By Ethan S. Burger, Irina Paliashvili, and Michael Lewis When preparing contracts for their clients engaged in business in Russia and Ukraine, lawyers usually devote considerable thought to the dispute resolution provisions. Typically, a lawyer‘s analysis focuses on whether it is advisable to provide for international arbi- tration of disputes, as opposed to their reso- lution by the local commercial courts. The dispute resolution provisions of such contracts typically read:

The Parties shall attempt to resolve all disputes arising out of this Agreement by amicable negotiations. In the event that the Parties fail to resolve a dispute, they shall submit the matter to [for ex- ample, the International Chamber of Commerce’s International Court ofAr- bitration in Paris; the London Court of International Arbitration; the Arbi- tration Institute of the Stockholm Chamber of Commerce; or the Inter- national Arbitration Court of the Rus- sian Chamber of Commerce and Industry] for resolution in accordance with the rules thereof.

For smaller value contracts, the lawyer may advise his or her client to provide that the local commercial court have jurisdiction over a dispute (since the cost of arbitration under the auspices of an international arbitral body is likely to be high). In light of the difficulty in certain instances of enforcing foreign arbi- tral awards, some lawyers are recommending the use of the local commercial courts irre- spective of the value of the contract.

Most attorneys do not give much thought to the first sentence of the dispute resolution clause above since i t often is viewed as boilerplate that states the obvious: Parties to a contract are unlikely to initiate an arbitra- tion or file a claim in a court against a busi- ness partner until after seeking to resolve the dispute by negotiation. Unfortunately, this is not always the case.

Resolving Commercial Disputes in Russia and Ukraine: Will Mediation Be a Viable Option?

In fact, many disputes before arbitrators and judges could have been resolved by the parties themselves had they engaged in a for- mal process aimed at reaching a mutually sat- isfactory settlement. Direct negotiations are most likely to succeed where the parties are represented by individuals with a thorough understanding of the relevant issues, are com- mitted to a continuing, productive relation- ship between the sides, and possess appropriate skills and demeanor for the con- duct of negotiations. Unfortunately, these conditions do not always exist.

It may be advisable to provide in contracts relevant procedures aimed at resolving dis- putes without the need for costly and uncer- tain arbitration or litigation, before

on the part of one or both parties, it is often the result of numerous other factors such as:

A RAPIDLY EVOLVING LEGAL, TAX AND BUSI-

NESS ENVIRONMENT. Changesoccurringin the market and changes in laws will have a dis- parate and often unanticipated impact on the parties to a contract. The continuation of ex- isting business arrangements often becomes less attractive than orher opportunities. This happens most frequently where a party origi- nally made an inaccurate assessment of the other party’s commitment to the relationship or had unrealistically high expectations of what the other party could accomplish.

SIGNIFICANTTURNOVER I N KEY PERSONNEL.

Such personnel turnover can have

Burger i s counsel and Paliashvili i s president and founder of Russian-Ukrainian Legal Group P.A., a Washington, D.C., law firm. Lewis is senior adviser to the Washington, D.C.-based, Center for Dispute Settlement, nonprofit corporation founded i n 1971 that provides mediation consulting and training. This article i s adapted from a version appearing i n the €ast/West Etecutive Guide, Vol. 8, No. 2 (February 1998). The full-text of this article is available at www.rulg.com.

- far-reaching and harmful conse-

quences for relatively new en- such disputes in fact arise. While such processes could take a va- riety of forms used by U S . terprises and business

businesses, we believe that me- relationships where written contracts and formal proce- diation may offer the most

promising means of alternative dures do not reflect the actual

dispute resolution in Russia management arrangements

and Ukraine for certain types of followed on the ground. The

disputes such as construction, fran- role that staffing issues play in

0

chise agreements or other arrangements where there is a possibility that the parties may be interested in resuming businesslike relations. In addition, mediation may be ap- propriate where both parties to a dispute are concerned about their reputation within a particular industry.

CHARACTERISTICS OF DISPUTES I N RUSSIA AND UKRAINE Western investors in Russia and Ukraine are increasingly finding themselves in commer- cial disputes with their joint venture partners, suppliers and customers. In the typical situa- tion, the western party at the outset of a busi- ness relationship brings much needed capital and business know-how to a proposed project, introduces a new product in an untapped market or offers a service previously unavail- able or only available at unacceptable stan- dards. The Russian or Ukrainian party offers its local contacts, real property, personnel and savvy that makes it attractive as a business partner.

