Cooperation beats confrontation9 April 2020
The Corona Crisis will place a massive burden on state courts in Germany and elsewhere. However, there are alternatives available to businesses and lawyers.
With the Corona pandemic the entire world is witnessing an unprecedented crisis that threatens people’s lives, restricts civil rights and puts the global economic system to a test. Even though Germany, like many other countries, quickly put together emergency stimulus packages, there is legitimate concern that many of the 3.5 million German companies, 4 million self-employed and their employees will stand with their backs against the wall financially within weeks or months. A large number of those affected will seek to obtain justice, be it before labor, social, administrative or civil courts. In practice, parties are already breaching contractual obligations or are threatening to do so. The German court system will have to cope with an unprecedented flood of lawsuits. The fight for justice will likely take years. Not only in Germany.
Could contractual due dates be rightfully postponed and contractual obligations rightfully be suspended? Could employment contracts and supplier relationships be rightfully terminated? Could general meetings be rightfully cancelled? Were there ad hoc publicity requirements regarding certain business judgements? These are the kind of legal questions that will arise. At the same time, insurance companies will face a flood of lawsuits, both justified and unjustified. Additionally, there will be public law disputes about issues such as refused or delayed permits, delayed processing of building applications as well as other administrative measures or omissions infringing the rights of those affected. If on top of that, courts will have to reduce their activities over the period of the crisis. Their current structural and staff capacities, available as of today, will not even be nearly sufficient to cope with the flood of legal disputes, and certainly not within a reasonable timeframe.
Business enterprises need solutions for their problems
There are alternatives available to business enterprises and their lawyers. While there will inevitably be disputes at an unforeseen scale, businesses can decide for themselves how to resolve them. The recently deceased economist Clayton Christensen argued that companies should design their products and services to solve the problems, tasks and needs of their customers. He developed the theory of “jobs to be done”. Businesses do not need state courts or private arbitration. They also do not need court decisions or arbitral awards. And courts are not there to serve lawyers. Businesses need solutions to their problems. If you ask an entrepreneur or a CEO, the solution to his or her legal problem is rarely a court case.
Court proceedings and arbitration have undisputed advantages: they provide access to justice, offer legal certainty and, at best, create legal peace. But they are also expensive and take a long time. When a quick and inexpensive solution to a dispute is required, they are not the right choice. Many small and medium-sized businesses are lacking liquidity already today and do not have the resources to engage in time- and cost–consuming litigation or arbitration. Also, due to the unique character of the Corona situation and its manifold consequences, many disputes will be subject to very specific factual circumstances and will therefore require an individual approach and handling. This is not what at least German state courts are known for, particularly not in the lower instances.
Therefore, in this current crisis and its aftermath, the three following measures aimed at cooperation rather than confrontation can help businesses and entrepreneurs anywhere in the world to resolve their upcoming disputes in a non-confrontational and more business-wise manner: cooperation between their lawyers, cooperative dispute resolution procedures and cooperative business models in the future.
First: Cooperation between lawyers. Lawyers and in-house counsel are hired to represent the interests of their clients. If the interests of the parties diverge, they quickly fall into confrontation mode, at the latest when the dispute is litigated in court or in an arbitration proceeding. There is, however, another way. Cooperation works also, and particular, in case of conflicting interests. As our private lives show, a dispute does not necessarily entail confrontation. A dispute arises when there are conflicting interests. Provided that parties have the will to do so, they can cooperate in a dispute in order to find a mutual solution that best suits both parties’ interests instead of going through a confrontational court procedure. The method of Collaborative Lawyering developed by lawyers in the U.S. aims to achieve exactly this: The parties agree with each other that their lawyers should cooperate in order to work out the best possible and legally acceptable solution to the dispute for all parties. In a crisis situation, when the aim is to find a viable and practicable solution to the dispute as quickly as possible, there is no time for confrontation and escalation. Court decisions and arbitral awards relating to “corona cases” will not be available for months and years to come. What businesses need, however, are solutions that will be effective tomorrow.
