Katie Skeels, associate at Hogan Lovells, examines current trends and solutions in cross-border disputes

Hogan Lovells recently published a report - entitled 'Global Currents - Trends in Complex Cross-Border Disputes 2014' - which surveys current trends in cross-border disputes. The results suggest that senior executives and in-house counsel are proactively developing their dispute management strategies, including for securitisations, to suit the increasingly global business landscape.

In an increasingly globalised economy, there are significant benefits to be reaped from tapping into an international market. However, when relationships turn sour - which a number of high profile securitisation cases in recent years suggest is now more of risk than may have been the case previously - the combination of multiple jurisdictions in any given deal can substantially increase the level of complication in managing, and eventually extricating oneself from, the resulting dispute.

Hogan Lovells' new survey examines the experience of 148 senior executives and in-house lawyers across 18 industries in dealing with cross-border disputes, and highlights a number of key trends coming out of the global nature of many of the respondents' businesses. Some of the most exciting emerging markets, such as China, India and Brazil, are conversely seen to be the most challenging jurisdictions in which to bring or defend a dispute. However, perhaps surprisingly, it is the US that is seen as the most difficult place to litigate - despite its status as an established global economy.

Thirty percent of respondents' daily caseloads consist of cross-border rather than domestic disputes, and over half expect that proportion to increase even further over the next two years. Most cross-border disputes involve two or three jurisdictions, but many involve substantially more and some particularly complex cases can involve as many as 50 jurisdictions.

Annual legal spend on cross-border disputes averages US$6.6m, but in many cases the cost to companies is significantly more than that. Consequently, effectively budgeting for international disputes is now seen as an important and established part of many respondents' businesses.

These trends show that cross-border disputes can be very expensive, time-consuming to manage and navigate and show no signs of abating. However, the findings from the survey also suggest that - notwithstanding these serious challenges - senior executives and in-house counsel are increasingly deploying a number of different techniques to manage these disputes more effectively - which, in turn, is allowing them to reduce their impact on business and ultimate cost to the company.

Thinking ahead
Putting one's head in the sand is a common (and perhaps understandable) initial reaction from companies when complex cross-border disputes first emerge - sometimes in the courts of a far-flung jurisdiction - and taking an ad hoc and generally reactive approach to dealing with these cases may often seem like the best way of dealing with them. However, the survey reveals that many corporates - including in the structured finance world - are increasingly seeking to grapple with the issues posed by cross-border disputes head-on by planning ahead.

The survey identifies a number of different strategies. First, companies are looking backwards by thinking more proactively about the lessons that can be learned from past disputes or regulatory investigations.

Some companies, for example, are initiating their own reviews of processes and paperwork to root out any issues which generated past disputes, so that they can identify similar risks that might exist in other parts of the business. This is particularly so in the context of investigations instigated by financial regulators, where 'cross-fertilisation' of issues from parts of a business already under inquiry to others that were originally outside of the scope of investigation is becoming increasingly typical.

Second, companies are looking forwards by thinking about how they can be better prepared for cross-border disputes once they do emerge, so that they can be handled on their own terms rather than those of the opposing party. One way of doing this, as confirmed by the survey, is by the careful use of arbitration and dispute resolution clauses in contracts to control the jurisdiction in which a dispute may ultimately be decided and, in particular, to avoid jurisdictions that might be seen as difficult or unfavourable.

This could be said to be of particular importance in the structured finance industry, where 'forum shopping' is rife and parties race against each other to bring the dispute in their chosen court. This often leads to complex and expensive satellite litigation, while the competing courts determine where the matter should be heard.

Jurisdiction clauses in finance agreements can reduce this risk, although history has shown that they are not necessarily fool-proof. For example, the English courts have accepted that clauses providing for the courts of one country to have 'non-exclusive' (rather than exclusive) jurisdiction over a dispute may not necessarily prevent proceedings from being initiated elsewhere, such as the counterparty's home jurisdiction. However, with careful drafting, these clauses can significantly narrow the risk of a company becoming embroiled in a dispute in what may be perceived as an undesirable and legally challenging jurisdiction.

A further interesting development - given the financial crisis and its effect on headcount - is the increasing willingness of international companies to invest in their in-house compliance and legal functions, with the aim of building up their internal expertise in dealing with complex, cross-border disputes when they inevitably come through the door. This would suggest that companies are recognising that having experienced in-house lawyers at hand to manage disputes can be invaluable and ultimately result in a cost benefit to the company.

Local and global counsel
While cross-border deals in the structured finance industry can involve a wide number of different jurisdictions, the harmonisation of laws and regulations governing them has tended to lag behind. A series of running battles between structured finance counterparties have revealed how these divergences in law and regulations can create significant difficulties for parties faced with a cross-border dispute - for example, where a Hong Kong bank books a deal for a German public authority with a US counterparty, even the basic starting point of "which law applies?" can seem less than clear.

In the wake of the financial crisis, governments and regulators came under significant pressure to overhaul their derivatives markets to make them 'safe'. Legislation, such as the Dodd-Frank Act in the US and EMIR in Europe, was enacted for this purpose - but there are key divergences among the different rules.

The 2009 G20 mandate has encouraged governments to take steps to harmonise their laws, but that is still some way off. It is also worth remembering that it is not just securitisation-specific laws that a company might be subject to in a given dispute, as in some jurisdictions sanctions against any infringement of domestic criminal laws may well be just around the corner. Significant territorial legal differences are therefore likely to remain for a good deal longer.

In light of this complex cross-border legal and regulatory environment, detailed country-specific knowledge of each relevant jurisdiction can be crucial - without which parties to a dispute are likely to face significant disadvantages. What is also important is having an understanding of the cultural idiosyncrasies of the given jurisdiction, particularly in the emerging markets - as failing to recognise and safely navigate these may have even more serious consequences than failing to get the local law right. It is perhaps no surprise, therefore, that over a third of respondents to the survey say that finding experienced local counsel to handle their cross-border disputes - particularly in challenging jurisdictions - is their greatest concern.

Companies are also turning to their main legal counsel to provide them with a more holistic service - with over two-thirds of respondents opting to instruct a single global legal counsel to manage cross-border disputes for them. This would seem to make commercial sense; enabling companies to channel instructions through a single point of contact minimises management time, and using a single firm facilitates a coordinated strategy and - it would be hoped - ensures better cost and quality control.

Thinking about settlement
When a dispute emerges, there is often little that can be done to stop the wheels of justice from turning - however slowly and in whatever jurisdiction that may be. However, the survey findings show that some companies are seeking to wrestle back control by pursuing a deliberate strategy of identifying and - if necessary - settling problem cases early on in the process.

Gathering information and interviewing witness as the start of a dispute may seem like unnecessarily front-loading a case - in terms of time and, especially, costs. However, this strategy can often pay dividends in the long run by ensuring that only cases with a good chance of success are fought, weaker cases which could otherwise lead to a raft of further disputes are nipped in the bud and management time is freed up to devote to building the business, rather than being taken up with dispute management.

It is clear, then, that companies have a number of challenges on their hands in dealing with an increasing number of complex cross-border disputes. However, companies are starting to deploy a range of strategies for making these disputes more containable and more manageable - and can even see this as an opportunity to protect and promote their market position through decisive legal action. The survey highlights that many senior executives and in-house counsel are aware of these challenges - and are consciously and proactively looking to develop their dispute management strategies to suit the ever-increasingly global business landscape.