Commercial Litigation And Arbitration: New Challenges
COMMERCIAL LITIGATION AND ARBITRATION: NEW CHALLENGES
BY THE HONOURABLE J J SPIGELMAN AC
CHIEF JUSTICE OF NEW SOUTH WALES
TO THE FIRST INDO AUSTRALIAN LEGAL FORUM
NEW DELHI, 9 OCTOBER 2007
Australia is a federation with six States and two Territories, each of which has a Supreme Court with commercial jurisdiction, and a national court called the Federal Court of Australia which also has a commercial jurisdiction. Practices with respect to both commercial litigation and commercial arbitration can vary from one jurisdiction to another. There are, however, common themes and, subject to inevitable differences associated with variation in the size of jurisdictions, practices are generally similar throughout Australia.
The broad themes of this paper are fourfold.
First, for a considerable period Australian courts have subjected commercial litigation to intensive case management. That extends beyond individual case management to caseload or case flow management. This reflects concerns encompassing delays in the system for cases generally, as well as the costs which the courts impose on the parties in litigation. The techniques of and priority given to case management in commercial cases has been influential and has generally been adopted, with some delays, with respect to the management of other kinds of cases. Generally speaking management of commercial cases has been in the vanguard of all of these developments.
Secondly, because of long established special treatment, delay with respect to commercial cases have always been less than for other kinds of litigation. Generally speaking, delay is no longer a significant issue with respect to commercial litigation and is of considerably lower significance than it was a decade or two ago.
Thirdly, by reason of the fact that delay is no longer the significant problem that it was once, the focus of attention with respect to commercial litigation and arbitration is now reducing the costs of the dispute resolution process. This has brought to prominence questions of legal fees, expert evidence, discovery and length of hearing.
Fourthly, commercial arbitration, both domestic and international, is the subject of a uniform national regime. Generally speaking it operates with considerable success. Past judicial attitudes which may have treated arbitration with suspicion are now entirely superseded. Judges, especially commercial judges, actively support and promote alternative dispute resolution.
Case Management
Throughout the common law world over recent decades the judiciary has accepted a considerable expanded role in the management of the administration of justice. This appears to be virtually a universal phenomenon. The courts are no longer passive recipients of a caseload over which they exercise no control.
Generally speaking, Australian experience is that effective and efficient use of resources requires something more than managing individual cases for trial. The focus must be on the overall caseload, not on the individual case, i.e. a top down approach rather than the bottom up approach. This involves an overview of a particular caseload, which itself implies some form of disaggregation of the total caseload of the Court into distinct categories which require different treatment. This is based to a significant degree not only on specialised law, but also on specialisation amongst legal practitioners.
The essential requirements for the efficient and expeditious administration of justice are now well known:
(1) A court must monitor and manage both its caseload and individual cases.
(2) Case management and caseload management cannot be successful without judicial leadership and commitment.
(3) Procedures must be clearly established by legislation, court rules and written practices.
(4) Cases must be brought under court management soon after their commencement.
(5) Different kinds of cases require different kinds of management.
(6) The degree and intensity of management must be proportionate to what is in dispute and to the complexity of the matter.
(7) The number of court appearances must be minimised.
(8) Realistic but expeditious timetables must be set and, unless there is good reason, must be adhered to.
(9) A key objective is to identify the issues really in dispute early in the proceedings.
(10) Trial dates must be established as soon as practicable and must be definite, so as to ensure compliance with timetables.
(11) Alternative dispute resolution should be encouraged and sometimes mandated.
(12) Monitoring of the caseload must provide timely and comprehensive information to judges and court officers involved in management. Time standards may be useful in focussing the attention of all those involved.
(13) Communication and consultation within the court and with others involved in the litigation process is an ongoing process.
All of these requirements are reflected in Australian court practices and generally receive particularly stringent application in commercial litigation where they were often first developed.
Case management has involved considerable intrusion on what many may have once regarded as the pristine operations of the adversary system. However, complete freedom on the part of the legal profession to conduct cases in accordance with their own interests and wishes is not an essential feature of an adversary system.
Litigants who are dilatory in their preparation, or who otherwise take up too much of the court’s time, waste public resources and exacerbate the delays which other litigants have to suffer. Experience in all common law countries has led to the conclusion that delay reduction requires active involvement by the judiciary in the progress of litigation. Such matters cannot be left to the discretion of members of the legal profession whose competence varies widely and whose clients interests, or whose personal interests, may not conform with the public interest in these respects.
In many respects these developments have required a cultural change amongst legal practitioners, a change which is not yet fully reflected in day-to-day conduct of the adversary system. Nevertheless, over about two decades changes in the behaviour of legal practitioners has been substantial.
