Litigation & ADR report 2015: Cooling things down
There are signs that attitudes to ADR are changing with more clients adopting such methods to avoid heated courtroom battles
While law firms report some growth litigation, the increase in arbitration has been much more dramatic. Traditionally, Iberian clients have taken a litigious approach to commercial disputes, but there is a feeling that a “cultural shift” is taking place as clients awareness of the benefits of various types of alternative dispute resolution (ADR) grows. However, improving client awareness of ADR remains one of the biggest challenges facing law firms.
Alfonso Iglesia, partner at Cuatrecasas, Gonçalves Pereira, says that, while there has been moderate growth in litigation and domestic arbitration, there has been an increase of international commercial arbitration cases and an “explosion” in investment arbitration, much of it relating to renewable energy. Meanwhile, Uría Menéndez partner Álvaro López de Argumedo says there has been an increase in financial litigation as investors become “more aware of their rights”. According to Squire Patton Boggs partner Fernando González, there has been a tremendous increase in criminal litigation with “corruption affecting more corporations” as well as a lot of insolvency-related litigation. Iglesia adds that there is a tendency to criminalise shareholder conflicts.
Araoz & Rueda partner Cliff Hendel says he has seen, as both counsel and arbitrator, a significant number of disputes as a result of the “fall-out from the financial crisis”. He adds: “There are a lot of shareholder and joint venture-related disputes and M&A disputes of all types, especially involving price adjustments and claims for breach of representation and warranty. In the boom years, when deals went sour, things were sometimes not bad at all for either party. When deals go sour in today´s environment, things are really bad, sometimes even for both parties.”
On the issue of the use of arbitration, Freshfields Bruckhaus Deringer partner Vicente Sierra says a process of “cultural change” is taking place as arbitration is more widely accepted by clients in Spain. He adds that progress is being made and there are now more arbitration clauses in contracts. Meanwhile, Sierra says litigation is also on the increase: “We are seeing more and more since the economic downturn – there is a lot of insolvency litigation and shareholder disputes.”
Pérez-Lorca partner Guillermina Ester says insolvency-related cases are starting to decrease although there are still many insolvency proceedings ongoing as well as many cases relating to restructuring and refinancing.
Meanwhile, López de Argumedo says there are more instances of clients in the hospitality sector seeking a reduction of rents in lease agreements, and highlights the recent judgment of the Supreme Court of 15 October, 2014 in relation to this. One partner says it will be difficult for businesses in the hotel sector to review rents because the crisis has passed, but he says that insolvency and restructuring-related matters create a lot of litigious work. González says that there needs to be amendments to the legal cost of mediation, so that it will be more “broadly used” in Spain.
Gómez-Acebo & Pombo partner Javier Izquierdo says that he has not seen a Spanish client ask for mediation yet, but mediation is something to be considered in the future. He adds that banking litigation will continue and that litigation lawyers will become even more involved in refinancing matters. Iglesia says that methods of alternative dispute resolution have been created “bottom up” by clients in the “common law countries”. He adds: “It´s a less expensive way of resolving disputes, it has clear advantages and companies need to understand that this can be useful. If Spanish companies are exposed to these methods, it is likely that they will be keener to use them.”
Rodríguez says that clients are concerned about confidentiality in that they are worried the opposing party may use information they have acquired if the matter is not resolved at the mediation. According to López de Argumedo, large international corporations tend to welcome mediation. He adds that while mediation is more efficient and cheaper, Spanish culture is “very adversarial”. Linklaters partner Francisco Málaga says the issue with some clients is that, when their lawyer suggests going to mediation, they interpret it as the lawyer thinking they would lose the case in court. “I believe parties should be compelled to go to one session of mediation,” he adds.
Hendel argues that the most effective changes [in attitudes to mediation] come from society. “Legislation is not the answer, the most effective changes are bottom up, not top-down. In the US, institutions like CPR [the International Institute for Conflict Prevention and Resolution] have successfully encouraged hundreds of companies to adopt a policy statement saying they will consider alternative dispute resolution [ADR]. Hendel adds that the simple, cost-free statement (the so-called `CPR Pledge´) has proven very effective in overcoming the “typical reluctance of an executive or in-house counsel to suggest an attempt at mediation, for fear that the suggestion might be considered an acknowledgement of weakness”.
