Mediations in an emergency

It doesn’t need to be said that the current Covid-19 pandemic will have significant, lasting impacts on businesses. Parties negotiating contracts even a year ago could never have envisioned the situation in which they would now find themselves, and the resulting tangle of part-performance and non-performance is expected to significantly overburden courts around the world, both while the crisis is ongoing and after, when the disputes that have been put on hold for the duration of the crisis begin to flood the judicial system.

These are the concerns which led Lord Neuberger and Lord Phillips – both former heads of the UK Supreme Court – to publish a note via the British Institute of International and Comparative Law urging parties to commercial contracts to adopt a conciliatory approach towards disputes arising during (and as a result of) the pandemic.

Such an approach would not only ease the burden on the courts in grappling with the coming wave of litigation once the crisis passes, but avoid economic damage that would be caused by a ‘plethora of defaults’ as businesses struggle to meet their legal obligations in the face of Covid-19.

Put simply, the message is this: mediate, don’t litigate.

And while Covid-19 will give a chance for companies to use mediation to stay afloat and salvage contracts that might otherwise not have survived the pandemic, many argue that it also gives the chance for businesses and legal departments to re-orient their approach toward contracting and dispute management and realise benefits that stretch far beyond the current crisis.

Two such people are Jane Player and Wolf von Kumberg, two leading lawyers with extensive experience in dispute resolution of all kinds. They’ve been advocating for the conciliatory approach put forward by Lord Neuberger and Lord Phillips, and specifically for the use of mediation between contractual parties. Speaking with IHL, they spell out the impact that Covid-19 has had on the disputes ecosystem, the role that mediation has to play both during the crisis and beyond, and the fresh opportunity for general counsel to demonstrate their commercial – as well as legal – value to the businesses they are advising.

IHL: Firstly, tell me a bit about yourselves and your backgrounds.

Wolf Von Kumberg (WVK): My background is mixed. I spent about 30 years as in-house counsel for several global aerospace/defence companies. I held positions in this role around the world, the last position was in London as assistant general counsel – international for Northrop Grumman Corporation. In that role, and in my previous roles, we’d actually used ADR to a fairly large extent – especially arbitration, which was our go-to position in our international contracts and certainly over the last decade mediation as well. I became a Fellow of the Chartered Institute of Arbitrators in 1996, so quite early on, and I became a qualified mediator in 2001. Since then, I’ve also been active within the various ADR institutions, so I was the chair of the board of management of the Chartered Institute of Arbitrators for three years, I was the first chair of the International Mediation Institute an organisation largely formed by in-house counsel to bring about standards for mediators globally, I’m currently director of the Centre for Effective Dispute Resolution (CEDR), and a current director of the American Arbitration Association. Since 2015, I’ve been a full-time mediator and arbitrator.

Jane Player (JP): I qualified as a solicitor in 1987, and I’ve been a partner for about 20 years in three law firms – first at DLA, where I was head of their disputes team, and then at Bird at Bird where I was head of their international disputes team, and then for the last five years of my private practice career I was a partner at King & Spalding, a US firm, working in their London office.

I qualified as a mediator back in 2000 but my first mediation as counsel was in 1992, and that’s possibly what made me catch the mediation ‘bug’. In fact, my first law firm housed CEDR when it was set up back in the 1980s, so mediation has been in my blood since I was a baby lawyer.

I’ve been mediating alongside my private practice right up until 2017 when I retired and have mediated over 500 commercial disputes. I am now a full-time mediator, working on my own as a freelance mediator but I also take appointments from CEDR, IPOS, ICC, LCIA as well as a number of international panels in Singapore, Japan, India, Korea and Indonesia. A lot of the work I do is cross cultural and international.

IHL: Wolf, maybe we can start with you – from your position, how would you describe the current environment of disputes and how has that changed under the pandemic?

WVK: If I put my in-house counsel hat back on and look at what is happening within companies at the moment and particularly in the aviation and aerospace industries (where I come from), it’s quite frightening. I think right across the chain of contracts, you will find that many companies are currently stressed, so the emphasis right now for in-house counsel is going to be on survival. What is it that we have to be doing right now from a legal perspective to ensure that our company can get through this?

