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Reconciliable differences

It was a typical business dispute, except for the $320 million at stake. Alleging delays in the construction of a natural gas pipeline, Colombia's national oil company, Ecopetrol, was preparing to declare TransGas in breach of contract. TransGas, a joint venture controlled by the Canadian multinational company TransCanada, was building the $320 million pipeline and had threatened to stop work if Ecopetrol took that step.
The situation reached a tense stand off in the spring of 1997, endangering the completion of a 343-km network of pipes running from Mariquita to Cali that is critical to meeting Colombia's growing energy needs.

The parties could have taken the case to court. But in Colombia, as in almost every country in Latin America and the Caribbean, it can take from seven to 10 years to push a complex commercial dispute through the judicial system. A trial might have generated huge legal bills and negative publicity. And it probably would have ruined a business relationship that could otherwise benefit both parties for decades to come.

Knowing this, Ecopetrol and TransCanada had written a clause into the pipeline contract that bound them to resolve any disputes through arbitration. In March of 1997, convinced that they could not work out their differences, the two sides sought assistance at the Center for Arbitration and Conciliation run by the Bogotá Chamber of Commerce.

"The first two or three meetings were kind of aggressive," recalls Eduardo Zuleta, an attorney who represented TransGas. "Everybody wanted to blame the other party, and no one wanted to budge from their position."

But under the skillful guidance of Adriana Polanía Polanía, a veteran conciliator and head of the arbitration center, both sides were gradually able to narrow their list of disagreements to a few very specific items. Three months later, without even having resorted to a formal arbitration proceeding, Ecopetrol and TransGas signed an agreement that guaranteed the pipeline would be completed in August. The total cost to the companies, not including their attorneys' fees, was some $6,000 in conciliation service fees paid to the arbitration center.

Different path, same goal. Although the stakes were unusually high, the pipeline case was just one of thousands that are resolved through alternative dispute resolution (ADR) methods each year in Colombia (see Mediation for Beginners, on this page). With more than 120 arbitration centers across the country, and hundreds of trained conciliators and arbitrators, Colombia is a leader in this area, offering companies and consumers a speedy and efficient way to resolve disputes without going to court.

"This is a very gratifying line of work," says Polanía. "Considering the times our country is going through, it's almost incredible to be able to resolve a conflict in an average of 15 days. People are always telling us how grateful they are."

The benefits of ADR are not reserved for large companies or government entities. On the day Polanía spoke to IDBamérica, one of her staffers had just helped to resolve a dispute between a hairdresser and a retail computer store over an allegedly faulty piece of software. Many cases handled by the country's ADR centers involve relatively simple disagreements between family members over property or money. And for the millions of low-income workers in the region's informal sector, where legal contracts are rarely used, ADR can provide an efficient, low-cost means for resolving differences with a contractor or client.

ADR also provides an indirect benefit to a country's judicial system by easing the caseload of courts that are already overburdened. "The courts in most of our countries simply don't have the resources to deal with the volume of cases they are being asked to handle," says Ricardo Posada, an economist with the IDB's Multilateral Investment Fund (MIF). "In some countries there are thousands of cases just waiting to be heard. So if you are interested in resolving a matter expeditiously, and the dispute does not involve issues that can only be handled in court, then ADR can be a very attractive option for both citizens and the judicial system."

New relevance. Although laws codifying the validity of some kind of ADR have existed in nearly all the region's countries for most of this century, in practice very few companies or individuals have chosen this option. During the last six years, however, a wave of interest in ADR has led two-thirds of the region's countries to either overhaul old laws concerning ADR or draft new ones, and dozens of new arbitration and conciliation centers have opened their doors.

The IDB's MIF is currently funding programs to either strengthen or establish ADR activities at the request of Colombia, Costa Rica, El Salvador, Ecuador, Honduras, Panama, Peru and Uruguay. Later this year, similar projects are scheduled for approval in Brazil, Chile, Guatemala, Nicaragua and Paraguay.

The projects focus on strengthening the institutional capacity of the centers and training mediators and arbitrators so that they have the technical resources to handle a wide variety of cases. The projects also sponsor educational workshops on ADR for professionals in the business, legal and judicial communities.

According to Posada, who has helped design many of these projects, the new interest ADR is a byproduct of broad economic and social changes in the region. To begin with, the economic recovery of many countries following the debt crisis of the 1980s created a surge in business activity, with a parallel jump in the number of business-related disputes.

At the same time, the democratic opening that has transformed political systems in most Latin American and Caribbean countries over the last decade has fostered a stronger sense of individual legal rights, encouraging people to seek redress in more situations. In most countries, this new demand for conflict resolution services has literally overwhelmed the courts.

Foreign investors, who have flocked to Latin America as a result of economic reform programs and lower trade barriers, have also stimulated interest in ADR. Eager to avoid lengthy and unpredictable court battles, the majority of foreign investors today require some kind of ADR clause in their contracts with national companies and governments, according to Posada. The contracting parties often go so far as to specify where the conciliation or arbitration will take place. If a local source is not available, disputes are typically referred to regional offices of the American Arbitration Association in New York, the International Chamber of Commerce (ICC) in Paris, or comparable bodies.

"Arbitration plays a very important role for countries that are trying to attract foreign investment, because it gives investors a measure of protection in situations where the legal environment is still evolving or where they are under contract to government entities," says Posada. Indeed, although most international arbitration cases take place in the private sector, fully 8 percent of the disputes brought before the ICC Court for International Arbitration in 1997 involved public-sector parties.