Frequently, these business relations do not turn out as well as hoped. While in many cases this situation is the result of bad faith

business disputes in Russia and Ukraine frequently is underestimated due to a failure to appreciate the difficulty in find- ing skilled, motivated and loyal personnel, especially since home-office supervisors as- signed to oversee their company’s operations in Russia and Ukraine often lack relevant experience in these countries.

Not only are western businesses encoun- tering the problem of an increasing number of business disputes, which even if positively resolved can be highly disruptive to success- ful commercial operations. There also is the problem of achieving a favorable resolution to such disputes. Both Russia’s and Ukraine’s court systems can be tactfully described as being in the midst ofan evolution. While sig- nificant progress has been made in recent years, both countries’ judicial systems con- tinue to be plagued by a shortage of experi- enced and motivated judges.

Furthermore, Russian and Ukrainian judges are famous for their sometimes me- chanical approaches to business disputes- making rulings based on seemingly arcane civil law principles rather than the merits.

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Resolving Commercial Disputes in Russia and the Ukraine (continued from previous page) International commercial arbitration may not be a reliable alternative to litigation since the cost may be prohibitive, and some western parties have found themselves unable to en- force favorable arbitration rulings despite the existence ofthe 1958 New York Convention. (The two most notable examples with respect to Russia are the “Subway Restaurant ” case in St. Petersburg and the Aerostar Hotel dis- pute in Moscow.)

To further complicate matters, successful plaintiffs in Russia and Ukraine have fre- quently encountered difficulty in enforcing favorable court rulings. This situation is a result of a myriad of factors, including prob- lems in locating defendants’ assets; deficien- cies in applicable legislation; and a shortage of skilled and motivated court personnel. Given that so-called traditional forms of dis- pute resolution may not always be appropri- ate or effective, it may be appropriate for businesses to explore available alternatives.

MEDIATION AND PRACTICE I N RUSSIA AND UKRAINE As noted above, mediation is a form ofdirected negotiation. The form the mediation will take is within the parties’ control. See CPR Model Mediation Procedure Commentary, “The Me- diation Process” (available at www.cpradr.org/ medcomme.htm) and Leonard L. Riskin, “Me- diator Orientations, Strategies and Techniques,” 12 Alternatives 11 1 (September 1994). Just as western businesses have exported their prod-

ucts and services to Russia and Ukraine, they may find a ready “market” for mediation as a method of dispute resolution which they have used successfully at home. Such businesses could propose the inclusion of mandatory mediation in the dispute resolution clauses of their con- tracts in the region.

To increase the likelihood that their busi- ness partners will be receptive to the idea, it may be best to propose using existing proce- dures, such as the CPR Mediation Procedure (Revised 1998); the American Arbitration Association’s Commercial Mediation Rules, as amended and effective on Jan. 1, 1992; or a private specialized mediation organization.

Alternatively, western businesses could propose to engage in “conciliation,” which ofren is used as a synonym for mediation. It describes a similar, though distinct, process. Generally, conciliation may differ from me- diation because conciliators may be autho- rized by the relevant rules to offer their own proposed settlements to the parties, rather than helping the parties to develop their own. Such business can use the Conciliation Rules of the United Nations Commission of Inter- national Law, know as Uncitral, or under the auspices and according to the rules of a rec- ognized body such as the International Chamber of Commerce, the Stockholm Chamber of Commerce, or the International Centre for the Settlement ofhvestment Dis- putes. Unfortunately, these organizations have little if any experience in mediation of commercial disputes in Russia or Ukraine.

While the appearance of mediation as a formal dispute resolution process in Russia and Ukraine is a relatively recent develop- ment, the mediation of business disputes by (not entirely) neutral third parties is not. During the Soviet era, western scholars noted that the local Communist parry secretary of- ten found himself mediating disputes between enterprises and other entities located bureau- cratically under the jurisdiction of different ministries and state committees. These Com- munist party officials found themselves in situations where they were capable of brokering settlements, though this often OC-

curred only after promising benefits or threat- ening consequences if the parties did not resolve the dispute themselves before being heard by state arbitration bodies.