Lawyers say that the move to more inexpensive methods of resolving disputes is not bad news for law firms in terms of potentially declining revenues. As one partner says: “What´s good for my client is good for me,” while another remarks that “if you solve cases quickly, you solve more cases”. Lawyers remark that, in the UK, there are extremely specialised, industry-focused litigators but, in contrast, according to Málaga, “in Spain, litigators are considered specialists in all fields”. González adds that pharmaceutical litigation is very specialised and that litigators in this field need “certain skills not everyone can have”. According to Ester, clients need their lawyers to understand their business and how it works. She adds: “Clients appreciate that their lawyers have expertise in that area of business and experience in handling similar cases.”
Hendel agrees that international clients will increasingly look for specialist litigators, but adds that clients expect less specialisation from lawyers in Spain where clients tend to “greatly appreciate general expertise”.
No major litigation in 2015
López de Argumedo says he expects revenue from litigation to plateau in 2015 as “big litigation will not be a feature of the coming year”. Ester adds that pure commercial litigation is not yet increasing: “You need deals to have an issue and there haven´t been many deals in the past, though this year there has been an inflection and the situation has changed.” Meanwhile, López de Argumedo says that while dispute resolution teams currently have a “great burden” of financial-related litigation, this load will not increase as the volume of this type of litigation has now peaked.
Iglesia says that in the area of litigation and arbitration, there is an opportunity to grow abroad. López de Argumedo says that his firm, Uría Menéndez, is expanding abroad as demonstrated by its recent formal link-up with law firms Philippi and Prietocarrizosa, located in Chile and Colombia respectively, to create Phillippi, Prieto, Carrizosa & Uría.
González says there has been a growth in “commercial strategy-related” litigation. “Unfair competition matters will return,” he adds. Allen & Overy partner Antonio Vázquez-Guillén says there has been a reduction in banking-related litigation, but that there are opportunities with new investment funds in Spain. Málaga says it is a “small club” of lawyers and firms that compete for major litigation work in Spain: “There´s always a big litigation cake, and all the firms have different perspectives on it.” Rodríguez says that litigation is “very segmented” and that great lawyers are the ones that are very specialized.
González argues that banks are reducing the fees they pay litigators, while auditors have huge teams, which gives them an unfair advantage: “Auditors shouldn´t be allowed to compete in our area.”According to López de Argumedo, there is a big opportunity for law firms in Latin America, particularly in relation to international arbitration. However, he adds that the challenge for firms is to become as efficient as possible.
Meanwhile, Hendel says the challenge for Araoz & Rueda is whether the firm can “leverage our boutique firm as we are competing with a lot of other firms”. Hendel says the issue for Araoz & Rueda, as a small boutique, is whether the firm can continue to compete successfully with larger, more multidisciplinary firms with more specialised practitioners. “We have to make the most of every opportunity and treat every client, every dispute, and every transaction as if it is our last.” Izquierdo says there are lots of opportunities presented by new market players, and that the challenge for law firms is to be as efficient as possible.
Vázquez-Guillén says that distressed debt transactions and investment treaty arbitrations are two growth areas, though banking litigation is beginning to slow down. Meanwhile, the commoditisation of some types of litigation work, as well as new players in the market are contributing to pressure on fees, he adds. International trade with the Middle East and Asia – in addition to international arbitration – will offer opportunities for law firms, according to González. However, delays in court proceedings present a significant challenge: “The court office is very slow,” he adds. Rodríguez says there will be more restructuring-related matters, though competition is increasing, especially from boutique firms and the big auditors, and this means fees are a big challenge. “The link between client and their legal service provides is not always very strong,” he adds.
Knowledge management and the use of technology are two key issues that law firms have to address, according to Iglesia. He adds that hiring and keeping the best talent, improving lawyers´ legal and non-legal skills and growing in the international arena are other big challenges. Málaga says getting clients from the other departments within Linklaters is a key priority, while differentiating the practice from competitors is another major challenge. Ester says: “Law firms need to come up with creative solutions and be part of negotiations rather than just proceedings.”
Sierra says clients are becoming more pushy in terms of fees – in the last two years, he says there is a “clear tendency to ask for lower fees and lower rates”. Sierra adds: “Usually clients who provide a greater volume of work get a higher discount. However, we see in the market that some clients assume unnecessary risk by choosing their arbitration counsel for a specific case largely based on offers that are exceptionally aggressive on pricing.”
Baker & McKenzie partner José María Alonso says clients are more price-sensitive, demanding “higher value and more predictable pricing structures”. He adds: “Consequently, client requirements demand pricing to be based not so much on hourly rates as on fixed or capped fees – additionally, clients now demand a closer relationship between the outcome of the case and the fees, with an increased use of success fees.”