Previously, legal disputes within companies had a very formal route of being resolved – these generally would come to the legal department, the legal department would assess them and either try to deal with them themselves or go to outside counsel. That whole traditional way of dealing with disputes is changing. What we now are seeing is that the companies are looking for more pragmatic and better ways to deal with the immediate issues facing them, and that includes trying to restructure and negotiate their legal obligations. They need a platform through which to do that and courts are not the answer, as they cannot give the relief business is looking for.

We saw the BIICL report come out near the start of lockdown in which two very senior UK judges – Lord Neuberger and Lord Phillips – said that we have to look at trying to preserve contracts right now. And that means conciliation – a form of structured negotiation or mediation – because that’s really what mediation is, at the end of the day.

I think that’s the current emphasis, and that’s the big difference from the pre-Covid situation, where you had a much more traditional legal structure for dealing with these disputes.

JP: I couldn’t agree more with Wolf. What’s been fascinating throughout my legal career, is the importance for us lawyers to recognise that we’re just one cog in the commercial wheel of a business. Businesses run on risk – they understand risk way better than lawyers do, and general counsel or external lawyers operate by giving legal risk advice. Within an organisation you’re going to have operational risk and commercial risk as well as legal risk. I noted that the board will ask for the legal risk analysis for a particular venture and the lawyers will give it, but then the business will make a decision, understanding those risks, but perhaps irrespective of the legal consequences because it might still make commercial sense to do that.

Go back to 2008 in the financial crisis, and you see that very clearly. We as lawyers – then I was in private practice – were being contacted by clients saying they wanted to abandon their contracts – that they knew they had legal obligations, but to continue was not economically viable. As good advisers, it wasn’t an option to give a black-letter lawyer response and say ‘the contract can’t be legally terminated before a certain event etc’. One had to appreciate the position the company was in and say ‘well, if you terminate, you will be in breach, but here’s the exclusions clauses or the limitation of liability clause, and you may only be paying out perhaps 1.5x of what you were paid under the contract so that may be better than running an uneconomic contract for another five years.’

Creative and flexible lawyers who weren’t just going down the black-letter law route and were looking at ways to help their clients get out of a financial crisis were the ones clients were turning to. Now here we are again, and more than ever, the law will only be one factor in a complicated risk analysis that every business will go through in survival mode. Legal rights will only be so useful.

We’ve got the ability as mediators to help lawyers create a safe environment whereby their clients can talk to their counterparts – be they suppliers, customers, partners in business – on a confidential basis, making offers outside the contractual obligations, to ensure the project/contract stays afloat and in some cases , to achieve mutual survival. Compromise, extensions of time, the moving of milestones, slightly different performance obligations – all can be discussed in a safe environment, because a mediation takes place ‘without prejudice’ – that is within the safety of confidentiality and privilege which lawyers offer when they give advice.

Now more than ever, mediation is a perfect forum for these conversations to take place. If they happen without mediation then yes, they benefit from without prejudice privilege if you have a lawyer present, but those discussions will inevitably be positional – you’ll have lawyers fighting their clients’ cause against another set of lawyers fighting back. In a mediation environment, confidentially with each party, a third-party neutral hears the fears and the wishes of both sides and can help them find a solution that might serve both purposes and avoids further conflict.

That’s why, in my view, commercial mediation is needed more than ever in this current crisis.

IHL: Could you both please spell out the benefits of mediation? How much of a departure is this more ‘conciliatory’ approach from common practice?

WVK: I think businesses generally were already becoming more pragmatic in the way they dealt with disputes. Mediation has in fact been on the uptake in most jurisdictions. Certainly, in the US and the UK and in many of the European jurisdictions now, mediation has started to become a part of the normal dispute resolution process.

As Jane said, this crisis is a real catalyst now for businesses to start to utilise mediation for the very reasons that she outlined. The advantages that a confidential platform in which to have discussions with a neutral – which again moves you from a positional type of negotiation to a more interest-based negation – really lends itself to the kind of crisis we’re going through. That’s where parties can look at what is needed right now in order to get through the crisis situation and to restructure their legal obligations around needs rather than legal obligations themselves. That’s the key and that’s the environment that mediation provides.

JP: General counsel and their businesses will not have ready money available for litigation costs at this time and companies can least afford the time and management needs of a dispute. Companies should know that they could incur what is probably a tenth of the first year’s litigation costs in a mediation, where they will have an opportunity to sit down, roll up their sleeves and sort the issues out quickly. They can say ‘we’re all in this together – let’s sort this out as if we don’t keep this relationship working and we don’t look after each other during this demanding time, then in three to five years’ time when we are out of this and our businesses are back in action, we won’t want to work together and yet we may have to’ – to argue with your business partners now could be to spite your nose to save your face.

