AAA: Leading ADR Into The Future - An Update

Monday, August 1, 2005 - 00:00

The Editor interviews William K. Slate II, President and Chief Executive, American Arbitration Association.

Editor: What role has globalization played in the expansion of ADR worldwide? Do you foresee a system where international trade is governed by standard legal principles rather than individual state laws?

Slate: The answer to your first question is that the globalization of business has led inevitably to the international acceptance of ADR. It is comparable to the adoption of English as the common currency for international communication. ADR has become the common currency for resolution of many international business disputes because it introduces a greater degree of certainty into the outcome of those disputes.

The answer to your question about the adoption of standard legal principles is somewhat more complicated because it depends to a large extent upon the context. Let me just tackle that by saying that we are seeing a homogenization of civil and common law practices in terms of how a case proceeds. So what we're seeing in ADR is a little bit of discovery, but not some of the excessive U.S. style discovery. We're seeing sometimes more of a civil law approach to how questions are answered rather than hardball cross-examination. The International Bar Association rules, which we see written into contracts, reflect both civil and common law practices.

There has developed in international commerce a notion of lex mercatoria, which reflects commonly accepted business practices. Increasingly, within the international regime there are more published opinions, more published awards. They are not precedent, but they provide guidance. They establish a certain predictability, if you will. Examples of such guidance are the published opinions relating to so-called Bilateral Investment Treaties (BITs). These opinions are rendered largely, but not exclusively, by ICSID (International Centre for Settlement Investment Disputes), which is the arbitral arm of the World Bank. All ICSID opinions are published. Typically they involve disputes between private investors and nation states.

There is still a role for local law. Take for example a dispute involving an executive for a U.S. corporation working in Turkey, what law applies? Is it the law of Turkey or is it the law of the U.S., where the contract was made? Recently, I personally reviewed 22 closed international cases involving contracts with executives. I found that the law applied in 21 of the 22 cases was the domestic law of the country where the contract was made. Even though the general trend is toward applying a standard international legal principle, there are still some exceptions.

In an international context, arbitration is the only dispute resolution tool that can be relied on to apply the law of the jurisdiction that is agreed upon in the party's pre-dispute clause. Even though I'm a party from California and you're a party from Poland, we may agree that we want to use the law of New York State. And that could never happen in a court setting.

Editor: How does technology improve the AAA's services to clients?

Slate: All of our technology systems are fully integrated so the systems communicate across various platforms and share information in real time. They enable the neutral and the parties and their respective representatives (including their respective in-house and outside counsel case managers) to communicate, to schedule conference calls and to share case-related documents. These technology tools are available 24/7 from anywhere in the world.

Until last year we had no international cases filed online, and then out of the blue, last year 26 international cases were filed online. That's out of a case load of about 614 international cases, but this year we'll target to have almost 50 international cases filed online. Why are parties doing this? Because, the parties can initiate the case, answer the case, and choose a neutral online - time zones no longer matter. We have one case right now where over 400 documents, totaling so far 20,000 pages have been filed online. What does that mean? That means the parties and the arbitrators no longer need to get out that box of papers; they can just go in and access them online.

We have a brand new system called Neutral's E-Center where the arbitrators or the mediators can go online anytime and review case-related information, retrieve and upload documents, post awards, update their resumes and post messages. It holds down the cost for delivery of papers; it's quicker and is more likely to produce a response than a letter. People don't read letters anymore.

We offer the parties mediation even where there is only an arbitration clause. However, of all the international cases filed offline, only 5% attempted mediation. Where parties to international cases filed online 10% opted to first try mediation - and in 87% of the cases mediation was successful. That's double the percentage of those who file their case offline.

What does that mean? I'm not sure I know - but technology does offer us the opportunity to get under the hood and figure out what these things mean. To round out the technology answer, even if you file in the traditional way, everything goes online. This means that, right from the beginning, you can view online what's happening to your case, even if you didn't file online.

Technology also offers AAA new opportunities to provide service. We help other organizations develop dispute resolution services for their members. For example, in the securities area a new business model was rolled out about a month ago called NRE (National Research Exchange). NRE exists to resolve disputes about questionable market research between those providing such research and publicly traded companies. We worked with NRE for about nine months to help them develop a system to resolve such disputes. The NRE system runs off our technology but is their a system.

I think it's fair to say that corporate counsel as a group are the most savvy about ADR. They are also among the most inclined to file cases online and access our online services.

Editor: It can be argued that Sarbanes-Oxley requires all departments of a company, including the legal department, to be subject to an internal control regime that contemplates that they will use the assets of the company prudently to accomplish their respective missions. Would this require a legal department to consider the use of ADR under appropriate circumstances?

Slate: Yes, I would concur even if I weren't an ADR provider. Good internal controls are inherent in the philosophy underlying Sarbanes-Oxley and I would be surprised if that concept did not include looking at all the alternatives available to a company to achieve the best outcome, including the use of ADR.

ADR is definitely in the mainstream of dispute resolution techniques. There is common agreement that ADR should be part of the mix. This is manifested in a variety of ways. First of all, ADR is included in every law school curriculum. They teach that you don't just go out and take the other side to the mat, but that as an attorney you are a conflict resolution agent. Bar associations are providing at the very least strong hortatory support for the idea that ADR should be in the mix. So too with the courts. We have many court annexed programs in both state and federal courts which say that you should use mediation or arbitration before you even get to see a judge.

