Selecting the Best Resolution Process for Legal Disputes
The court system is not the only way to resolve legal disputes. Parties have other options, which are sometimes less expensive and more productive.
April 13, 2009
Litigation is often a blunt tool like a sledgehammer. Nonetheless, it is an effective means of resolving certain legal disputes. But there are other ways, including those frequently known as alternative dispute resolution (ADR). This typically includes arbitration and mediation. This article explains the advantages and disadvantages of each of these tools, and how to select the best means of resolving business disputes.
The Different Dispute Resolution Processes
The courtroom is the typical arena for litigation battles. But even most lawsuits are, for the most part, fought and resolved outside the courtroom. Statistics vary, but a significant percentage of lawsuits (in many jurisdictions, up to 90%) are resolved before trial, either by settlement, motion practice, or otherwise. Arbitration and Mediation are two of the alternate methods by which disputes may be resolved, although none is mutually exclusive.
Arbitration can be binding or nonbinding on the parties, although usually it is the former. While courtroom proceedings are open to the public (subject to very limited exceptions), an arbitration is not. Arbitrations may be heard by a single arbitrator, a panel of three arbitrators, or any other number agreed upon by the parties. Arbitrators are often former judges or practicing lawyers, but they do not have to be either. For example, a CPA may serve as an arbitrator in a tax dispute; an appraiser may arbitrate a real estate dispute; and a technology consultant may arbitrate a software contract dispute. And arbitrations may be conducted pursuant to a particular ADR organization’s rules (the American Arbitration Association may be the most well known), or rules on which the parties might otherwise agree.
Mediation is typically nonbinding, and more informal. It is essentially a structured settlement conference presided over by a trained mediator. Each side usually presents its position to the mediator — usually through lawyers rather than witness testimony — who then works with each side to bridge differences and reach a mutually acceptable resolution.
Many contracts now contain alternative dispute resolution provisions. This may include a requirement that all disputes be submitted to arbitration. For example, CPA firms might include a statement in their fee agreements that any disputes shall be arbitrated. Parties may also agree that before bringing a lawsuit or filing for arbitration, the parties will agree to mediate or otherwise make good faith efforts to resolve the dispute. In addition to contracts containing arbitration or mediation requirements, many courts require non-binding arbitration or mediation before the case makes its way through the traditional legal system.
Which Alternative Is Best?
Which dispute resolution method is best of course depends on the facts of each dispute, and the company’s goals.
One of the distinguishing features of our legal system is the broad discovery rights it provides litigants. Foreign companies are often surprised (and sometime offended) at the liberal ability a party has to acquire information from the opposing side. Indeed, discovery rules typically permit a party to request from its opponent any information that is relevant to a party’s claims or defenses. This often includes internal company communications, and even sensitive business information. Thus, where a party’s claims or defenses are substantially dependent on information needed from the other side, or the testimony of its employees, the traditional litigation process will often be the best — and perhaps only — way to obtain this information, thus making litigation the more logical choice.
Another key feature of our legal system is its appellate process. Thus, particularly where either the dollar stakes are significant or a ruling may have an impact on future disputes or relationships beyond the current dispute at issue, a party may want to reserve the ability to appeal an adverse ruling. There, the litigation process will provide the greatest appellate rights. On the other hand, arbitration decisions are typically final, and there is no appellate process (while there are some circumstances in which a court can overturn an arbitration decision, a court’s ability to do so is very limited).
While lawsuits often take considerable time to wind their way through busy court systems, arbitration is usually a more streamlined, efficient system for resolving disputes. As a result, legal battles are often resolved earlier and at a lower cost through arbitration. Also, the conventional wisdom is that arbitrators are more likely than a judge to take an equitable approach, including perhaps a Solomonic one that gives something to each side. Thus, a party with a weak legal or factual position will usually prefer arbitration.
Courts are public forums, and documents filed with a court are — subject to very limited exceptions — available to the public. Thus, if privacy and adverse publicity are concerns, arbitration may be preferred. Court decisions can also create precedent, which means they may guide future courts deciding similar issues. If a company is worried about losing a case that may negatively impact other lawsuits in which they find themselves, arbitration will usually help avoid such a result, as arbitration decisions are not public records, nor are they likely to have precedential effect.
Mediation — just like any other settlement discussion (formal or informal) — is something that can take place at any stage of a dispute. Oftentimes it is beneficial to attempt mediation at the genesis of a legal dispute, to see whether future fees and costs can be avoided. But mediation can also be beneficial after a court or arbitrator issues a significant decision that provides further guidance to the parties; it can take place as a final shot at resolution shortly before a trial or hearing; and mediation can even take place after a judgment is entered, particularly in the legal system where the trial court is the end of one stage, but the beginning of the appellate process. As an example, the U.S. Seventh Circuit Court of Appeals frequently conducts settlement conferences after trial proceedings are concluded but before the appellate briefs are filed. And while it may seem surprising to some that a lawsuit would settle after trial court proceedings are concluded, it is not unusual.
Our justice system compensates litigants through money damages, and sometimes equitable relief, such as an injunction prohibiting certain action. A court’s (and usually an arbitrator’s) ability to offer creative remedies is therefore often limited. A mediator, however, is not so constrained, and can often help the parties reach more creative business-oriented solutions than legal ones.
Keep in mind of course that the legal system does have one final benefit, in that it is free (except for perhaps a modest filing fee). On the other hand, an arbitrator’s or private mediator’s fees will have to be paid by the parties. In the long run, however, these fees can be substantially less than what it may cost to fight a protracted legal battle in the court system.
While parties must make strategic decisions throughout a lawsuit, strategic decisions from the outset (including before a dispute even arises), can influence the means by which legal disputes are resolved. Careful consideration should be given to the dispute resolution forum, as it can not only affect the process, but the end result as well.
Jason M. Rosenthal is a partner with Schopf & Weiss LLP, a national business litigation firm based in Chicago. For more information, contact Rosenthal at 312-701-9300 or visit sw.com.