Navigating The Dispute Resolution Landscape: Imperatives For a CLO This article is an attempt to share some of the learnings on dispute resolution from an insider's perspective The chief legal officer (CLO) helps steer business decisions with the outlook of preserving value, ensuring continuity, preventing unwelcome surprises, and avoiding deadlock situations. The three broad buckets of...
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Navigating The Dispute Resolution Landscape: Imperatives For a CLO
This article is an attempt to share some of the learnings on dispute resolution from an insider's perspective
The chief legal officer (CLO) helps steer business decisions with the outlook of preserving value, ensuring continuity, preventing unwelcome surprises, and avoiding deadlock situations. The three broad buckets of the CLO's effectiveness are to preserve, protect and grow the business of the enterprise. Dispute resolution is traditionally seen as a 'protect' key result area (KRA), which may be a fundamental mistake. Managing and resolving disputes related to strategic relationships and transactions is by all measures a 'grow' KRA for the CLO. For this very purpose, even the most skilled CLO with over two or three decades of cross-border litigation practice experience under his or her belt is logically expected to be, philosophically, litigation adverse. Without this mindset, for the CLO to ace the 'grow' KRA in the current dynamic business, technology and regulatory environment is difficult, if not impossible.
Contract drafting is primarily rooted in context, and sometimes the context is lost or misinterpreted in contracts. This is often the key stage where the text appears to branch away from the business intent and expectations, and so this stage requires special attention. This is more so in case of templated and outsourced contracting where the focus of the negotiators is on several other moving parts necessary for expeditious contract closure. At the contracting stage, the necessity of practical scenario analysis and risk management specific to the deal context perhaps trumps all other due diligence essentials.
Contracts which are actively managed through their lifecycle (or until full integration, in case of transactions) have a much better chance of success owed almost entirely to the contract managers and relationship managers, who know the contract like the back of their hand and are vigilant to any external or internal stimulus of disruption. In the absence of active lifecycle management, precipitative actions need thorough scenario analysis of the best available options, and the cost and value of the risks and rewards need to be laid out as clearly as possible by the CLO for informed decision-making. While it is common to blame the government of the day to be the most litigious party in many legal jurisdictions, active contract lifecycle management process is also broken in many commercial enterprises leading to disputes which ought to have been anticipated and obviated by both parties. There is a lot that CLOs can do to steer and influence how informed decisions are made in this context.
Dispute negotiations have always been primarily about preparation. Smooth unwinding of contracts, avoiding negotiation brinks, and having a long-term perspective of counter-party relationship, amongst other factors, hold the key of how to approach disputes and steer business conflicts for the most strategically efficient outcome. Disputes, at a formative stage, require a dashboard view which a CLO is best positioned to provide, taking into account the CLO's insight into manoeuvring and posturing done by the counter party and its possible implications on the position of the enterprise.
Generally speaking and barring a few exceptional circumstances, entangled large disputes are the outcome of a series of mistakes or lost opportunities by either of the opposing parties. In many instances, objective subject matter technical expertise is not introduced into the dispute at the pre-ADR stage to assist the business in arriving at the most efficient and logical outcome. Often, the uncertainty of formal dispute resolution, including arbitration, are also not factored into decision-making. Moreover, it's common to observe internal dispute management and monitoring processes being replaced by dry litigation status reporting without any opportunistic or risk management insights, losing the governance opportunity for the business to review strategies early in the course of dispute resolution process.
Even after formal ADR proceedings have commenced, there are a number of infliction points that present themselves for resolving the deadlock. These may be in the nature of potential M&A transaction, regulatory investigation, management rejig, stage of resolution proceedings, etc. In order to take advantage of these infliction points, the CLO needs to be alive to, inter alia, the following factors, and the board of directors, especially the independent directors, may also need to be vigilant for the same :-
1. As time passes, positions of parties harden, context and mind-space with key stakeholders on both sides is lost, sunk cost and hurdle rate for resolution keep ratcheting up.
2. Ego and agency problem with some of the decision makers within the enterprise management may be something that needs to be challenged and addressed for logical outcomes. The enterprise needs to have governance processes strong enough to determine when to quit fighting. High litigation expenditure in enterprises working on capital light models in a light touch regulatory environment, is usually a good indicator of a potential agency problem that ought to be probed and addressed with governance processes.
3. It is not uncommon in some mid-sized businesses for accounting treatment related decisions dictating legal strategy decision making (instead of the other way round), making buy-ins for resolution more up-hill within the enterprise.
4. Keen negotiators on the bargaining table need to have chips in their pockets to play and achieve the best resolution outcome for an enterprise. CLOs are best placed to do this, but where management buy-in is a major hurdle, they sometimes enter the negotiation with an empty pocket and both hands tied behind. In such situations, not only does the mediator feel helpless in guiding the parties, it is also a recipe for further igniting the dispute, instead of resolving it. A CLO must highlight to the stakeholders the inevitable higher cost of resolution, should they change their mind after sending negotiators to the table without any chips to play with. It's a case of being penny wise pound foolish, but the CLO must use all her/his communication skills to knock home the point.
CLOs with reasonable cross-border dispute expertise realise the boon of early and timely mediation, even for the most impossible looking deadlocks. The days of the zero-sum game in dispute resolution are over, and all stakeholders need to be alive to the multifaceted nature of modern commercial dispute resolution to enable efficient outcomes.
Regardless of all the hurdles and factors working against capitalising on an infliction point to resolve, it is incumbent upon the CLO to try best to steer business decision-making towards a resolution at the opportune time. In the absence of a management buy-in, some CLOs have even found it rewarding to cloak resolution procedure as a tactical necessity just to get their management engaged and set the negotiation ball rolling again. Though this may not be the most transparent approach, it can be no one's case that the CLO has not acted in the best interest of the enterprise.
To put it mildly, cross-border disputes are expensive. CLOs play a pivotal role not only in optimal resolution outcomes, but also in minimizing costs throughout the resolution journey. For less sophisticated enterprises, outside counsel firms often completely oust the legal decision making of the CLO - often to the imminent detriment of the enterprise. This is more so when the outside counsels are from legal jurisdictions where ADR has not firmly taken root and practice has not yet adjusted to the new standards of acting in the best interest of the client and managing the potential conflict with interests of having extended client engagement.
Should the CLO be in the desired driver's seat, high costs incurred in engaging outside counsel firm for coordinating multi-jurisdictional facets of the dispute may also be partially or wholly avoided.
Many CLOs have proved their mettle in deftly coordinating high-pressure multi-jurisdictional enforcements too. High legal costs are an area of concern in international arbitration. At the end of the day, all actions of the CLO and the enterprise's management have to stand the governance test of efficient use of the company's resources.
In enterprises where unfortunately, the CLO does not have a seat on the high table in decision-making, the enterprise is put to grave risks specially in relation to dispute resolution relating to cross-border strategic relationships and transactions. This is an area which may require more stakeholder attention, especially in relatively less mature legal jurisdictions.
No discussion on strategic cross-border dispute resolution can be complete without underscoring the importance of a formal process of lessons-learnt and market horror-stories. These allows an enterprise to learn and adapt from past precedents in its business and the market in general.
Businesses are becoming more and more agile, but they do have some catching up to do when it comes to their response to cross-border disputes. CLOs play a pivotal role in navigating the dispute resolution landscape.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.