In some jurisdictions more formal steps have been taken to require change in legal practice. For example, legislation may require a legal practitioner before filing a pleading to certify that the claim has reasonable prospects of success. This formalises the traditional professional obligation of legal practitioners, being a duty to the court that they must not permit the commencement or continuance of baseless proceedings. In other jurisdictions detailed statutory preconditions designed to promote settlement are imposed and must be complied with before instituting proceedings.
The requirements of commercial litigation have long been accepted as special in these respects. The Commercial Court in London was established in 1895. The first special legislation providing for separate treatment of commercial causes was passed in Australia in 1903. The essential requirements of commercial litigation were established at that time and remain the same today.
Technical rules and long encrusted practices and procedures have been set aside. Judges have been empowered to require the parties to identify the real issues in dispute at an early stage and, thereafter, give directions to ensure speedy and efficient determination of those issues. These are the basic principles. They apply not only to individual cases but also to the body of commercial cases considered as a whole.
The cost structure of Australian commerce has been transformed over recent years by new management techniques, by technology and by the full gamut of microeconomic reforms. The contemporary commercial community has an expectation that all areas of its cost structure is subject to similar review. Lawyers are not and have not been immune to this expectation.
The costs and delays of commercial litigation and of corporate insolvencies can also be regarded as a drag on the economy. The amounts in dispute are, in effect, dead capital. Neither party to a commercial dispute can treat the amount in dispute with confidence as either working capital, capital for investment or capital for distribution to investors. A creditor with a claim on a company in liquidation is similarly constrained. The longer a commercial dispute continues, or the longer a corporate liquidation continues, the greater the loss to the community in terms of dead capital.
Some jurisdictions have adopted an “overriding purpose”, influenced in this respect by the Woolf reforms in England. The way that overriding purpose is expressed in one jurisdiction is that a court must attempt to facilitate the “just, quick and cheap” resolution of the real issues in dispute. By statute the parties are required to participate in court processes and to comply with directions and orders in order to further this overriding purpose. Legal practitioners have a statutory duty not to conduct themselves so as to cause his or her client to breach that client’s duties to assist.
Different courts in Australia adopt different approaches to the application of case management although the objectives are the same. There are variations in the degree to which caseload management and individual case management is divided between registrars of the court, who are not judicial officers, and judges. There are also variations in the degree of specialisation associated with particular areas of commercial litigation. Plainly the smaller courts are not able to operate on the basis of specialist judges who devote the whole or a substantial proportion of their time to dealing with particular categories of dispute in the same way as larger courts are able to do.
Most case management systems involve some system of differentiation, sometimes called “tracks”. A number of courts have specialist lists which deal with particular kinds of cases in a manner specifically adapted to the requirements of the particular sphere of disputation. A number of courts have commercial judges and corporation judges who are usually responsible for the case management of defined categories of commercial cases with a view to those cases being heard only by certain nominated judges. In one court the American style of “docket system” had been adopted, but judges do specialise to a certain degree by self-nominating to serve on a panel of judges to whom a case of the particular character will be referred.
There is a degree of specialisation in both the allocation of jurisdiction between courts and also within courts. Intellectual property, competition law and most admiralty cases are heard in the Federal Court and a number of judges within that Court have developed particular expertise in that field. The larger Supreme Courts have judges who case manage and hear commercial cases, defined to include a broad range of disputes about contracts, insurance, bills of exchange and such matters. Corporations law cases are divided between the Federal and Supreme Courts. The former are allocated to a self-nominal panel. One State Supreme Court allocates the bulk of corporation law disputes to a nominated small group of judges for specialist treatment, separate from the judges who sit in the commercial list. Some courts also have separate case management for building and construction disputes.
As noted above, practices which developed originally in the management of commercial litigation are now regularly deployed in other areas of the Court’s jurisdiction. Accordingly, the relevant statutes and court rules, which may once have focused on commercial cases, are now expressed in general terms applicable to all kinds of cases. These rules are also often backed-up by detailed Practice Notes with respect to the conduct of proceedings, including separate Practice Notes for special areas of the Court’s jurisdiction. Annexed hereto are the Commercial, Technology and Construction and Corporations Practice Notes of the Supreme Court of New South Wales and the Admiralty Practice Note of the Federal Court.
Court rules confer a range of powers on judges enabling directions and orders to be made to confine a case to issues genuinely in dispute and to ensure compliance with court orders, directions, rules and practices. The comprehensive range of powers include:
- Power to direct parties to take specified steps and to comply with timetables and otherwise to conduct proceedings as directed, with respect to discovery, admissions, inspection of documents or property, pleadings, particulars, cross-claims, affidavits or statements, time place and mode of hearing.
