Arbitration|Conflict Resolution|Mediation|systems design

ADR and Commercial Finance: Life Among the Deal Lawyers

The ABA Business Law Section has turned its back on the August Annual Meeting of the Association and is now convening its own Annual Meeting in Chicago a month later.  It is a resounding success by any measure, but certainly from the perspective of the Business Law Section:  Over 1,500 attendees, 500 of whom are first-timers.

One of the many ambitious and rewarding CLE offerings at the Section Meeting was a three-part Symposium on ADR in Commercial Finance.  It was an extraordinary example of collaboration among three committees in a usually highly silo-ed organization:  Commercial Finance, Project Finance and Development, and Dispute Resolution.

The first program addressed “Dispute Resolution in Commercial Finance: Protecting the Value of the Deal.”  Each speaker addressed a particular aspect of a transaction and the challenges of problem-solving.

Pamela Corrie, Head of Global Litigation for GE Capital, addressed the front end of the deal.  She reported that, when negotiating a dispute clause, the case for arbitration is by no means clear.  Her company monitored 25 cases on an arbitration track and 25 similar cases on a conventional litigation track, and the results were hardly conclusive: arbitration was no cheaper, no faster, and sometimes actually slower.  However, in arbitration she could select own neutral, and that has substantial value.  On the other hand, the absence of appeal of a wrongly analyzed award has risk.

So the choice of adjudicative process is a function of the nature of the risk/reward analysis that is particular to the deal.  For example, in matters where a commercial client of longstanding is involved, preserving the relationship is easier through ADR – when it is done right.  Ms. Corrie has 12 businesses to serve, and drafts arbitration clauses specifically to meet needs of each and the nature of the interests of the counterparties involved.

The culture of the client also influences the level of risk aversion and the attitude towards conflict management.  Outside counsel can create opportunities by offering education and training on ADR and assisting transactional lawyers to analyze and draft clauses.  Nevertheless, one approach will not fit all needs.  The solution needs to be appropriate to deal size, client, counterparty, etc.  Competent drafting can avoid pitfalls, but the drafter must understand what that particular client has, wants and needs.

Judith Miller, of Jaffe Raitt Heur & Weiss, addressed what happens when the deal, now underway, starts to crater.  By this time the lender has a history with a borrower and the lender wants some assurances before entering into a forbearance agreement.  Arbitration or mediation both have a place but, again, individual assessment of needs and interests is critical to the process.  Confidential dispute resolution such as arbitration can be good if there is sensitivity to the risk of publicity, or concern about lender liability.  Arbitration may, but is not necessarily, be less costly; sometimes is more costly because those in control of the dispute process want a robust procedure yielding a reliable outcome, because it can’t be appealed.  There is always uncertainty on the merits, whether issued by a judge or an arbitrator; but you have certainty on the process, including the qualifications of the adjudicator, and that is why many prefer arbitration.

If troubled loan ends up in Chapter 11, the viability of an arbitration clause is subject to bankruptcy court’s determination whether it is a core issue.  Even if an arbitration is alreadyb in process at the time of bankruptcy filing, there is no assurance that it will continue.  By operation of Bankruptcy Rule 9019 it can continue, but other creditors may be prejudiced and may object, particularly if it will impact on the disposition of entire debtor’s assets.  By contrast, mediation has been proven very effective in bankruptcy proceedings, most recently in Chapter 9 municipal filings.

Stuart Widman, of Miller Shakman & Beem, addressed how to select a neutral, and how to get the most out of a neutral.  If the idea is to protect the value of the deal, then mediation is preferred.  Arbitration tends to tear the parties apart; it yields a binary outcome; and it’s not good for solving business issues.  Particularly if there is an intention to go forward with the deal, then the agreement can be modified through mediation rather than enforced through arbitration.

Key characteristics of good neutral are authority, management skills and a willingness to make the call.  Two most important things in assuring useful and practical ADR processes are the selection of the neutral and the drafting of the clause, so transactional lawyers must have skills in papering in anticipation of the deal’s going sour.

Widman agreed that not every arbitration is quicker and less expensive.  But he believed that whether it is depends on the parties and their counsel.  If the parties insist upon a 3-person tribunals, full discovery, and so on, then the process will be designed for what the parties wanted.  And it can be tweaked once the process starts, and costs are getting out of hand.  Indeed, every aspect of arbitration can be modified or created; Widman reported an arbitration agreement providing that rulings of law that are made by the sole arbitrator can be reviewed by a second “appellate” arbitrator, but findings of fact could not.

Widman closed the session with a welcome reframing of the familiar acronym:  ADR = Appropriate Deployment of Resources.  Whether in arbitration or mediation, the neutral must respect the parties’ decision how to deploy their own resources.

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