This article originally appeared in Mealey’s® International Arbitration Report, Vol. 35, #12 December 2020.

By Peter Halprin, Stephen Wah and Nika Gigashvilli

Introduction

For the most part, 2020 started as any other year would, with many businesses looking forward to continued success. In the United States, the country was in the midst of the longest economic expansion in U.S. history and the nation faced near record-low unemployment.1

Unfortunately, 2020 was not like any other year. The global pandemic wrought havoc on the world economy, and pushed many well-established businesses into bankruptcy.2 Writing about this in April, the Brookings Institute forecasted the following:

The current crisis could bring a much greater surge in business bankruptcy filings than either of the two most recent recessions. Prior to the current crisis, businesses took on an extraordinary amount of debt—$15.5 trillion, according to one estimate, a 52% increase since its high point during the 2008 crisis. This debt, coupled with the nearly complete shutdown of the economy and the fact that the revenues of many businesses will be slow to recover, even after economic activity resumes, suggests there will be a surge of business bankruptcies. Businesses also may be less hesitant to file for bankruptcy than they otherwise would have, given that some debt is now guaranteed by the government and the distress has been triggered by a crisis outside their control. At the very least, regulators need to assume that a bankruptcy wave is coming.3

A June report from the Organisation for Economic Co-operation and Development (‘‘OECD’’) estimated that, absent government intervention, 12% of small and medium sized-enterprises were expected to fail due to the pandemic.4 This number represented up to 5% of employment in 17 countries. Industries expected to be particularly impacted include wholesale and retail, accommodations and food, manufacturing, and construction.5 In a subsequent report, issued in September, it was estimated that the failure rate of small and medium sized-enterprises would increase by nearly 9% without government supports.6

In the United States, as of mid-October, more than 1,300 cases were filed in relation to insurance coverage for pandemic business income losses.7 In the United Kingdom, an appeal will be heard by the Supreme Court on the ‘test case’ regarding pandemic insurance coverage.8 At the outset, the UK’s Financial Conduct Authority estimated that 370,000 policyholders could potentially be affected by the test case.9 The bottom line is that businesses need help and they need it right away.

While traditional litigation and alternative dispute resolution alike can assist businesses in recovering monies to which they are entitled, the pace of such resolutions are inadequate in the status quo.

Given the current challenges, new thinking is required. As such, this paper suggests that arbitrators, counsel, institutions, mediators, and parties from the common law tradition consider looking at the issue of ‘‘double-hatting’ – arbitrators acting as mediators and vice versa in the same case – anew. In other words, this paper suggests that a bold approach is required to rapidly resolve pending disputes and to assist businesses with a return to business. With the proper procedural safeguards, the time may be ripe for rejecting conventional wisdom and embracing forms of double-hatting.10

The risks and rewards are well known. Per Axel Reeg, referencing something short of double-hatting:

Engaging in settlement facilitation, for an international arbitral tribunal, may be a tricky issue. It may result in disaster if overly active arbitrators are pushing hard for a settlement are successfully challenged and the tribunal falls apart. It may also earn praise by and lead to satisfaction of the parties with the performance in cases where it facilitates a solution both parties can live with rather than rendering an award which produces a full victory for one side and a full defeat for the other.11

Despite the obvious upside, there has traditionally been great hostility to double-hatting by those trained in the common law tradition. This paper explores the differences between arbitration and mediation, the pluses and minuses of the double-hatting approach, and the embrace of combined approaches in civil law jurisdictions such as Austria, China, and Germany. Following this, the paper will offer best practices for double-hatting and whether conventional concerns about double-hatting can be addressed through steps short of arbitration and mediation such as settlement facilitation.

Click here to read the full article.