05.05 Alternative Dispute Resolutions (ADR)

05 International Litigation and Alternative Dispute Resolutions

Proceedings before state courts are costly, nerve-racking and, above all, they can take a very long time (e.g. in Switzerland, over three instances up to the Federal Supreme Court, three years and more [!]). For this reason, proceedings before state courts, especially in business cases, should be avoided whenever possible!

For this purpose, the parties should agree on the following stages of dispute resolution – in contracts in advance, otherwise when the dispute arises – the so-called Alternative Dispute Resolutions (ADR). They are the middle rungs of the ladder from Chapter 05.01.

Change management or escalation procedure

A change management or escalation procedure deals with how the parties, especially in a long-term relationship, handle changed circumstances (prices, law, etc.) and disagreements. The idea: first look for a solution at the lowest level and within the project; if that fails, move up the hierarchy and outwards in the organisation – from internal to external dispute resolution. The further one moves away from the people directly involved, the more objective the matter becomes – and the easier a solution is found.

For example, it can be agreed that a (legal) disagreement is first negotiated between the project leaders. If no agreement is reached, the problem goes to the management of the parties. If this level fails too, the matter can be raised to the last internal level, the boards of directors, in the case of corporations.

Mediation

If there is no agreement here either, the internal escalation has failed and an external escalation follows. As in life, it is sometimes good to involve a third party in a dispute between two people. In the escalation procedure, this is a mediator: a person who is independent of the parties. The mediator’s task is not to decide the conflict, but to help the parties find a solution that is acceptable to all. This is the great advantage of mediation: a solution that all accept is far more likely to be implemented. Mediation is a way of helping the parties to help themselves.

If mediation has been agreed as a stage of the escalation procedure, it must not be skipped. The Swiss Federal Supreme Court made this clear in BGE 142 III 296: the parties had agreed that, before any arbitration, a dispute must first go through a mediation attempt under the rules of the International Chamber of Commerce (ICC; see below); one party nevertheless started arbitration directly. The Supreme Court suspended the arbitration until the agreed mediation had been properly carried out – an informal attempt to settle was not enough. A party that skips a rung of the ladder is sent back to the rung it left out – and loses time and money. In the contract, mediation should therefore be worded as a mandatory stage («shall», not «may»), ideally with reference to institutional rules and with a time limit.

Arbitration

But even if mediation fails, there is still an external stage before going to a state court: arbitration. An arbitral tribunal is a private court that the parties have explicitly agreed upon – usually in an arbitration clause in the contract. Its decision, the arbitral award, is binding like a court judgment.

Arbitration is well known from sport, where it also shows its obvious advantages. If there is a foul in football and the teams do not agree, the matter would have to be taken to a state court – the game would be suspended and resumed months later. Instead, the teams or their association have agreed that a single judge, the referee, decides. The advantage of a referee is that he or she decides quickly, so that the game can continue immediately. But this is also the disadvantage: the referee has no time to judge the matter à fond – the decision is «fast law». To give referees a better basis for their decisions, video evidence has been introduced – which, however, leads to delays.

Another advantage of an arbitral tribunal is its professional competence: tribunals for commercial cases are often staffed not only by lawyers, but also by experts such as software engineers, civil engineers, architects, physicists or chemists, depending on the matter to be judged.

The decisive advantage in international business, however, is enforcement. A judgment of a state court is enforced abroad only under the rules of that foreign state or an existing treaty (see Chapter 05.03) – often slow and uncertain. An arbitral award, by contrast, must be enforced in the 172 states that have joined the New York Convention of 1958 – practically the whole world. This is why international contracts very often contain an arbitration clause.

Well-known arbitration institutions are those of the chambers of commerce, in particular the International Chamber of Commerce (ICC) in Paris, and in Switzerland the Swiss Arbitration Centre with its Swiss Rules of International Arbitration. What most people are probably not aware of: whoever registers a domain name has submitted to the domain arbitration procedure prescribed by the Internet Corporation for Assigned Names and Numbers (ICANN), the organisation that coordinates the allocation of internet addresses. One of the tribunals provided for this purpose is that of the World Intellectual Property Organization (WIPO) in Geneva. These proceedings are regularly conducted in English.

05 International Litigation and Alternative Dispute Resolutions