Six Sigma principles from the mid-1990s, classifying litigation as a “problem” or “defect” posing manageable risks and susceptible to control-based solutions aimed at decreasing their prevalence.

All in all, an exciting set of observations.  And a timely reminder (at least for me) that facilitated negotiation is a skill that is better taught to future MBAs than to future JDs.

Texas lawyer and mediator Don Philbin has devised a piece of software that, based upon thousands of negotiations, can indicate the likely responses to various negotiation offers and demands, thus guiding counsel in what response an opponent will likely take to a particular negotiation tactic, avoiding guesswork and streamlining the process.

Philbin says that the software, Picture It Settled,  is “a highly intelligent predictive analytics tool that is based on deep data harvested from thousands of cases.”  He describes it as a mix of “neural networks, probability theory and behavioral patterns.”

He claims that the software “estimates when parties are likely to settle and for what amount with high accuracy.”  Taking the place of intuition and guesswork is a reliable and data-backed model of anticipated reactions to various moves.

Philbin sees three types of benefits for negotiators availing themselves of this software: (a) scenario planning, (b) negotiation move planning, and (c) offer projections.  Says Pilbin, “Negotiators have distinctive, repetitive patterns of behavior so their strategic moves are not as unpredictible as people think.”

I have no idea whether the software works and whether it is accurate, but I suspect that few students of behavior would contest these observations.  Each of us thinks that the deal we are working on is, if not unique, at least peculiar.  Yet any claims agent in any insurance company will tell you values for a particular type of damage in a particular market for a particular type of claimant, just as any in-house insurance counsel will tell you how much it costs to move for summary judgment in Kansas City.  Do we really believe that there is that much variation in outcomes of identical cases?  Do we really think there should be?

For years now game theorists and insurance companies have debated the feasibility of the “black box” — the neutral instrument that would read three “bids” and three “askeds” and inform the parties of the outcome.  Maybe we’re getting closer to that day?

On January 22, 2013, CPR Institute issued a press release announcing the promulgation of the “21st Century Corporate ADR Pledge.”  The Pledge provides for signitories “to commit its resources to manage and resolve disputes through negotiation, mediation and other ADR processes when appropriate, with a view to establishing and practicing global, sustainable dispute management and resolution processes.”

The original CPR Corporate Policy Statement for Alternatives to Litigation was a commitment to investigate ADR options in the context of an individual dispute between signatories.  By contrast, this new Pledge “seeks to change the way the world resolves conflict by moving away from case-by-case resolution towards a sustainable system-based process for greater efficiency and improved quality.”

For many of us, the CPR Pledge was a signal event in the take-up of corporate ADR.  It indicated to the world that many hundreds of major companies, on their own behalfs and on behalf of their thousands of operating companies, knew what mediation was and viewed it as a tool in their toolkit.  Quiate an event in the 1990s.  It was at that time an extraordinary leap forward in the credibility of ADR as a viable method of managing business-to-business disputes.

To some degree, that lion has been tamed.  Businesses may have varying views of the efficacy and universal applicability of business mediation, but most American companies know what it is.  What is the strategic aim of this new Pledge?

Well, for one thing, signatories assert their belief that they “can and should engage in a systematic and collaborative approach to dispute management and resolution with domestic and global customers, suppliers, partners and competitors” and that “law firms schooled in ADR can better serve our legal needs.”

Let’s parse that one out.  First, a company adopting this Pledge views disputes as things that are subject to “management and resolution,” not as instances of contract breach or triggers for litigation to seek legal remedies.  Second, the scope of disputes at issue ia on a global scale, acknowledging that business relationships, not legal jurisdiction, is the defining coompass to their concerns.  Third, the disputes they are discussing involve not just those within the company or between it and its contracting counterparties, but also with its partners and its competitors.  Finally, the statement gives very clear notice that the signing company will seek outside counsel that are competent in rendering ADR counseling and service. 

