Economical Alternatives to Litigation of Business Disputes

Engaging in litigation is one of the most expensive, time consuming and personally draining experiences one can have in business. In addition to attorneys' fees, the business client must invest his or her own valuable time and energy in litigating, commodities often better spent on making the business profitable.

Given the problems which accompany litigation, the parties to a business dispute should consider whether their disagreement might be settled through alternative dispute resolution ("ADR") methods.

Rather than wait for a dispute to arise, a party who believes that ADR would be advantageous might think ahead and include in business contracts provisions which require the use of ADR prior to, or instead of, judicial proceedings. It is important that the attorney who drafts a business contract be experienced in the use of ADR techniques.

In addition to requiring the use of ADR, the contract should specify in detail the type of ADR to be used, including the issues subject to ADR, whether any decision will be binding, and other relevant limitations. The contract also should provide that the prevailing party in any litigation or ADR will be awarded attorneys' fees as well as interest on the actual damages awarded. Such a provision will encourage all parties to settle.

Parties considering ADR should be aware of the various methods available and how they differ both from one another and from litigation.

Negotiation. Negotiation is the most informal and commonly used method of dispute resolution. The parties should meet face-to-face and try to reach agreement. That meeting may or may not involve attorneys, but, generally, it is in the client's best interest that counsel be present. In addition to having a clear view of the relative strength of the client's case, the attorney can help the client adopt an objectively reasonable settlement position.

Mediation. While negotiation involves only the parties and their counsel, in mediation a neutral mediator assists the parties in their attempt to resolve the dispute. The mediator has no authority to impose a solution on the parties, makes no findings, and renders no binding decision. Rather, the mediator assists the parties in their negotiations by helping them to define issues and to more effectively communicate their settlement positions.

Mediation is faster and more cost effective than arbitration and litigation. It offers more opportunity to keep a dispute private than does litigation and also allows the parties to choose a third party experienced in the subject matter of the dispute. Because the process is less adversarial than arbitration or litigation, mediation is particularly appropriate if the parties hope to maintain their business relationship.

Although mediation is non-binding, the parties should sign a mediation agreement embodying their settlement. Such an agreement can be judicially enforced like any other contract.

Arbitration. The parties to arbitration submit their dispute to one or a panel of arbitrators, whom they have chosen. Disputes are often submitted to organizations such as the American Arbitration Association, which provide arbitrators and have established rules of procedure.

After conducting a hearing, the arbitrator renders a decision. Usually, the decision is binding upon the parties. The winning party can ask a court to confirm the arbitrator's award and may then enforce it in the same manner as a court judgment.

Arbitration, while less formal and sometimes faster than litigation, is slower and more formal than mediation. Like mediation, it offers more privacy than litigation and allows the parties to choose arbitrators experienced in the relevant area of business.

Depending on a party's perspective, however, there are potential disadvantages to arbitration: (1) compared to mediation, arbitration is more adversarial and more likely to damage a business relationship; (2) compared to litigation, arbitration offers less opportunity for discovery (unless the parties explicitly provide for discovery); (3) unlike a trial court decision, binding arbitration offers virtually no opportunity to appeal the arbitrator's decision; and (4) unlike a court decision, an arbitrator's award creates no judicial precedent which can be relied on in later cases.

Where appropriate, ADR is a highly attractive option. It promises considerable time and cost savings and minimizes the disruption and stress caused by business disputes.

Thomas V. Bennett, Esq. (tvb@barronstad.com)

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