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<xTITLE>Commercial Dispute Resolution In Germany</xTITLE>

Commercial Dispute Resolution In Germany

by Nicola Neuvians & Michael Hammes
October 2005
Introduction

In recent years, Germany has seen a significant increase in interest concerning out-of-court dispute resolution between companies. The Dispute Analysis & Investigations (DA&I) practice at PricewaterhouseCoopers and the European University Viadrina Frankfurt/Oder explored this development with two objectives:

1) to assess current corporate preferences and expectations in handling disputes under civil law; and

2) to identify the need for changes and future trends in civil dispute resolution.

A survey was designed based on six types of dispute resolution procedure: negotiation, litigation, arbitration, expert determination, conciliation and mediation. The survey, in the form of an anonymous questionnaire, generated responses from 158 German companies. The results were published in May 2005 in the PwC study, "Commercial Dispute Resolution – A Comparative Study of Resolution Procedures in Germany", of which this is a summary.

Utilization of dispute resolution procedures

It was no surprise to find that negotiation and litigation are by far the most frequently used methods in settling disputes. However, the study’s major finding proved surprising – at least at first sight. In certain cases, corporate perceptions and expectations about which dispute resolution procedure should be adopted do not correspond with the actual procedure eventually chosen. The discrepancy between perception and action appears in two areas:

  • Litigation, the procedure most frequently used, is perceived to be disadvantageous in many respects;
  • Procedures involving out-of-court dispute resolution procedures (supported by third parties), which are generally perceived to be relatively beneficial, are used very rarely.

Despite widespread knowledge of the different types of alternative, out-of-court resolution procedures, the majority of companies surveyed still tend to use negotiation and litigation for both national and international disputes. In fact, 17% of the companies who responded use only these two types of procedure.

Nevertheless, 80% of the surveyed companies have gained some initial experience with arbitration, expert determination, conciliation, and mediation. In fact, close to one-third, or 28%, of all survey respondents have used mediation in resolving disputes. The willingness to use such procedures increases in direct proportion to company size.

The main reasons for using court proceedings cited in the survey – i.e. the failure of previous procedures, legal action taken by the other party or a lack of willingness by the other party to consider alternative procedures - indicate that court action is often perceived to be inevitable. However, the specific advantages provided by litigation were considered to be virtually insignificant.

If alternative dispute resolution procedures are chosen, such actions are justified mainly by corporate philosophy or by pre-existing agreements – in particular, contractually-defined arbitration or mediation clauses.

Trends in dispute management

Overall, the survey identified a trend towards a systematic approach to dispute resolution. This trend increases significantly in direct proportion to company size. As the size of the company increases, the influence of the legal department rises and in larger companies, decisions for selecting dispute resolution procedures are made mainly by corporate lawyers and only secondarily by company management. In smaller companies, management tends to make the decision.

Appraisal of various dispute resolution procedures

According to survey results, the key selection criteria for procedures are the dollar amount involved, the sensitivity of issues being addressed, the potential financial impact, and the strength of business relationship at stake

Where the dollar amounts involved are high, negotiation is the first choice, followed by litigation, arbitration, and expert determination as equally preferred options. In contrast, mediation or conciliation are the preferred options if the dispute is of a sensitive nature or if financially important and crucial business relations are involved.

The discrepancy between perception and reality is particularly striking in regard to the question of what benefits can be attributed to the various dispute resolution procedures, measured in terms of costs and duration of the procedure, the quality of results, sustainability, maintenance of business relations, confidentiality and autonomy of the parties.

Participants in the study had strong views of the different benefits associated with specific procedures. Negotiation received the highest value in all categories (from 77% to 99%), while court proceedings achieved the lowest values (with the exception of two categories: sustainability and quality of results).

On the basis of the overall assessment, negotiation was rated the most beneficial approach, followed by mediation, conciliation and expert determination. After arbitration, litigation is perceived to be by far the least beneficial approach.

With ratings of 70% to 75%, arbitration is considered the most beneficial procedure in relation to three criteria: the quality of results, the sustainability of the dispute resolution process and confidentiality. Based on the high values given in the first two of these three categories and the low values then related to the direct and indirect costs of this procedure, arbitration is perceived in a very similar manner to litigation. However, there are significant differences in the evaluation of these two procedures in the categories of confidentiality, duration of proceedings, and subsequent continuation of business relations. In these three areas, arbitration is perceived to be much more beneficial.

