Questions from the C-Suite

Ben Giaretta and Baldev Bhinder describe the commercial questions that in-house counsel must address when a company is considering arbitration.

The guardians of the company

In-house counsel often have the hardest job in arbitration. Like the Roman god Janus protecting the door of a house, they have to look both outside and inside the company. Four interrelated questions, in particular, may be asked by your C-Suite executives:

• What can we gain from this?
• What is our plan?
• What will it cost?
• What can we say about this?

1. What can we gain from this?

Arbitration must always have a purpose – but that purpose may not always be easy to see. Pursuing an arbitration is not an objective in itself, and the temptation should be resisted of starting (or defending) a claim simply because the initial assessment of the merits is favourable. A more detailed inquiry is needed before you can report to your CEO what the goal of an arbitration is.

Goals can include repairing damage that has been done, or sending a clear message internally or externally. On the other hand, maintaining a particular relationship may be the company's priority. At best, arbitration is a means to achieving your goal, and it may be only one of several routes to this. At worst, in some situations arbitration could be an obstacle, and it may be better to consider some other form of dispute resolution, or take no action at all.

There can be both an objective and a subjective view of what can be achieved through arbitration. To establish the former, you will need to consult external advisers and weigh up the chances of succeeding in the arbitration. For the latter, you may need to speak to many stakeholders, questioning them carefully in order to establish what is really in the best interests of the company.

2. What is our plan?

Setting your goal must of course take into account what is feasible. Your COO will ask for a plan describing how the aim will be achieved. The first step will be to identify a team to work on the arbitration, from both within and outside the company.

Consider carefully who should be on this team. You will probably need a mixture of talents. In doing this, beware the false economy of selecting a low-cost external provider who cannot, in the end, give appropriate service. On the other hand, avoid the "Veblen effect" of choosing goods or people simply because they are expensive.¹ Focus on real value.

Once the team is appointed, develop the plan using the best available information. A realistic assessment of the likely timetable is an important part of this. Remember that information changes and the plan is not static; and there are risks inherent in arbitration, as we explained in an earlier briefing.

When preparing the plan, bear in mind what has already been done towards achieving your goal. Arbitration is not distinct but is another step in a process, building on everything that has preceded it.

3. What will it cost?

The feasibility of a plan, and your goal overall, will depend on what the arbitration will cost. You will need to explain the costs to your CFO. Arbitration costs fall into three categories:

• actual costs: the fees you will have to pay external counsel, arbitrators and the arbitral institution, as well as other costs including travel, accommodation and transcribers;
• transaction costs, as described by the economist Ronald Coase:² the time and effort that you will need to expend in identifying external counsel and arbitrators, and engaging with them during the course of the arbitration. This also covers the time spent by people throughout the company discussing the arbitration and its possible outcomes; and
• material costs: an arbitration award is fashioned from evidence, and that evidence will come from the company's files and its personnel. Employees will be distracted from their normal functions by the need to gather and present this evidence. Witnesses, in particular, may suffer from the time and stress of engaging with counsel, preparing statements, and appearing at a hearing.

The latter two cost categories are difficult to quantify but can have a real effect on the bottom line, by impacting the company's business during the dispute.

Your plan will help you estimate these costs and will indicate, for budgeting purposes, when they may be incurred. The risks of the plan must also be acknowledged: particularly the risk of losing the arbitration and the costs that will result, not only through having to pay the other side's expenses but also the internal fallout that may follow.

4. What can we say about this?

Arbitration is private and, for the most part, confidential. Nonetheless, you will still need to present a communications plan to your CMO and others. The right messages need to be conveyed to:

• employees: there needs to be a consistent explanation of how the dispute has arisen, what is being done about it, and what any impact on the business will be;
• customers: to the extent that customers hear about the arbitration, you will need to explain what this means to them;
• shareholders: you will need to explain how the arbitration is adding value to the company;
• the market: there may be a need to make an announcement on a regulated exchange; and
• the press: whether or not there is an announcement, the dispute may become public knowledge and you may need to engage with the press.

What is said about the arbitration can be a cost (i.e. leading to reputational damage), but may also be a gain (i.e. building brand value by demonstrating how the company does business). These messages need to be consistent with what is said during the arbitration, since they may reach the other side or the arbitrators.

The language that is used can also impact on whether your goals are achieved. As Kenneth Cloke has observed,³ how parties tell the narrative story of a dispute – both to others and to themselves – can affect its outcome. Language influences ideas, and ideas can become entrenched. Blaming the other side may satisfy a psychological need but may also set up a barrier to achieving a commercial resolution.

<sub>Notes
1. Named after the American economist Thorstein Veblen, author of The Theory of the Leisure Class (Macmillan, 1899).
2. R. H. Coase, The Firm, the Market, and the Law (University of Chicago, 1988).
3. Kenneth Cloke, The Dance of Opposites: Explorations in Mediation, Dialogue and Conflict Resolution Systems Design (GoodMedia Press, 2013).</sub>