Why many companies would rather avoid court process to settle disputes

Parties are increasingly opting to settle disputes out of court to avoid the drama and costs associated with litigation.

It is not a new phenomenon but has in recent years picked up as pressure piles on businesses to stem rising legal costs.

According to Legal Week Intelligence, which tracks such trends, legal fees for major companies across jurisdictions have been falling over the past few years.

For instance, legal fees spend by companies on the FTSE 100, comprising blue-chip firms listed on the UK stock market, fell by a third between 2011 and 2013.

This trend is largely attributable to the desire by many companies globally to engage in negotiated settlements to avoid full trial with its potential adverse implications on the financial health and reputation of a business.

Various studies by the World Bank and other global institutions show that litigation costs affect the competitiveness of businesses and economies.

The Boston Consulting Group, an international business research firm, estimates that litigation has cost businesses in Europe and America $178 billion since the 2008 financial crisis.

Little wonder then that litigation has been dubbed the “new cost of doing business”.

LEGAL BACKLOG

This also explains the shift to alternative dispute resolution mechanisms.

Between January and September 2014, financial institutions in the US and Eurozone spent about $60 billion settling claims out of court.

Although there is a dearth of such data locally, it is generally accepted that the Kenyan Judiciary continues to grapple with a huge case backlog despite efforts to streamline the system.

A protracted property feud involving a prominent Kenyan family concluded last year after nearly three decades illustrates the enormity of the challenge facing our courts.

Such inordinate delays are a major factor in creating uncertainty in the legal system, consequently increasing the risk and cost of doing business.

Alternative dispute resolution (ADR) is gaining currency.

The number of cases settled through arbitration, mediation, and negotiation is on the rise.

Indeed ADR has taken root in Kenya and is accepted as an avenue for resolving disputes.

ADR and related methods hold the key to reducing the huge case backlog constantly plaguing our courts.

Kenyan firms are increasingly resorting to out of court settlements in order to cut the financial and reputational risks associated with courtroom battles.

Besides the financial risk of paying damages, businesses are also exposed to risks to their reputation stemming from negative publicity.

CHEAPER WAY OUT
A case in point is the settlement of a high-profile case pitting financial services firm Britam against Acorn Group, a real estate development company.

In October, Britam and Acorn Group announced that they had arrived at an amicable settlement after the parties agreed on how to divide the assets in question. 

The settlement saved both parties hundreds of millions of shillings in potential litigation costs.

What motivates parties to pursue out-of-court settlement?

The outcome of litigation is difficult to predict and such uncertainty poses risks to the parties involved.

The motivation to settle a case depends on many factors. 

First, the parties may wish to cut litigation costs including fees paid to lawyers and courts as well as travel expenses, not to mention time lost attending court hearings.

Second, the parties are assured of their privacy as the details of the dispute are kept out of the public domain.

BETTER ALTERNATIVE

Some settlements even carry confidentiality clauses binding the parties.

Third, settlements are more predictable compared to the uncertainty of a protracted dispute.

No trial guarantees either party victory. The ultimate verdict depends on many variables.

Fourth, the parties avoid the drama and stress of the demanding, laborious, and often emotional court processes.

Fifth, such settlements provide a flexible way of sorting out the core issues without a major fallout and consequent damage to the reputation of the parties.

With ADR, legal disputes can be resolved amicably.

More importantly, for the process to work, there must be a genuine desire among the parties to focus on the bigger picture.

Besides reducing the backlog in the courts, such settlements constitute best practice for improving a country’s overall business climate, thus fostering investor confidence and trust.