The major advantages of expert determination (with ratings from 50% to 73%), are perceived to be confidentiality, the subsequent continuation of business relations, the quality of results, and the duration of procedure. While the arbitration findings are perceived to be very similar to litigation in terms of quality of results and confidentiality, expert determination is perceived to be much better in the categories of costs of procedure, duration of procedure and party autonomy.

With results ranging from 68% to 93%, mediation consistently ranks second for all criteria (with the exception of two categories: quality of results and the sustainability of dispute resolution process). And compared with other procedures, conciliation is perceived to be relatively similar to mediation. However, the absolute advantages of conciliation across all categories are on average only 9 percentage points behind those of mediation.

The discussions concerning the advantages and disadvantages of dispute resolution procedures are based on numerous assumptions. According to survey findings, the following statements generated the highest approval:

  • In German companies, there is a clear desire for greater cooperation between management and the legal department for the purpose of dispute management.
  • In choosing a dispute resolution procedure, it is very important for corporate decision-makers that the risks associated with a particular procedure are known and manageable. On the other hand, cost is of relatively minor significance in the choice of dispute resolution method.
  • In the handling of disputes, major emphasis is given to the continuation of existing business relations.
  • And finally, along with the desire to influence the procedure and result, survey respondents strongly agreed with the statement, “Cooperation and safe-guarding of one's own interests are not mutually exclusive.”

Discrepancies and initial explanations

The discrepancy between the dispute resolution procedures chosen by companies and their perceptions as to the different procedures’ benefits is clear:

  • Parties initially choose negotiation as their preferred procedure and then have recourse to court proceedings, which they often reject for a variety of reasons.
  • The advantages of out-of-court procedures are understood by the parties; however, in practice, they are regarded as being of minor significance.
This study does not provide any conclusive findings regarding the reasons for the discrepancy between perception and reality; instead, it provides useful indicators.

The study shows that, as company size increases, so does the frequency with which out-of-court procedures are used. In combination with the increased influence of the legal department in large companies, this appears to point to broader knowledge of and a more systematic approach to dispute resolution which takes which takes into account the different benefits of procedures.

If the reasons for choosing litigation, despite the perceived lack of benefits, are considered (i.e. legal action instituted by the other party or the unwillingness of the other party to consider out-of-court procedures), the following conclusion could be supported: a structured approach to dispute resolution is required in advance of a dispute arising. This will help reduce the gap between the initial perception of which procedure would be most beneficial and the subsequent action choosing of a different procedure.

Overall, the perceptions and preferences of the surveyed companies, as well as the trends evident in larger companies, indicate that the advantages of out-of-court procedures will be exploited to a greater degree in the future. According to survey results, of greatest promise are procedures - or combinations of procedures - that provide autonomy for the parties similar to that available through negotiation -- along with the advantages of support by third parties.

Conclusion and outlook

In view of the discrepancy between perceptions as to the benefits of dispute resolution procedures and their actual choice of procedure, the process could be improved by companies taking better advantage of the entire range of available procedures – in particular, out-of-court procedures involving third-party support.

Increasing companies’ experience in the use of out-of-court procedures appears to be a high priority. In this respect, the study clearly shows that the structured implementation of out-of-court procedures has a much greater impact than ad-hoc, point-by-point approaches. Such structured implementation measures include the routine use of differentiated dispute resolution clauses in contracts (in particular, price adjustment clauses) or the inclusion of dispute resolution preferences in corporate philosophy.

Training internal decision-makers in the entire range of dispute resolution procedures would appear to be another valuable strategy. Such training must communicate, in particular, the importance of assessing the situation-specific benefits and risks of key procedures to ensure that the most suitable approach is selected. A major goal of this training should be to present a continuum in which the individual procedures do not compete with, but rather complement, each other.

Survey results indicate that a systematic approach in the management of disputes can contribute to an efficient dispute resolution process that meets the needs of all parties involved. When such solutions are implemented, due consideration should be given to the close cooperation of management and the legal department.

The study can be downloaded from http://www.pwc.com/Extweb/pwcpublications or can be requested by telephone from +49 (69) 95 85 - 55 50.

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Biography



Dr. Michael Hammes

PricewaterhouseCoopers
Dispute Analysis & Investigations (Forensic Services)
Marie-Curie-Str. 24-28
60439 Frankfurt


Nicola Neuvians
PricewaterhouseCoopers
Dispute Analysis & Investigations (Forensic Services)