Ramón Fernández-Aceytuno, partner at Ramón y Cajal, says a major challenge facing law firms is “making their attorneys understand which factors make ADR appropriate and encouraging them to educate their clients and also assist them in choosing the most appropriate process”.
Pedro Rodríguez Rodero, managing partner at Ontier, argues clients will need to change their culture to adopt ADR: “Litigation is the way to solve conflicts in Spain.” Meanwhile, Cristina Coto, partner at CMS Albiñana & Suárez de Lezo, says when clients have to make a decision about investments, one of the first aspects they examine is the “state of justice”. She adds: “They want to solve any litigation they might get involved in as fast and as secure a way as possible, with the clearest legislation – thus, they are demanding justice as a competitive factor.
Olleros Abogados partner Iñigo Rodríguez-Sastre says, with regard to new opportunities, the firm is focusing its efforts on corporate compliance-related matters. He adds: “In addition, we have invested substantial resources in intellectual property, litigation and media disputes as we think audiovisual cases will increase in the near future.” Meanwhile, Santiago Martínez Lage, managing partner of Martínez Lage, Allendesalazar & Brokelmann, says: “I honestly believe that mediation is something we should encourage between everyone, clients and lawyers, for the benefit of everyone, including clients and lawyers.” Pablo Calvo-Sotelo Ibáñez-Martin, partner at Roca Junyent, argues that increasing the use of mediation will involve spreading awareness, not only among clients, but also among members of the legal profession, that mediation is “an increasingly credible alternative to going to court”. With regard to arbitration, Luis García del Río, partner at García Del Río, Larrañaga & Jimenez Bonilla Abogados, says clients are demanding a speedy procedure for “seeking provisional measures, based on an emergency arbitrator”.
Gallego, Martos y Quadra-Salcedo Abogados partner Andrés de la Quadra-Salcedo says the “reactivation of international commerce is increasing litigation with an international nature and this will force medium and small law firms to look for best friends in other jurisdictions”. He adds that, in the meantime, the expected increase in foreign investment will offer local firms more opportunities to “support foreign law firms and foreign clients in Spain”. Julio Romero, director at Benow Partners, says the best method to resolve conflict is negotiation between the parties. He adds: “In our law firm we think that, if is possible, a negotiated solution is always the best thing for the customer. However, when such a solution is not feasible, arbitration is the best system of dispute resolution.”
Portugal: BES litigation
Frederico Gonçalves Pereira, partner at Vieira de Almeida & Associados says the crisis involving
Banco Espírito Santo (BES) and Grupo Espírito Santo (GES) has given rise to a considerable amount of litigation. He adds: “In fact, the crisis brought very different and technically complex disputes to the Portuguese market.” PLMJ partner José Miguel Júdice says, in addition to BES-related litigation, there have also been a lot of insolvency and restructuring-related disputes. Meanwhile, he adds that alternative dispute resolution work will generate an increase in revenue in the coming year, particularly international arbitration and possibly also mediation.
Francisco Cortez, partner at Morais Leitão, Galvão Teles, Soares da Silva & Associados, says that one of the major recent trends has been a move “away from the billable hour”, with lawyers assuming more risk, especially in the case of large firms representing larger corporate clients. He adds that clients want more predictability in legal spend, and alternatives to the billable hour, namely success fees and fixed fees.
Abreu Advogados partner José Maria Corrêa de Sampaio says there has been an increase in the use of ADR, particularly arbitration. “The use of ADR aims to reduce the number of litigation proceedings pending in state courts, while simultaneously making Portugal more attractive as an international arbitration seat”, he adds. “Also we have the incorporation of new arbitration centers for commercial matters, which is very good for promoting arbitration, and decreasing arbitrations costs.”
Fernando Aguilar de Carvalho, partner at Uría Menéndez-Proença de Carvalho, says litigation and ADR activity is still “typical of what you would expect during economic crisis, with plenty of activity in insolvencies, restructuring and debt recovery related cases, as well as in white collar crime and regulatory related matters”. He adds there has also been a surge in commercial litigation, namely disputes among shareholders, as well as banking sector litigation, with disputes related to “swap agreements and other financial instruments”.
Linklaters counsel Ricardo Guimarães says a recovery in the economy is likely to lead to more arbitrations. “Recent years have seen an increase in cross-border transactions and there is usually a lag until related disputes arise – in that context, international law firms have an extraordinary opportunity to advise clients on multijurisdictional transactions and in relevant markets for foreign investment, inbound and outbound, such as Asia and Africa.” Guimarães adds that clients expect arbitration to be a “skilled and specialised forum where decisions are rendered in the shortest period of time possible, lowering their exposure to dispute resolution as investment is taking place”.
