The Converged World

22 May 2007

Sophie Lamb, David Tudor

Convergence describes the coming together of hitherto distinct strands of communication and entertainment services — telephony, the internet, television — resulting from the adoption of internet technology by the telecoms industry.

Advances in internet protocol (IP) technology mean virtually any data can be carried reliably and efficiently, allowing network operators to use a single network. It also means any network operator delivering an IP stream to its customers could potentially offer the so-called ‘quadruple play’ of fixed and mobile telephony, broadband and television.

As barriers have broken down between formerly separate industries, companies have been forced to re-define their competitive landscape and broader commercial strategies. Last year’s merger between NTL Telewest and Virgin Mobile to form Virgin Media illustrates the way convergence has driven corporate activity in the sector.

Disputes in the converged world

In this context, disputes are likely to arise concerning piracy and illegitimate or unauthorised use of content and complaints about competition law (including disputes over access to technology or infrastructure and associated claims of abuse of dominant position). There may be an increase in class actions, with groups of interested parties — rights-holders, market entrants and consumers — pooling resources to pursue a collective remedy.

At a contractual or relationship level, special features of deals and arrangements in the converged world may increase the likelihood of disputes. Much of this activity will be of a ‘never done before’ nature, meaning there is no guiding authority or reference point should things go wrong. In high-value or business-critical arrangements, this increases the scope for potential disputes and could materially reduce the prospects of early settlement.

At the deal negotiation stage, difficulties can often arise when those venturing into new commercial territory assume that business practices, terminology and trade usages carry the same meaning and significance as in their legacy industry. Such parties could find agreements, once fixed, do not reflect their understanding or expectations

In highly technical or novel arrangements, there is inevitably scope for disconnect between the ‘in principle’ deal agreed at board level and the detailed agreement implemented by internal counsel and external advisers. The risk is heightened when detailed implementation is delegated to those who were not involved in the original negotiations and so were never privy to the strategic or technical rationale underpinning the agreement.

Implementation issues in the converged world are compounded by the inherent difficulty in identifying contractual terminology apt to cover novel or evolving concepts and by the proliferation of technologies and devices designed to exploit the opportunities created by convergence.

Business models and deal assumptions may be undermined by changes in the regulatory landscape or by lack of consumer take-up. There may be disputes over the allocation of contractual risk or as to how exit rights should be valued.

Finally, there is also real potential for disputes over content. Competition is fierce — particularly over access to premium sporting events — and rights-holders are keen to exploit additional commercial opportunities created by the converged landscape. These conditions could well produce contractual disputes, particularly those concerned with the scope of contractual exclusivity in light of technological advancements (and in particular those developments which could not have been foreseen at the time of contracting).

Arbitration in the converged world

The generic advantages of arbitration — privacy; neutrality; flexibility of procedure; expertise of decision-makers; established pedigree in highly technical and high-value disputes; and enforceability of arbitral awards, among others — make it particularly suitable for resolving contractual disputes that may arise in this area.

An emerging preference among in-house counsel for international arbitration rather than litigation in foreign courts means it is inevitable that a large proportion of contractual disputes in the converged world will be resolved by arbitration, as has been the case with so many international telecoms disputes in the past decade.

While it is important to understand the benefits of arbitration, one must also be mindful of its limitations.

Some of the factors likely to give rise to a preference for arbitration over litigation in foreign courts include: difficulty of enforcing foreign court judgments; judicial systems inexperienced in resolving comparable disputes (and/or resolving complex or highly technical disputes with a high degree of predictability); unfamiliarity with a given legal system or its trial process (plus the applicable law and language); concerns over judicial integrity; and a lack of finality in the judicial system.

In the context of international arrangements in the converged world, arbitration is, by contrast, likely to offer a number of benefits.

Neutrality — a neutral forum in which neither party enjoys a home court advantage.

Independence — decision-makers must remain independent of the parties, giving integrity to the process and allowing it to be embraced by the wider business community.

Expertise — the freedom of the parties and ability of an appointing institution to select decision-makers who are expert in the relevant field. In appropriate cases this could entail selecting a technical rather than (or in addition to) legal expert for inclusion on the arbitral panel. Arbitral tribunals have long been resolving highly technical or otherwise complex disputes, including disputes that fall to be decided in accordance with foreign laws, to the satisfaction of the business community.

Privacy — the confidential nature of most arbitral proceedings allows the parties to preserve business confidences, details of proprietary technology and arrangements of a commercially sensitive nature.

Flexibility — the procedural framework is inherently flexible and encourages the parties to seek agreement on the procedure most suited to their individual dispute. This particular feature of arbitration will, if properly exploited by the parties, ensure its continued and innovative use. In theory, the parties could agree to expedite the entire process, resulting in a final binding decision on the merits in a much shorter time-frame than would be possible in traditional court proceedings. On a more practical level, the parties can even agree to change the venue of any hearings for the convenience of parties or witnesses, or to hold procedural hearings by telephone or video conference to avoid the cost and inconvenience of international travel.

Finality — there is finality to the arbitral process in that the scope for successful appeal or challenge is limited. Under the Arbitration Act 1996, even a failure to produce or disclose relevant documents during the course of arbitral proceedings will not necessarily result in arbitral award being set aside or remitted to the arbitral tribunal for reconsideration.

Advantages at the enforcement stage — the scope for successfully resisting enforcement of an arbitral award in any of the 140-plus countries that are signatories to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) is extremely limited. The portability and enforceability of arbitral awards therefore offer significant practical advantages when compared to a foreign court judgment.

Although arbitration is perceived to be a more commercial forum for the resolution of international business disputes, it is criticised by some for taking too long and costing too much. There are moves afoot to meet these criticisms, however, including an imminent report by the International Chamber of Commerce task force on reducing time and costs in complex arbitrations.

Parties and counsel can also exploit the flexibility of the arbitral procedure in order to avoid unnecessary cost and delay. Where time is of the essence, it is open to the parties to agree to resolve the dispute on an expedited basis, with a streamlined procedural timetable and limited rounds of written briefs. Some delays and costs can be avoided by opting for a tribunal of one, rather than three, and there are distinct logistical and cost advantages to using the online case management facilities now offered by some of the leading arbitral institutions (a feature likely to appeal to clients active in the technology sector).

The right forum

Despite the many advantages offered by arbitration, there will always be cases in which national courts are the more appropriate forum. By necessity, actions against third parties will not (in the absence of an agreement between the parties) be resolved by way of arbitration. Arbitration is also of limited benefit to those parties seeking to enforce and create precedents in relation to, for example, intellectual property rights.

Some clients may simply be unwilling to limit the scope for appealing unfavourable decisions. Finally, national courts will remain the first port of call for parties seeking urgent interim relief, particularly injunctions. Mediation will also continue to offer distinct benefits to those looking to preserve business relationships and strategic alliances.

In order to plan effectively for disputes in the converged world, it is important to understand both the advantages and the limitations inherent in the various dispute resolution methodologies available. Each transaction should be considered on its own merits, with particular focus on: the nature of the disputes likely to arise in the context of the given transaction; the ideal timeframe for resolution of such disputes; the likely country of enforcement of any award or judgment; the need (if any) to create a precedent (or the desire to avoid creating any precedent); and any particular concerns in relation to publicity or protecting confidential/proprietary information.

Sophie Lamb is a partner and David Tudora senior consultant in the international dispute resolution group at Bird & Bird.

This article was published in Legal Week on the 22nd of March 2007.