It is a cold hard fact that most lawsuits settle somewhere short of trial—usually for three reasons: too expensive, takes too long, or risk of losing. As a business owner, you should consider two other ways to end contract disputes, arbitration and mediation—jointly known as alternative dispute resolution (“ADR”). In this post, I’ll explain the ADR process and how it can help you end contract disputes outside a court of law.
What is ADR?
Arbitration is a close relative to litigation, offering a “private trial” in front of one, or a panel of three, trained “neutrals.” Neutrals are third parties and usually, but not always, practicing lawyers and former judges who understand and follow established legal rules used in contract lawsuits, albeit in a more relaxed atmosphere than a public courtroom.
By contrast, mediation involves a non-binding negotiation by the parties through a third party mediator. As opposed to declaring a “winner” or “loser” by a judge, jury or arbitrator(s), mediation is designed to find common ground where the parties actively contribute to a resolved contract dispute that is favorable to both parties.
How Do I Get to ADR in Contract Disputes?
If you want to enforce your rights with vendors and customers outside of court, add a dispute resolution clause to your contract or insist on this clause in your vendor’s contract. The sales staff may balk at the idea of addressing dispute resolution upfront. After all, sales people are taught to sell and “coffee is for closers.” In order to close a deal in a competitive brawl for that big account, it can be tempting for commissioned sales people to gloss over the need for “fine print” in contracts. And as someone who has been there and done that (I used to sell CNC Machine Tools), I know the temptation is very real.
However, as one of my law professors used to say, neither party pays much attention to the details of a contract until someone is trying to get out of it. I am not saying you should always walk away from a deal without an ADR clause. But you should objectively assess the monetary risk of what might happen if the relationship goes south and it comes time to perform or pay up.
What Does ADR Cost?
Many in the arbitration field tout the potential for saving money over litigation. However, in my experience, that is not necessarily true. For example, each party is going share the upfront costs. At a commercial ADR provider such as the American Arbitration Association (AAA) where a three-member panel of arbitrators decides a $500,000 construction contract dispute, the upfront cost to each party will exceed $10,000 just for the AAA filing fees and down payment for the arbitrator(s) compensation. Moreover, all of the traditional litigation activities such as interrogatories, document production, depositions and a hearing on the merits of the dispute are still going to ring the cash register of your lawyer.
By contrast, mediation does have the potential to save you money. This is a more collaborative contract resolution process where both sides can decide to narrow the issues for their mutual benefit with the help of a third-party mediator—and sometimes skip the parties’ lawyers altogether.
Other advantages of ADR in Contract Disputes?
save time
Americans are a litigious bunch. In Cook County (Chicago) Illinois for example, the state court docket for the Law Division (lawsuits seeking $30K+) exceeds 12,000 new cases filed this year alone. When the stated goal of this Division is to resolve the average case in 12 months, the only ones who will think your case is moving quickly are the judge and your lawyer. And the Municipal Division (under $30K) is by far crazier, with the number of new cases filed in 2018 soaring into six-figures. Whether resolving contract disputes by arbitration or mediation, ADR can almost always save time, and in some cases money.
save a business relationship
In mediation, the mindset is working toward a common goal to resolve the dispute, not just now, but to potentially continue the business relationship after the dispute is resolved. Mediation can be particularly useful when both businesses must rely on each other’s product or expertise and cannot afford to burn business bridges. A mediator’s goal is to facilitate the parties’ journey to find their own reasonable solution to a contract dispute in place of an arbitration award or judgment by a court.
keep privacy
Perhaps one of most valued features of ADR beyond speed is the ability to resolve contract disputes privately rather than through the public setting of a courtroom. If company trade secrets are at issue, the confidentiality necessary to maintain those intellectual property rights makes both arbitration and mediation more desirable options. Even lawyers who do not litigate sometimes fail to appreciate that “confidential” or “confidential attorneys’ eyes only” designations will only get you through discovery in a court of law, not trial. A judge will almost never seal off a trial from public view—such a cloaked proceeding is the antithesis of a transparent legal system.
preserve court enforcement
Arbitration provides an “award” to the prevailing party that can be entered and enforced in a court of law as necessary without having to go through a second discovery process and trial. Mediation is a voluntary, collaborative process where both sides desire a fair outcome. If one side does not abide by the outcome, mediation nonetheless results in a settlement contract that can be enforced in a court of law if necessary.
keep home field advantage
Choice of venue is also an important cost, time and strategic advantage. An ADR clause in the contract can dictate where the arbitration or mediation is to take place. Keeping the venue near your primary place of business can mean less travel time and related costs, while retaining a local affordable law firm that you trust.
Recover Costs by Using ADR Contract Resolution?
Finally, you need to be aware of recovering the cost of dispute resolution. Absent a contract term or legislative statute to the contrary, in the United States each side pays their own legal fees and court costs regardless of whether they win or lose a lawsuit. Legislative exceptions are rare, such as when someone intentionally takes your trademark, copyrighted work or misappropriates trade secrets. But a so-called “fee shifting” provision in an ADR arbitration clause can force the losing party to pay the winning party’s attorneys’ fees and costs spent to resolve the dispute. This can be an important check valve on hasty or emotional decision making. The monetary risk of losing moves front and center before any arbitration demand is filed.
–Denny Esford