Clients now prefer ADR
Clients increasingly prefer using ADR rather than the courts, according to SRS Advogados partner José Carlos Soares Machado. “Thus, there are growing opportunities for law firms that offer alternative dispute resolution services.” He adds that clients also increasingly seek a more “ongoing service” focused on pre-litigation, in order to prevent litigation proceedings.
Litigation and ADR are areas where there is plenty of opportunity for growth, according to João Caiado Guerreiro, partner at Caiado Guerreiro & Associados. “People and companies are more conscious of their rights and disputes are increasing,” he says. “There are plenty of disputes – actual or to come – related to the BES resolution and some sales of assets by both BES and GES.”
José Jácome, partner at AAA Advogados, says one of the biggest challenges facing law firms is providing “sensible and strongly grounded legal advice” in an environment where the outcome of cases is particularly hard to anticipate given the novelty of the applicable laws, the lack of judicial precedents and “the limited experience of Portuguese courts in similar matters”. Mark Kirkby, partner at Sérvulo & Associados, says the “traditional slowness and uncertainty” of Portuguese-speaking jurisdictions, particularly in administrative courts, has moved many disputes between public authorities and international investors to jurisdictions where arbitration exists. He adds: “This is an excellent opportunity for Portuguese firms with strong teams in this area.”
Clients increasingly take more “carefully considered” decisions in order to prevent disputes in the long term, says João Maria Pimentel, partner at Campos Ferreira, Sá Carneiro & Associados. He adds: “In this context, direct contact between the client and senior partners is being increasingly demanded, putting some pressure on law firms to progressively raise the seniority of their lawyers.” Sandra Teixeira da Silva, partner at AVM Advogados, says that, despite the positive outlook for the Portuguese economy during 2015, the number of businesses facing financial distress in recent years will “still bring insolvency and enforcement work, alongside disputes arising from employment matters, essentially involving lay-offs and collective dismissals”.
Ana Cláudia Rangel, head of the litigation and ADR department at Raposo Bernardo, point out that, in the last year, there was a large judicial restructuring in Portugal as well as major changes to the civil procedure code, though she adds: “It is too early to draw conclusions about the practical effects of these changes.”
Cortez argues that new lawyers are expected to develop business skills, languages, engineering and science skills, for example, in other words, “behaviours that set them apart from their peers”, which entails a whole re-thinking of organisational structures, pricing, and service models that have been used the market for years. Gonçalves Pereira says clients now consider litigation much more carefully in light of restraints such as the judicial costs in Portugal, which he says are “very high for disputes in which the claims have a high value”. Gonçalves Pereira adds: “Once the decision to litigate is taken, the clients are very focused and informed and require very specialised representation focusing on the relevant areas of the law, such as M&A, securities, and banking.”
Júdice says that that current client demands will now favour larger law firms or ADR and litigation boutiques that are able to specialise with lawyers “skilled in quantum issues and fluent in different languages”. Aguilar de Carvalho says that for a law firm to thrive in the current climate, its lawyers need to be “passionate and enthusiastic about their work, keep up to date on constant changes in legislation and on legal trends, and commit to providing their clients with the support and answers they need, in a timely and cost effective manner”.
Arbitration centres evolving
Kirkby believes that now is the moment for law firms to create specialised arbitration teams. He adds: “Because of the specific nature and sophistication of arbitration law, and also because the regulation of Portuguese arbitration centres is evolving and moving closer to the regulations of the large international arbitration centres, the ability to capture the really interesting cases depends on the confidence that firms are able to project in the market in terms of the specialised excellence of their teams.” Rangel argues that one of the biggest challenges relating to litigation is making it a speedier process. “For most clients, waiting two or three years to obtain a court decision is always too long.”
Fernando Ferreira Pinto, partner at Ferreira Pinto, says significant opportunities have been created by reform in the Portuguese legal system relating to disputes concerning patents within the pharma industry. He adds: “This offers mandatory arbitration, which requires experienced arbitrators in the market and lawyers capable of managing the arbitration process with strong industry expertise.”
The potential for the wider use of ADR in Iberia is considerable. However, the challenge for law firms is to educate clients about its benefits. The firms that manage to do this successfully and quickly could make some significant gains in what is an increasingly competitive market.