The language of law

The law uses language similar to the language of risk management, but that language is interpreted in a different way. Understanding this difference is a key to unlocking controls that may reduce your residual risk. If you have ever picked up a legal textbook, talked to lawyers or been in court, you will have encountered language on the issue of risk that sounds vaguely familiar. There is an entire body of law, called ‘tort’, which sets out how much risk is acceptable and when you will be held liable if a risk materializes and causes damage to others. Tort law lays down that, in certain circumstances, you are deemed to owe a ‘duty of care’ to others. An employer’s duty to employees is an example. How much care you have to exercise is determined by an objective ‘standard of care’. If the standard of care you exercise is lower than a court would expect, and this contributes to someone sustaining a loss, then a court will hold you liable to pay compensation for the damage caused. Compensation for personal injury is the classic example.
In order to determine the standard of care, courts are meant to look at the ‘magnitude of the risk’. The greater the risk the greater the standard of care will be. An example will help you to understand this. Take a zoo. The standard of care required to guard against visitors being injured by animals will vary according to the threat posed by a given animal. If a visitor is attacked by a lion, serious injury or death is the likely result. On the other hand, an attack by a penguin is likely to result in the victim being more embarrassed than anything else. So the law requires that a higher standard of care be applied to lions than to penguins. So, if you think about it, this idea of setting a standard of care on the basis of the magnitude of the risk looks like part of an RM process, of establishing the ‘probability of an occurrence and possible consequences’. In setting this standard of care, the law takes into consideration the ‘costs of preventative measures’ and the ‘social value’ of the activity being engaged upon. Again, this is language on which you can place a meaning, as its sounds pretty much like ‘cost–benefit analysis’ and ‘defining your context’ or ‘setting strategic objectives’ in an RM process. [.............]

Risk management – alternative dispute resolution

Disputes represent an obvious risk for organizations; they can be costly in terms of fees and opportunity costs (lost management and executive time), and can be a threat to an organization’s reputation. Even with the best risk management systems in place, it is almost inevitable that an organization will be faced with a dispute at some stage. While it might not be possible in all cases to prevent disputes from arising, an organization can control how it responds to a dispute. The traditional approach, taken by organizations when responding to commercial disputes, has been to consider their legal position and, if there was a genuine relationship between the parties to preserve, initiate negotiations. If negotiations failed, the next step was to commence litigation proceedings in the courts.
In more recent times, organizations have realized the importance of managing disputes before they escalate to the point of litigation. In-house and external lawyers now consider whether an alternative dispute resolution mechanism can be applied to a dispute while it is in its early stages. This is because the costs involved in litigating a matter to trial are often grossly disproportionate to the amount that is at stake. As litigation progresses, management and executives are required to devote more time and attention to the dispute, particularly when parties are required to disclose relevant documents to the other side and submit detailed evidence to support a case.
Managers should be aware that litigation is not the only way to resolve a dispute. There are a number of other methods that exist, collectively described as ‘alternative dispute resolution’ (ADR) procedures, which are being increasingly used effectively to manage disputes and their consequent risks. In the UK, the courts first formally recognized ADR in 1998, with the introduction of the new court rules (known as the Civil Procedure Rules – CPR). Under the CPR, the court is charged with the duty of case management, and part of that duty includes encouraging parties to use ADR if the court considers it appropriate. In this chapter, we briefly outline three forms of ADR that have become more
popular in the UK’s commercial arena in recent times.1 We then focus on mediation, the most commonly used ADR mechanism in the UK. We conclude with a discussion of the costs risk to which organizations are exposed if they do not consider using ADR when faced with a commercial dispute

Fight for the right?

The European Commission is so certain that litigation costs adversely affect the take-up of patent rights that it has proposed that anyone applying for a European patent should be required to have compulsory patent litigation insurance. A study for the Commission determined the average amount spent by each party in a patent infringement action in a number of EU countries. Considering both the first instance trial and the cost of an appeal, the most expensive country was the UK, where on average each party spent N980,000. In Germany, where there has to be both an infringement action and a separate nullity action, the costs to have both issues tried and then reviewed on appeal are about N730,000 for each party. The party spend in France, by contrast, are of the order of N125,000 each. However, the same study worked out a litigation ratio for each country and determined that the number of patents that are the subject of proceedings remains very low. The number of European patents in force in various countries was determined and divided by the number of patent infringement actions started per annum to determine a litigation ratio indicating the incidence of patent litigation. So in France, where 250,000 European patents are currently in force and 50 patent actions are started a year, the litigation ratio is 1:5,000. Only 50 per cent of patent actions in France proceed to trial and judgment, so a similar calculation gives a first judgment ratio of 1:10,000. The comparable figures for
the United Kingdom are a litigation ratio of 1:2,000 and a ratio to first judgment of 1:8,000. Thus in most countries across Europe very few patents are the subject of litigation. Even where an action is started, at least half are settled before trial. In the United Kingdom, only about 20 actions a year go to trial, which is one-sixth of those started. It is accepted that the cost of patent litigation in all European countries is significant. However, the level of expense incurred in litigation in the UK is generally higher than that seen in other European countries. This difference in cost arises out of differences in process.

Litigation risk

If the assumption is that change brings litigation, then the plethora of legal, regulatory and social changes that businesses have faced in the last 10 years alone should have the courts braced for the litigation floodgates to open. A recent report titled prepared by Lloyd’s of London in cooperation with the Economist Intelligence Unit, warns that the UK is increasingly facing a US-style compensation culture. But warnings of increased litigation are nothing new. In 2004, the then chairman of the Financial Services Authority, Callum McCarthy, warned that the UK was at risk of losing its advantage as a less litigious society than the United States. Similarly, in recent months the legal and mainstream press has devoted columns of print warning of impending credit crunch litigation. Yet are such warnings