Disputes from a Commercial View Point

“Winning lawsuits is not the goal, minimizing risks and maximizing profit is the goal”.^[112] This citation describes perfectly the commercial view on business disputes.

2.1 Maximized Profit

The profit (P) is the difference between the financial return (R) and the invested dispute costs (C):

P = R - C

At first glance the formula sounds pretty simple. However, the variables R and C are not independent but linked to each other. The Legal Department needs to identify the dispute resolution process with the highest return on investment. This can either be evaluated on an individual case basis, a business relationship basis or a holistic enterprise basis. The following example may illustrate the different dimensions:

Company A bought equipment from Company B. The equipment is defective. The parties disagree on the root-cause and thus the responsibility for the defect rectification. As company B is not willing to repair the equipment, company A repairs the equipment on its costs (5 Mˆ). A claims the incurred costs from B.

With respect to the individual case, the profit of A is maximized when the difference between the costs to settle the claim and the compensation received from B is the highest. The settlement costs are not to be confused with the repair costs of 5 Mˆ which is the face value of the claim. The costs to settle are the costs needed to resolve the dispute. They comprise the own costs to work out the claim file, costs for external support (e.g. external lawyers, technical experts), adminis­tration fees for court or dispute resolution providers.^[113] Assumed B would offer to settle in out of court negotiations for 2.5 Mˆ and A had invested 200 Kˆ in own resources and a technical expert, the “profit”^[114] for A would be 2.3 Mˆ.

Fig. 3 Comparison of profit in case example

In this example, maximizing profit would mean to settle during negotiations instead of fighting the claim through in arbitration.¹¹ It is thus of importance that the in-house counsel can easily evaluate the costs to come for all available dispute resolution processes and recommend the best suited process (as described in detail under Sect. 4.3). The cost calculator (Fig. 27) is a good supporting tool in that regard.

The problem in maximizing the profit lies in the uncertainty. A definite compar­ison can only be made hindsight and only when an award is rendered, i.e. party A declined the settlement offer of B. However, A has to decide on whether to settle out of court or not before the award. A’s decision at that moment in time can only be based on assumptions, expectations and experience. The evaluation of the expected result of the arbitration is the task of the Legal Department in collaboration with the other functions.^{[115] [116] How to run the calculation of the expected value is shown below under Sect. 4.3.2.}

However, for dispute settlement considerations, focusing on the individual case is not sufficient. Sustainable profitability is the goal. When claiming B, A is running the risk to overexcite the demand, causing B to terminate the business relationship with A.

3.2 Minimized Risk

Declaring risk minimization the goal of dispute management implies that the term “risk” does not include positive effects of an uncertainty (=opportunities) as can be found in some risk definitions.^[117] With respect to disputes, risk can thus be defined as an uncertainty that an actual return on an investment will be lower than the expected return.

In case of an offensive claim^[118] there is uncertainty on the outcome. When the claim is submitted, the other party can either accept, partially accept, reject or even counterclaim.^[119] In case of rejection or a counterclaim, the claimant may waive the claim or take legal action. If the claimant takes legal action, the outcome (award) is uncertain. In the best case, A could win in total with reimbursement of the investment costs; in the worst case A could lose all and is even obliged to reimburse B the investment costs.

3.3 Maximizing Profit While Minimizing Risks

The goal in dispute management is to minimize the risks while maximizing the profit. In the example, the uncertainty can be reduced or even be excluded at several stages; however, the impact on the profit is different. Not claiming B at all would reduce any uncertainty right from the start, but does so at the expense of not getting any profit/reduction of loss. Accepting the settlement offer of B also eliminates uncertainty; but also the chance to get the full amount claimed from B. Fighting it through to a final award eliminates uncertainty by risking to get a lower profit than by settling out of court or even by risking to make further losses.^[120]

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