Second: cooperative dispute resolution procedures. Alternative dispute resolution procedures such as mediation, conciliation, expert determination, adjudication and mini-trials are either unknown or unused in Germany. What businesses and their lawyers do not know, they will not do. These uncertain times offer the chance to try the unknown. Out-of-court proceedings are quick and cost – efficient – at least in comparison to court and arbitration proceedings. When entrepreneurs and companies need quick and cost-efficient solutions to their (legal) problems, it is illogical to file a lawsuit or initiate arbitration proceedings. After all, by the time a judgment or arbitration award is rendered, facts will have long been established. To resolve different opinions on one or more legal issues, parties do not need a court. They can jointly appoint an expert to determine a solution to the legal issues in dispute. Alternatively, each party can appoint an expert and instruct these two experts to prepare a joint legal opinion. At an early stage, the highest possible common denominator is often more helpful than a final judgement in the distant future. Businesses that want or need to quickly negotiate a settlement, but are unable to do so, have the option of engaging a neutral expert or adjudicator to issue a recommendation or legally binding decision. This out-of-court decision can, but does not have to be submitted to judicial review by one of the parties to the dispute. Parties who want an interest-based rather than a rights-based dispute resolution, can engage a mediator to facilitate negotiating a viable solution. What makes out-of-court dispute resolution procedures so appealing is the variety of approaches, the flexibility driven by party autonomy and the procedural speed. If the parties and their lawyers are willing to do so, they can resolve the dispute in days or weeks rather than months or years. In addition, the fact that out-of-court procedures are far less costly than court and arbitration proceedings is widely unknown to otherwise cost-conscious entrepreneurs.
Third: cooperative business relations in the future. Both in Germany and around the world, business relations are coming to a standstill during the Corona crisis. Alexander Dibelius, former head of Goldman Sachs Germany, considers the “shutdown” of the economy to be more frightening than the pandemic itself. Millions of employees and the companies they work for are facing weeks and months that will be uncertain, if not life-threatening. Many of yesterday’s business models no longer work, and tomorrow’s business models may be different. The idea of rethinking contractual relationships as “formal relational contracts” has been the subject of discussion in the U.S. for some time. Last year’s report in the Harvard Business Review may serve as an example. According to this relational concept, contracts are not as much designed to primarily serve the purpose of regulating – with specific intentions and expectations – the rights and obligations of the parties in a static manner from a particular fixed point in time together with quite often drastic sanctions and remedies. Accordingly, contracts are not a “battle zone” for bargaining power. Rather, contracts are simple, understandable and practically implementable instruments to design a future business relationship in a way that works for the mutual benefit of the parties for an extended period of time and that, through specific regulations, enables parties – in their common commercial interest – to put their (business) relationship on an equal footing and to balance it continuously. In this way, contracts evolve in line with the underlying business relationship. This is because business relationships are oriented towards the future and not centered on the present, they are dynamic and not static. Contracts are created through cooperation between the future contractual partners and they rely on sustainable incentives for cooperative collaboration for the duration of the contractual term. Due to the regulations agreed upon by the parties, a formal relational contract keeps adapting constantly throughout its duration. Disputes or even court decisions as to whether the contract had to be adapted in retrospect on the basis of good faith or due to a fundamental change in circumstances thus become obsolete. In the U.S., Dell, FedEx, and AstraZeneca practice this new business relationship-oriented method of drafting and executing contracts. In Sweden, Telia is doing the same. Long-term business relationships are particularly well-suited fields of application: examples include outsourcing, purchasing, franchise and joint venture agreements as well as long-term project contracts in the construction and capital goods business, including public-private partnerships.
The ongoing Corona crisis is forcing us to think differently in many respects. In light of the foreseeable overwhelming of courts and arbitral tribunals, this also applies to the way in which businesses will resolve legal disputes arising from or in connection with the pandemic. They will do this in the manner they and their lawyers choose to. If they want to, they can use alternatives to contradictory decisions by state courts and arbitral tribunals here and now.
This is an English adaptation of a German article which the authors published on April 6, 2020, in F.A.Z. Einspruch, the online law magazine of the leading German newspaper Frankfurter Allgemeine Zeitung (F.A.Z.). The authors wish to thank Malte Benfeldt and Petrit Elshani for their invaluable support with the English translation.
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