In the private environment of a mediation, solutions can be reached by the parties themselves which a judge or an arbitrator won’t have the power to impose. Open, safe conversations can take place such as ‘I can’t pay, I can’t perform, I know I should but I can’t – so what are we going to do about it? What are you going to do to be flexible to allow me to perform in part, pay in part, maybe give me a loan or agree a debt which I can pay off over a number of years or let me provide a different type of service – so that in due course, we can both of us trade out of the problem?’ Transparency of positions leads to compromises that parties can live with to allow them to trade another day.

And that’s the key – we as lawyers and mediators need to help businesses trade out of the lockdown.

WVK: That’s a great point. And the point is that a court can’t deliver that. It can’t restructure the arrangement between the parties – and that’s what’s needed right now. And that’s what I think Lord Neuberger and Lord Phillips recognised – that that is not possible through traditional litigation and that’s why they’re encouraging parties to find a different way to resolve Covid-19 disputes.

IHL: It seems like the case for mediation should make itself, but to what extent have you seen companies incorporate mediation into their dispute management policies?

JP: Not enough of them yet, and it’s a real shame.

I’m not convinced that people are fully aware of just how flexible and useful the mediation process can be, particularly pre-dispute; where you aren’t really wanting to mention breach or suggest there is a dispute yet, – where you’re worrying about whether you can pay or perform in two, three, four months’ time, and you want to have those conversations as early as possible. That is where, I think, mediation has real value. People either think positional management conversations can achieve the same (which sometimes they do, but not always) or they think mediation is only useful once a dispute is under way and external lawyers have been engaged . By then, positions are often entrenched, encouraged by initial case reviews by lawyers keen to litigate! Mediation can be used much earlier to facilitate just the conversations businesses need to have now.

WVK: There is an understanding amongst sophisticated in-house lawyers that mediation does play an important role. It is, as Jane said, about getting that message across to mid-size and smaller companies – and they are the ones that benefit the most from this. It puts them, in a sense, on a more even playing field with the larger companies – which in a litigation situation won’t happen, because they will be out-manoeuvred and in many cases won’t be able to afford to properly deal with the litigation.

So, mediation is a great leveller. It provides a platform for any sized company to interact. I think increasingly, mediation – because also the courts in the UK in particular – were requiring mediation to take place with cost consequences if you didn’t mediate. So, I think that there was already a greater uptake before Covid-19 and I think that will now increase even more rapidly.

IHL: If there is any reluctance by companies to mediate, what would be fuelling that?

JP: Wolf and I are obviously very evangelical about mediation – we think there are few cases that would not benefit from it. But the reality is, people are tactical. If you’re a big company with a large wallet, it may be a legitimate tactic to push someone to the wall and make them succumb to your demands. What it does not do though is build solid future business relationships and I do wonder, in a post-Covid world, whether those unethical tactics will pay off long term.

People’s memories are long, and attitudes toward fair and reasonable behaviour now will play a role in future contracts. Companies in many specialist sectors we are working in – construction, defence, IT – recognise that there is a limited number of good partners and word travels fast. Reputation is more important than ever. Why would you irritate an important and useful partner who you’d like to work with in the future by taking pedantic points on one particular contract? Much better to look at it as a relationship management exercise as opposed to a contract management, and have those safe conversations, so that you build long-term mutually supportive relationships. This can apply to even the smallest of SMEs. It’s a small world, and it’s getting smaller all the time with international contracts being given out on a regular basis and I think past behaviours will be judged.

Mediation gives you that opportunity to turn around and say: ‘Look, I realise this contract has turned out to be a really poor one for me economically and I need out, or at least a renegotiation, but I’ve got other contracts that I’m going to be handing out over the next five years or so or other opportunities for us to partner in, if we can have a sensible conversation over this one.’

WVK: I think much of this, particularly in smaller businesses, was still due to not having enough awareness about mediation and what benefits the process could bring to commercial dispute resolution. The legal community and larger businesses have I think done a good job in recognising that mediation does have a positive role to play. Many larger businesses now have ADR policies in place. Many law firms now have a specialised group within their dispute resolution practice specialising in mediation advocacy, recognising that this is a different skill set from that of litigation. So, increasing awareness and educating business as to mediation is still a priority for mediation to have greater uptake in resolving commercial disputes.