These undertakings are significant and, assuming that the initial signitories provoke others to join them, and that these undertakings are taken seriously, could be tectonic in their consequences.  This is not just “getting the other side to the table.”  It is changing the way contingenties are acknowledged and managed by the leading economic forces in the world.

And the initial signitories ain’t chopped liver.  The first 25 include some familiar CPR names and some very welcome new ones: AEGIS Insurance, Akzo Nobel, Amgen, BP, ConocoPhillips, Danaher, DuPont, Flour, FMC, GE, GlaxoSmithKline, IBM, Johnson & Johnson, Microsoft, Northeast Utilities, Pepsico, Pfizer, Royal Dutch Shell,Teradata and Walgreen.

CPR founder Jim Henry once told me about farmers not being too concerned about leading an entire herd of cows to the barn — they would lead the one with the bell, and everybody else would follow.  Looks like we have 25 bell cows here.  Hope the barn is a big one!

Ken Feinberg has been engaged by Liberty Mutual Insurance Company to design, implement and administer a dispute resolution process for the tens of thousands of home and auto policyholders who are asserting claims in the wake of Superstorm Sandy.  About forty select mediators and arbitrators were chosen to constitute the pool of neutrals for the plan, and Feinberg assembled us recently to explain the process.

There are three stages.  Policyholders who are dissatisfied with the coverage or damages decision that Liberty Mutual’s claims agent makes upon initial assessment are encouraged to challenge that decision, which will be re-examined by a different and more senior panel of adjusters within the company.

In the event that the policyholder remains dissatisfied, the policyholder may opt for mediation of the issue, at Liberty Mutual’s expense, and using a mediator that Feinberg’s office has independently selected.  The policyholder is not obligated to mediate, but if she chooses to do so then Liberty Mutual is obligated to participate in the mediation.

If the mediation process still fails to satisfy the policyholder, then arbitration is available to render a final, binding and unappealable result.  In this case, however, Liberty Mutual is not obligated to participate — both parties must agree to arbitrate in order for the process to take place.  Again, the arbitrator is selected by Feinberg, not Liberty Mutual.

In overview, this is a three-step tiered structure, of which the first is in-house and all but the last are non-adjudicatory.  There are no costs to the policyholder choosing to avail herself of any of the sequential stages in the process unless she chooses to engage a consultant, representative or expert.  It is clearly designed to encourage policyholders to enter the process.

Why?  The answer was given by Feinberg by reference to an almost identical procedure that Liberty Mutual had used following Hurricane Katrina.  There, about 20,000 claimants availed themselves of the dispute resolution process by seeking review of the claims decision in the first instance.  Yet there were only 175 mediations.  And the arbitrations?  Zero.

Now, one can’t assume that the policyholders were all satisfied and that’s why there were so few mediations.  And it is of course possible that parties who declined to arbitrate did so because they preferred to litigate instead.

Nevertheless, one is compelled to conclude that an overwhelming batch of claims was addressed individually and to the satisfaction of an overwhelming number of stakeholders — including the courts who would otherwise have been required to hear the disputes. 

And this is the sort of thing that puts a smile on the face of a student of business conflict management.  It is, at heart, a managerial rather than legal approach to a business challenge.  Being a mutual company, Liberty thrives not only on its premium flow but on its relationship with its policyholder/owners.  Open claims files are expensive claims files.  Every business consideration counseled addressing and closing these claims expediently and efficiently.  One assumes that, somewhere embedded in those claims, is the homeowner from Tulsa who seeks coverage for the storm in New Jersey, or the company adjuster who denied coverage for roof damages on the ground that it was flood-related, or the homeowner who insisted that his basement was flooded because of the wind.

The most admirable attribute to this process (details available at www.LibertyMutualSandyADR.com) is that it is driven by long-term business considerations and a healthy respect for the customer, rather than a desire to pay as little as possible as late as possible and only when required.  It seems to be a paradigmatic example of commercial dispute resolution that reflects and serves the business plan of the company, and not just the legal advice of the attorneys.  Bravo.