Recently, Russia has begun to use concil- iatory commissions, at which labor and man- agement are equally represented, and professional mediators to resolve employment and other labor disputes. In addition, last year Ukrainian President Leonid Kuchma by presi- dential edict created the “Chamber of Inde- pendent Experts on Issues of Foreign Investment.” Such experts will compose three-member panels that will examine dis- putes between foreign investors and Ukrai- nian state bodies, and issue recommendations on how to resolve them. The recommenda- tions may serve as a basis for quick and inex- pensive dispute resolution without the need to resort to adjudication or arbitration. It is

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ABOUT THE CPR INSTITUTE FOR DISPUTE RESOLUTION ORGANIZED BY PROMINENT CORPORATE COUNSEL, THE CPR INSTITUTE FOR DISPUTE RESOLUTION has become a leader in developing uses of private alternatives to the costly

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(continued from previous page) not clear from the chamber’s regulations whether such recommendations are binding. The chamber’s panels have the authority to send their “decision” to the Ukrainian presi- dent and other state bodies with a recom- mendation that such decision be implemented, and President Kuchma has indicated informally that he regards such rec- ommendations binding on the parties.

The use of formal mediation as a tool for dispute resolution seems to be slowly taking hold at the grassroots level in both countries. (We use the word formal here since local busi- nessmen will often rely on their krysha, the

ADR HOLDS PROMISE To our knowledge, formal mediation of com- mercial disputes between western and local parties has not been used widely in either Russia or Ukraine. Nevertheless, we believe that it holds promise for western businesses active in both countries. It has been our ex- perience that Russian and Ukrainian business people, to a greater extent than their western counterparts, have a fairly significant need to “save face” in disputes. Perhaps this charac- teristic arises from a sense of feeling less so- phisticated than their western counterparts. Maybe it is a product of being less familiar with international business practices. For

whatever reason, the adversarial nature of either

The use of mediation arbitration or adjudication can aggravate this character- istic, which exacerbates an

While we believe that as a dispute resolution already tense situation.

tool Seems to be slowly mediationcouldbesuccess- ful in certain types of dis-

taking hold a t the putes between western and Russian or Ukrainian par- ties, we recognize that cross- cultural disputes can make international commercial mediation difficult. Media-

grassroots level in both countries. _ .

persons or organizations being paid to “pro- tect” their businesses, to “informally” settle their disputes. In the case when both parties have their own paid protection organization or individuals, the hired group or people have been known to hold so-called criminal courts that seek to resolve the dispute on the mer- its.) This is not surprising given the relatively limited history of private law practice other than in family law matters, noncommercial civil disputes and criminal defense work, and the general nonlitigious nature of the popu- lation so far.

Independent mediation centers (such as the Ukrainian Conflict Resolution Associa- tion, the Ukrainian Mediation Group, the Moscow Center on Conflict Resolution, Pre- vention and Research, and the St. Petersburg (Russia) Conflict Resolution Center), often supported by western non-governmental or- ganizations such as the American Bar Asso- ciation and the Search for Common Ground, are beginning to offer mediation services in the areas offamily, employment, small claims and consumer disputes.

tion depends on successful communication. Differ- ences in language, gestures

and negotiating style are more acute in transnational mediations. To have the great- est likelihood ofsuccess, we would advise that a mediation team consist of a mediator from the home country of each of the parties in- volved in the dispute.

Ideally each mediator should be trained and have a proven ability to work with other mediators and parties. Each mediator should have some experience dealing with persons of the same nationality as the disputing par- ties and have some facility in the parties’ lan- guages to be able to converse, a t least minimally.

Mediation’s development in resolving Russian and Ukrainian commercial disputes is likely to be demand-driven in the coming years. That is, ifdissatisfaction with commer- cial courts and arbitration continues, busi- nessmen and women will be eager to find alternative means to resolve their disputes. Both countries currently lack a supply of trained and knowledgeable mediators. But as in market economies, demand no doubt will

* spark a greater supply. - lllll

Getting the Word Out, Over There The authors are investigating the potential for mediation in resolving commercial disputes in Russia and Ukraine by focusing on the follow- ing areas:

(1) further refinement of their Rus- sian language mediation training materials including preparing fact patterns for simulations;

(2) preparation of articles on media- tion for publications such as Ekono- mika i zhizn (for Russia) and Biznis (for Ukraine);

(3) preparation of a survey on me- diation to be sent to members of the chapters of the American Chamber of Commerce in both Russia and Ukraine, and to heads and Legalstaff of Russian and Ukrainian enterprises, as well as the tabulation of the re- sults.

(4) liaison with interested US. indi- viduals and organizations.

(5) finding funding from founda- tions, private companies and govern- mental sources for training mediators with the proper language and professional skills, to be orga- nized by the Center for Dispute Settlement. The mediators then might be placed on a roster of an ex- isting body or a new body devoted to mediation in Russia and Ukraine.

Contact Ethan 5. Burger for more in- formation a t ethansb@rulg.com or by fax at (202) 822-1621.

-By Ethan 5. Burger, Irina Paliashvili, and Michael Lewis