- Powers with respect to the conduct of the hearing, including limiting the time that may be taken in cross-examination, limiting the number of witnesses, limiting the number of documents that may be tendered, limiting the time that may be taken by a party in presenting its case or in making submissions.
- The exercise of such powers may identify certain matters required to be taken into account including the subject matter, complexity or simplicity of the case, the costs of the proceedings compared with the quantum of the subject matter in dispute and the efficient administration of court lists.
- Powers have also been conferred to direct a solicitor or barrister for a party to provide to his or her client a memorandum stating the estimated length of the trial and estimated costs of legal representation, including costs payable to the other party if the client was unsuccessful.
- Powers have also been conferred to order costs to be paid by a legal practitioner, where costs have been incurred by reason of some serious neglect in competence or impropriety.
Generally, Court practice in commercial litigation is to reject the traditional forms of pleading and to make provision for something in the nature of an initiating statement which sets out in summary form:
- The nature of the dispute;
- The issues which are likely to arise;
- The contentions and the response to contentions;
- The questions that either party considers appropriate for resolution such as reference to a referee;
- Identification of matters that may be appropriate for determination by a single expert;
- Description of all attempts to mediate.
The general practice of commercial judges includes the following steps:
- Reviewing the suitability for mediation or reference out or the use of a single expert or a court appointed expert;
- Laying down of timetables for preparation of matters for trial in considerable detail including;
o Filing of statements on agreed issues;
o The making of admissions;
o The appointment of single experts;
o The exchange of expert reports and the holding of conferences;
o The filing of lists of documents and provision of copies of documents (often referred to as “the agreed bundle”);
o The administration and answering of interrogatories (increasingly rare);
o The serving and filing of affidavits or statements of evidence by specified dates;
o Directions about the use of technology in the exchange of documents, statements and also for the course of the trial.
Reduction in the backlog, which was perhaps never as great in commercial litigation as it was in other forms of civil litigation, has been substantial over the last two or three decades in most Australian jurisdictions. A number of measures have led to that result.
First, in most jurisdictions additional judges have been appointed. This has included both fulltime judges and, in some jurisdictions, acting judges.
Second, the jurisdiction of lower courts has generally been increased and a significant number of cases have been transferred from the Supreme Court to the District Court and, in some cases, to a Local Court or, in federal jurisdiction, to a newly created Federal Magistrates Court. The courts lower in the hierarchy have generally been able to approach matters with a higher degree of expedition. The Australian experience is that getting the distribution of the caseload in the hierarchy of courts correct is an important way of achieving the most effective use of limited resources. Some lower courts have also adopted specialist commercial or building and construction lists.
Thirdly, the courts have actively encouraged mediation and commercial arbitration and other forms of alternative dispute resolution in all areas of litigation, but especially in commercial litigation.
With respect to some areas of litigation, though not in the commercial area, the courts adopted a technique of backlog reduction which was called a “blitz”, in which a large number of cases of a particular character were listed together in a form of running list. Each such blitz was preceded by a series of listing conferences designed to ensure that cases were properly prepared for hearing, including requirements for greater pre-trial disclosure and strictly enforced a no adjournments policy.
The blitz technique involved sitting a very substantial number of judges, including on occasion virtually the entire court as well as acting judges and including appeal judges, to hear cases that were listed for a particular week rather than for a particular day in the form of running list so that whenever one case settled or was determined the next case in the list was sent to the judge immediately and that occurred irrespective of the convenience of counsel.
From time to time courts conduct “mini blitzes” with respect to particular kinds of cases when filings build up, but that is not generally the case with commercial litigation where there are specialist judges managing the caseload.
Costs
Attention is increasingly given in the course of case management, both before and during a trial, to ensuring that the costs of proceedings are proportionate to the complexity and significance of the matters in dispute. In some cases the test of proportionality has a statutory basis.
The major cost is, of course, legal fees. Such costs are increased by delay, by multiple attendances at court and by the length of the trial. There is a tension between case management and cost control. Many aspects of case management bring costs forward and may increase costs in those cases which would have settled in any event.
The new focus on costs, instead of delay, has required greater attention to these issues, e.g. by attempting to limit the number of attendances at court and discouraging interlocutory applications. Case management practices differ widely in this respect.