And, from corporate counsel we get confirmation that the use of ADR makes a difference both in economic and non-economic performance. In our dispute-wise study, we queried legal department leaders of 254 companies, including 101 Fortune 1000 companies. Essentially the study posed two critical questions. Can companies be identified and segregated based on the characteristics of their management structure and style in dealing with business disputes? And the second question was, if so, is there a relationship between dispute management practices and economic and non-economic business outcomes? And, the answers were resoundingly "yes."

The companies that applied the most savvy approaches to dispute resolution enjoyed both economic and non-economic benefits. Dispute-savvy legal departments spent less money on resolving disputes than other departments of comparable size - and their lawyers felt less stressed. Although they were just as busy, they had a more positive feeling about themselves and their work. Their companies had better relationships with customers, vendors and employees and their PE ratios were significantly higher. If I were a corporate general counsel or CEO, I would take cognizance of the fact that the PE ratio of the most dispute-savvy companies was significantly higher than those companies that were less dispute-wise and consider whether my company was making a proper allocation of its dispute resolution dollars to ADR.

Editor: Are there regions where the use of ADR is growing particularly rapidly out of concern for the uncertainty of outcomes in the local legal systems (China, South America, etc.)? Does AAA have a significant presence in those areas?

Slate: We see real growth in China and in other areas where investors have less faith in the local legal systems. Our international caseload grew 257% in five years. It grew in Europe, Canada, Mexico and in other countries, including those in Asia and Africa. There are several organizations like the AAA throughout the world with whom we have cooperative relationships. We will work with them if they have a case in the U.S. and they'll work with us if we have a case in their countries.

There are two important reasons for this growth. The so-called New York Convention on the Recognition and Enforcement of Arbitral Awards now has over 135 signatory nations that have agreed to give arbitral awards the same full force and dignity as judgments by their national courts. There is no comparable convention for court awards. And, the outcomes of arbitration are much more predictable than the vagaries of many legal systems elsewhere in the world.

Editor: Tell us the applicability of ADR to class actions.

Slate: In Green Tree Financial v. Bazzle, the U.S. Supreme Court held that it is possible for an arbitrator to handle a class action if there is an arbitration clause which does not preclude class actions. The Supreme Court has yet to rule on the question of whether an arbitration clause that specifically precludes a class action can keep a case from becoming a class action within an arbitral context.

There is a growing acceptance of the idea that arbitration of class actions is a realistic alternative to litigation. We think that many of the reasons for people to use arbitration and mediation for other types of cases are equally applicable to class actions - ADR is less formal, faster, less costly and neutrals are available with subject matter expertise.

Right now we have over 70 class actions pending. It's a whole new area of activity, and we've made the decision that they should be public. So every class action case which is filed with us immediately goes on our Web site. People can track what's going on there. We have developed a set of class action rules, which follow Rule 23 of the Federal Rules of Civil Procedure. These cases are now making their way through the arbitral process.

Editor: One of the areas you cover are very large cases. Are you continuing to see growth in that area?

Slate: We are. One of the principal reasons for this growth is the ability of the parties to adapt ADR to meet their special needs. Furthermore, we have large complex case rules that parties use in the large arbitration and mediation cases which are tailored to the vagaries of such cases and of course those rules are available on our Web site. We have a special panel of large complex case arbitrators who are known figures that have a reputation for handling large cases. The parties design their clauses and choose their neutrals based on the nature and the size of these cases. We see step clauses being increasingly used in large complex cases. These clauses call for the parties to proceed through a series of steps beginning with negotiation followed by mediation and then final and binding arbitration.

Editor: Sarbanes-Oxley imposes obligations on the management and the board to appropriately investigate complaints of wrongdoing. Does AAA make available the service of neutrals who can assist a company in such investigations?

Slate: We see in the newspapers a continuing flow of new scandals where corporations and other organizations need to have an individual with an impeccable reputation undertake a fact-finding inquiry and recommend measures that might be taken to fix what might be broken. It is a new service both for us and for any institutional provider. Our pool of fact-finders have outstanding credentials. Their services are being used in a range of matters, which are not all large and complex. Recently we were sought out in a case which dealt with employment practices across a very large metropolitan school system. Right now, we're in discussions to provide fact-finding services to a foreign government with several billion dollars of exposure arising from how they have dealt with the health needs of handicapped citizens. I believe that we may be the only institution that provides such services. Historically, this has been a cottage industry where there was no easy way to find the right person in time to meet what is frequently an immediate need. In many cases the mere appointment of the right-finder can demonstrate good faith and maintain the confidence of a company's customers and other constituencies. We are in the process of letting people know that the service is available. Part of this is education.

Editor: Are current or former corporate counsel active in AAA? How can our readers become involved?

Slate: We make extensive use of corporate counsel as arbitrators and mediators and many serve on our Board of Directors. In addition to retired corporate counsel, a number of very busy corporate counsel from major corporations make it a point to serve as neutrals in a few mediations or arbitrations each year because they want first hand experience with the process. As leaders, they want to understand the process so that they can help their law departments use the ADR tool more effectively. If your readers are interested in applying to serve as neutrals they should contact one of our vice presidents at our 34 offices around the U.S. They are listed on our Web site.