New incentives. ADR clauses are not just desirable to foreign investors, however. Local companies that are beginning to branch out into neighboring Latin American countries or that are trying to raise funds on the stock market also stand to gain.

Maria da Cunha, an attorney who consults for the MIF on ADR and other issues, says that as the region's economies become more diversified and companies become more dependent on a variety of suppliers and investors, the incentive to use ADR increases.

"If you're a publicly traded company, you may have to comply with financial disclosure rules that force you to report the costs of any lawsuit you are involved in," she says. "Shareholders and potential investors see lawsuits as a liability." Likewise, companies that are trying to break into new markets and attract business partners don't want their reputations sullied by press reports of lawsuits.

And there is another risk in going to court: the parties usually have no guarantee that the judge hearing the case will have the expertise to handle complex disputes that hinge on highly specialized or technical issues. "If you are going to court to resolve a software piracy issue and the judge has never used a computer, you might get a surprising decision," says Posada.

By contrast, ADR offers a great deal of control. ADR proceedings are strictly confidential, and detailed procedural rules are agreed to in advance by both parties. Moreover, ADRadr centers typically maintain a roster of arbitrators and conciliators who are experts in particular areas of industry or technology, or who specialize in sectors such as labor, insurance or construction.

Jorge Suescún Melo, an arbitrator at the Bogotá Chamber of Commerce, says these factors help remove a lot of the uncertainty inherent in a court trial. "In ADR proceedings everything is clear, all decisions are made in the presence of all the parties involved, so normally there are no surprises at the end."

For a business, the swift, confidential, and more predictable nature of ADR proceedings makes it possible both to minimize the bad blood arising from a dispute and preserve a valuable commercial relationship. "Because of the agreement we were able to reach, the relationship between Ecopetrol and TransGas today is excellent," reflects Santiago Jaramillo, another Colombian attorney who represented TransGas in the pipeline case. "This is very important for a company that wants to be in Colombia for the long term, because it tells the local business community that we have the will to negotiate and conciliate if something happens in the future."

Privatizing justice? Despite these advantages, the use of ADR methods in the region remains very limited. While a few countries, notably Colombia, Chile and Argentina, have made significant strides, in most of the region ADR is still largely unknown. "Many business- people, even those belonging to the chambers of commerce that traditionally champion ADR, don't know what ADR is, or they're very confused about how it works," says the IDB's Posada. The same can be said for many practicing lawyers and judges, who sometimes assume that ADR is an attempt to undermine their influence or authority. In some cases, ADR has even been portrayed as an effort to "privatize justice."

"That is an unfortunate misperception," says Posada, "because proponents of ADR have never been interested in competing with the courts. The purpose of ADR is to supplement the judicial system by dealing with cases that don't really require the intervention of a judge." Ironically, when lawyers and judges have a chance to attend an ADR seminar and ask questions, he added, they almost always conclude that it deserves their support.

In fact, the legal community has come to champion ADR in some countries. In Argentina, for example, after several years of public debate, many lawyers and judges supported the passage of an ambitious law that mandated the use of ADR as a first step in almost all civil cases, starting in 1996. Today, Argentine judges routinely refer tens of thousands of cases per year to 3,300 mediators who are trained and certified at centers managed by the Ministry of Justice. Only if the mediation process fails are the parties allowed to request a trial.

"The judges are very enthusiastic about that law," says Christina Biebesheimer, an IDB legal expert who has worked on a number of judicial reform programs in the region. Figures released last April by Argentina's Ministry of Justice show why: of the 116,660 cases that were referred for mediation in the first two years after the new law went into effect, only 32,644 ultimately went to trial. The most frequent types of disputes handled by mediators concerned damages from traffic accidents, late payments for services or utilities, landlord/tenant disputes and various breaches of contract. Most mediation proceedings lasted between 60 and 90 days and cost around one-tenth of what a trial would, according to the ministry. Moreover, less than one percent of all mediated agreements were not upheld by both parties--a sign that people consider mediation to be just as official as a court decision.

Growing support. Judicial officials in many other countries are interested in the potential for expanding the use of mediation and other ADR methods within the court system. In Peru, for example, approximately 80 percent of all small claim civil cases are already handled by justices of the peace. These officials, who are usually respected local citizens, function essentially as conciliators who attempt to resolve disputes. Only cases that cannot be resolved on the spot are referred to the court system. Under a judicial reform program partially financed by the IDB, the Peruvian government has been sponsoring training programs for justices of the peace that aim to improve their ability to resolve more complicated cases.

"This is an effective way to expand access to justice while keeping pressure off the courts," says Biebesheimer, "because the justices of the peace are available in even the smallest towns and they tend to inspire the trust of local people."

A similar approach is being promoted by the state of Rio de Janeiro in Brazil, which has opened small "Houses of Justice" in low-income urban neighborhoods. The houses are open after hours, so working people can fit visits into their schedules. In addition, the houses are staffed on a rotating, part- time basis by senior judges from the state's court system. "The idea is to resolve cases quickly for low-income people who can't afford a lawyer or who live in neighborhoods that are too far from a courthouse," says Biebesheimer.

The idea, she might also have said, is to increase people's options. Whether they are practiced in a chamber of commerce, a courthouse, a community center or even a town plaza, ADR methods are expanding the range of options available to people who need to resolve differences. And that, in the long run, can only help the broader cause of justice.

-- With reporting by David Mangurian

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