IHL: How would you recommend in-house lawyers ‘sell’ mediation to the business?

JP: Before I left private practice, I went to an in-house conference and I was really interested to hear in-house counsel say how rare it is for them to get onto the board and become a part of the commercial decision-making. Perhaps this is an opportunity for commercially minded general counsel to prompt the C suite, to engage with them.

I personally was very keen to be seen not as a litigation lawyer when I gave legal advice, but as a risk lawyer. General counsel, and I am sure in-house lawyers know this better than I do, don’t just sit within their legal expertise but are asked to advise about commercial risk alongside the legal obligations.

WVK: I think right now the opportunity for the in-house department is to actually engage with the businesspeople to restructure those legal obligations. As Jane says, they are not going to be looking so much at the legal position – although they might want to outline that for their business managers, as a starting point. What is more relevant at the moment is to engage with their business managers in a process whereby those legal obligations can be restructured. And this is where they can promote mediation – they can say that mediation is a confidential platform, so everything that we discuss will be kept within these four walls, it will not be able to be used against us. So even if we are telling them we can’t afford to pay for this now and we need to restructure it, and that effort fails, then they won’t be able to use it against us later.

The other thing to stress is speed. You can do it virtually. You don’t have to wait for the courts to reopen – you can sit down today with somebody that’s a neutral and begin discussions on a needs and requirements basis – not necessarily on a legal basis – and you can come up with much more pragmatic solutions.

All of these, you’ll be preaching to the choir here. That’s the way businesspeople negotiate, and they are then becoming much more part of the team, so really, it’s an opportunity for the legal department to shine here and demonstrate that they are value added.

JP: A really good example might be within an integrated IT project. It’s all well and good to say what your obligations are and what the contract originally envisaged but the reality is, after a few years, on the ground the actual position is often very different. However, if you have an issue arising and you’re an owner with a supplier onboard, the thought of kicking off your supplier and trying to find a third party to come in and take over mid-project is a nightmare. Likewise, if you’re the supplier the last thing you want to do is walk off, so what you’re looking for – and what the lawyers are looking for with the operational directors – are levers and incentives to motivate different behaviours. They are asking themselves what can they say or do to encourage people to do something different than their strict obligations under the contract? How can they incentivise their business partners to perform in a different way, to pay in a different way, to supply something in a different way?

Thinking positively, although it is going to be stressful and it is going to be busy, it couldn’t be a better time to be in house if you want to get more involved in the commercial decisions of the business.

IHL: What does this mean for the future? Do you both expect that this will in fact be, as you both suggested earlier, a catalyst for a change in approach to disputes and mediation?

WVK: Jane put it well before. I think the whole nature of contracting is going to change. I think the idea that contracts, once concluded, are written in stone is something that will dramatically be affected by this. I think contracts will be seen – and I think parties have started to look at it in international trade in this way – as a framework. I think flexible contracting, in the sense that contracts will evolve over time as the relationship changes, is going to become much more of a norm.

What that means, however, is that you have to have a mechanism through which that can happen, and I think the whole concept then of mediation or structured negotiation will be built into contracts so that you’ll have neutrals to help the parties to actually make these types of amendments. And so, some form of a neutral being involved in the contract performance phase is probably going to become much more popular. Whether you call that neutral a project mediator, or a disputes board, whatever it is – I think there will be more of an emphasis on flexible contracting.

JP: I agree. These long-term projects, especially in an international context, but also generally, will need commercial ‘marriage counselling’. You’d be mad to think that you could enter into a ten, 20-year contract and not think there will be bumps in the road. The key is to anticipate them and have a plan. I think businesses need to factor in, as a cost of the project, the need to manage these important projects, because if they don’t, and there is a dispute, litigation or arbitration is extremely expensive and is likely to ruin relationships. It’s much better to have, as Wolf says, an in-life mediator; a neutral that sits within the contract, paid for equally by the parties who is only used when there is an issue. That mediator’s task then is to bring the parties back to the table, remind them why they’re ‘in bed’ together and the benefits of trying to compromise and make the project succeed for all rather than issue dispute notices. The parties remain in control of both the problems within the project and the viable solutions available aided by commercially minded lawyers. That is very much the future for successful long-term contracts and joint ventures everywhere.