Costs of dispute resolution
Disputes cannot always be avoided and situations arise where one’s own interests must be protected, even when it results in litigation or arbitration. But what are the costs of disputes? It is often most cost-effective for the parties to resolve the dispute by other means than litigation or arbitration, e.g. by mediation. If the dispute is not settled amicably, other means of dispute resolution must be relied upon.
The comparison between the costs emerging from litigation before general courts and from arbitration is set out below.
1. Perform a risk analysis
Why are the costs of dispute resolution significant? When considering whether to take a case to court or to arbitration or to neither of them, it is recommendable to make an objective assessment also considering the indirect costs of dispute resolution. The risk analysis evaluates the best possible outcome of the trial and what it requires as well as the worst-case scenario. The risk analysis naturally entails a legal analysis of the strengths and weaknesses of the case, but that alone is not sufficient as other aspects and costs should also be included in an extensive analysis.
It is straight-forward to calculate the direct monetary value of what can be achieved by litigation if a payment is received for a receivable or if a claim for damages is managed to be avoided. This is not always the main factor since receiving a decision can have a great significance as an issue of principle in other similar cases. In these cases, the significance as an issue of principle should be given a monetary value. All values converted into money should be set against what can be lost if the case does not go as intended.
In addition to the direct costs, the risk analysis should also take the indirect costs of the dispute into account. Internal costs of the company include, for instance, the costs of not being able to use all its resources to develop and run its business or the psychological strain caused by the incomplete nature of the case and the uncertainty relating to the end result. An incomplete dispute may even burden the business management more than the knowledge of an unfavorable end result. In addition, indirect costs may arise from not being able to continue the normal business operations with the counterparty. A pending dispute may also complicate the completion of a transaction or lower the purchase price.
2. Mitigate the costs
The best way to impact the costs is by planning the co-operation in advance, by using well-made contracts and by evaluating the costs of different means of dispute resolution for the co-operation in question already when signing the contract. The differences affecting the choice of dispute resolution clause arise as follows:
When comparing general court proceedings and arbitration, one of the most significant differences in the accrual of costs is that in court a part of the costs, e.g. the salaries of the judges and the administrative costs are borne by the state. In arbitration proceedings, all costs are borne by the parties, including the fees of the arbitrators and the management fees to the Chamber of Commerce.
In challenging and multidimensional disputes, the most significant direct expense item is often the costs of the attorneys. These costs do not necessarily differ much from each other in court proceedings and in arbitration. Overall, the amount of legal expenses is affected by the fact that a matter resolved in arbitration will not be reopened. In litigation, on the other hand, the parties are in principle able to appeal the judgment to a court of appeal. Cases with difficult legal interpretation issues can further proceed from a court of appeal to the Supreme Court. The court proceedings including appeal procedures may take several years. In complex cases, the proceedings in a court of appeal may extend the process by more than a year, and an appeal to the Supreme Court may extend the process by about 4 months if no leave to appeal is granted or by 19 months should the leave to appeal be granted. Arbitration proceedings usually take significantly less time and matters are, on average, settled definitively in eight months or even within a few months.
In each case there are some differences to the indirect expenses such as the risks to reputation and the risk of disclosure of sensitive information of the company. These risks are lower in arbitration proceedings than in a general court, since arbitration is generally not public, nor are outsiders informed of the initiation of the proceedings, while litigation in principle is public. It is possible to request the court to keep all or part of the court documents confidential in legal proceedings, but this requires a justified reason. For example, encryption of the names of companies constituting a party is usually not possible.
To put it simply, in the beginning the direct costs are higher in arbitration proceedings than in litigation, but the longer the court proceedings take, the smaller the differences between the costs will be.
According to the most recent amendment to the arbitration rules of the Chamber of Commerce, the costs shall be paid explicitly at the beginning of the arbitration proceedings, since the Arbitration Institute requires an advance payment from the parties in all cases, which is intended to be sufficient to cover all anticipated costs of the arbitration proceedings.
3. Three tools for preventing and managing disputes
- Anticipate – draft the contract well to clearly reflect the common will of the parties and consider what kind of a dispute resolution clause would be appropriate for the case.
- Documentate – this begins with contract negotiations and continues beyond the termination of the contract. Make sure that all actions and matters related to the contract are well documented, since this will facilitate the resolution of the matter later when the material is reviewed by a new company member, an external representative or a court resolving the dispute.
- In the event of a dispute, perform a risk analysis – this is always worth doing as honestly with yourself as possible and at the earliest possible stage.