Australian courts are still developing techniques for controlling the costs of commercial litigation. Recently the technique of a “stop watch” or “chess clock” system, developed by commercial arbitrators, has been applied in commercial litigation. In this system, in advance of the hearing, the parties agree on the total time that the case ought to take at trial and a formal allocation of time between the parties, usually equal, with some time reserved for the court, is made in advance. All the parties know that if they take too much time in opening the case, they will have to take less time in cross-examination or in final submissions etc. A count of the time that each party takes in maintained on a rolling basis.
The allocation of time and the total length of time is not rigid and can alter as the trial unfolds. However, this mechanism provides some form of discipline on the parties which a judge is able to enforce. This technique is of particular significance where there is a real risk that the trial could incur costs that are wholly disproportionate to the amount in dispute.
In Australian commercial litigation the second largest cost after legal fees is the cost of expert evidence. Various steps have been taken in Australian jurisdictions to both improve the quality of expert evidence and also to minimise the costs associated with such evidence. Courts have developed guidelines or codes of conduct for expert witnesses, directed to establishing the proposition that the expert witness’ paramount duty is to the court rather than to the party that calls the witness. Those guidelines and codes also set out a range of matters that must be disclosed in any report. The Federal Court guidelines are attached.
It has often been the case that both parties in a commercial dispute have prepared extensive expert reports that overlap to such a significant degree that a substantial proportion of the costs incurred are duplicated and therefore wasted. By means of guidelines, codes and directions parties are encouraged to agree on the appointment of a single expert, especially for specific matters which are rarely in genuine dispute, such as quantification issues. Furthermore, directions are made requiring experts to confer in order to identify areas of agreement and disagreement and to prepare joint reports setting out the matters which are agreed and the matters about which there remains dispute. Some rules enable a court to direct that such conferences occur in the absence of legal representatives of the parties.
The operation of the adversarial system has been such that, in significant areas of disputation, highly qualified people refuse to accept a retainer to give evidence. On the other hand a hard core of professional expert witnesses emerge in particular spheres of legal disputation. There are doubts about the integrity of such expert witnesses because of their tendency to be called on a systematic basis only on one side of the record.
By guidelines, rules and directions, courts now encourage the use of single experts. Provision exists in the rules for court appointed experts, but those rules are rarely invoked.
More significantly, in terms of the efficiency of the process of giving expert evidence, is the system of concurrent evidence, sometimes referred to as “hot tubbing”. This is a system in which experts on a particular issue are sworn together and their evidence is given under the direction of the judge, who often directs the issues upon which the evidence is to be given and asks many of the questions. The process also allows the experts to ask each other questions. Properly conducted concurrent evidence allows experts to join in a discussion about the issue with the judge and advocates, rather than to follow the normal form of examination, cross-examination and re-examination with the information restricted to answering specific questions at all three phases.
Experience with the use of concurrent evidence suggests that many experts who have in the past been reluctant, or have even refused, to give evidence are now prepared to accept retainers. Furthermore, the experts confirm that the process increases the integrity of the expert evidence because it gives all experts an appropriate opportunity to contribute their learning to the resolution of the problem and diminishes the sense of obligation which they would otherwise feel to assist a particular party. It appears that the use of this approach has increased the pre-trial settlement rate of complex litigation.
Of particular importance in many commercial disputes is the cost of discovery. Australian jurisdictions vary in their practices in this regard. Some still adopt the traditional rules of a broad basis of discovery. Increasingly, however, particularly in commercial litigation, judges case manage commercial litigation with a view to limiting discovery to matters likely to be in dispute and direct that discovery occur by categories of documents.
In significant commercial litigation full scale discovery can now cost multiples of millions of dollars. These expenditures are quite often disproportionate to the amount in dispute. This is an ongoing problem. It is now exacerbated by the fact that, for most Australian commerce, information is now kept entirely in electronic rather than documentary form. The process of discovery now involves access to corporate records that have always been kept in an electronic form and, in many cases, have been deleted from hard drives in accordance with document management policies designed to ensure the documents are only kept for the time in which they are commercially relevant, as distinct from relevant for purposes of future litigation.
In most cases the deletion of documents in the course of managing the electronic database of a particular commercial enterprise is not completely effective. Various recovery techniques are available by means of interrogating hard drives, with different levels of sophistication. There are now frequent disputes in commercial cases about what steps it is appropriate to take, in order to ensure that deleted documents are recovered so that they can be the subject of discovery. Frequently searches are requested for deleted emails or drafts of documents. These requests can add considerably to the costs of discovery.
No clear rules have emerged for balancing the costs of the process of discovery on the one hand against ensuring that the court is in a position to determine the truth of a particular commercial dispute on the other hand. One step taken recently has been to attempt to stop the multiple handling of documents. As most documents are originally in electronic form the traditional mechanisms of dealing with them in the course of litigation has proved particularly costly: it involved taking something in electronic form, producing it in a hard copy format able to be checked by lawyers for purposes of relevance and to assess issues of legal professional privilege before disclosure and then disclosing them both in hard copy and, frequently, scanning the disclosed materials to make them available to the other party and to the court in electronic form.
New rules have been developed and are being developed to ensure that information that is in an electronic form originally is kept in that format through the different stages of the discovery and inspection and trial process. This is a specific manifestation of the manner in which the court’s emphasis has shifted to controlling costs rather than being concerned with delays.
Arbitration and Mediation
All Australian courts now actively encourage alternative dispute resolution mechanisms. These are basically in the form of arbitration and mediation. Detailed provision formerly made for neutral evaluation was not much used and in some cases has been removed from the rules. There has been a substantial increase in the number of legal practitioners who are skilled in mediation and arbitration. The most successful of these practitioners have been retired commercial judges.
All courts offer some form of court-annexed mediation. Sometimes it is done by registrars of the court, who are not judicial officers. In other courts, however, judicial officers become involved in the process of mediation.
In some Australian jurisdictions specific requirements are imposed upon parties to attempt settlement, particularly by means of mediation, either before instituting proceedings or before the matter is set down for hearing. There has been some use of what is known in England as “pre-action protocols” which set out, at least in one State, in statutory form detailed steps that must be taken prior to the actual institution of proceedings. In other jurisdictions there are obligations under rules or practice notes that mediation should be attempted prior to a matter, or a particular kind of matter, being given a trial date. As noted above, case management of commercial cases, whether in lists or by judges under an individual docket system, systematically encourages alternative dispute settlement.
One matter that appears somewhat counter intuitive is the conferral upon courts of a power to order mediation. This was once thought to be pointless because it appeared unlikely that a party who was ordered to mediate would be prepared to enter such negotiations in a co-operative manner. That has proven to be false. Reluctant starters have often proved to be willing participants in the negotiation process. It appears that many litigants have either not understood, or not been advised by their lawyers about, the weakness in their case, or have adopted a negotiating posture from the outset that they could not possibly lose. A formal order of the court requiring mediation has overcome such inhibitions and has proven particularly successful in a number of spheres of jurisdiction.
One well-established technique of particular significance in building and construction disputes, but also used in general commercial cases, has been a formal mechanism for reference of the whole or part of a proceedings to independent referees. These referees are sometimes experts, e.g. engineers who are asked to determine a particular technical matter for purposes of proceedings. Increasingly, however, the referees are retired judges to whom the whole of a matter, including legal issues, is referred.
Such a reference is conducted under the general supervision of the Court and culminates in a report by the referee to the Court, which the Court must adopt before it is effective. The principles applied are that such reports will be adopted save for very good reasons. This mechanism is of particular significance in cases where technical expertise is required. It is also of particular utility where only some parties, or only some issues, in a wider dispute are subject to an arbitration clause. A person can be nominated as both an arbitrator and as a referee and, therefore, resolve the whole of the dispute. Many of the referees are in fact retired commercial judges who also act as commercial arbitrators.
With respect to international commercial arbitration Australia is a full participant in the coherent international system for resolving commercial disputes by arbitration: i.e. the interlocked provisions of the UNCITRAL Model Law, the New York Convention for Enforcement of Arbitral Awards and the Washington Convention for Investment Disputes. Australia has implemented all of these international provisions by statute. It also has a long established system for commercial arbitration by uniform legislation in all jurisdictions.
The mechanisms for mediation are not so structured. However, in all significant commercial centres commercial legal practitioners are well aware of the availability of mediation and have well-established connections with the pool of independent mediators. Increasingly, in-house counsel in commercial firms and the clients themselves are conscious of the cost and time benefits of successful mediation. The universal approach of commercial judges who case manage such litigation is to encourage mediation. That is reflected in the settlement rate both during the course of case management and after a matter has been set down for hearing. These approaches have required a change in the culture of the legal profession which has been more gradual than the change in the attitude of the judiciary.
Many persons involved in commercial arbitration are critical of the way in which legal practitioners adopt the full panoply of formal trial procedures for the course of an arbitration, including all of the traditional delaying techniques such as requests for particulars, interrogatories, disputes about disclosure of documents and the formal steps of examination in chief, cross-examination and re-examination, as if conducted under formal rules of evidence. Many commercial arbitrators are now critical of what they see to be a failure on the part of arbitration to take advantage of its ability to deliver a comparatively quick and cheap dispute resolution process, by reason of the fact it is not formally bound by rules of evidence and traditional procedures. Practices may well be changing in response to these criticisms.
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