When does alternative dispute resolution make sense?

Not infrequently, businesses find themselves enmeshed in disputes that cannot be resolved through informal negotiation. Those disputes can always be litigated in the courts, but the path to resolution is often time-consuming and expensive.

In recent decades, the burdensome nature of litigation has led many businesses and their in-house counsel to consider alternative dispute resolution as a way to avoid the court system.

But what exactly is ADR? Many business owners (and maybe even some in-house counsel who come from a transactional background) do not have a clear answer to that question. Far more will wonder if ADR makes sense for them in a given situation.

Types of ADR

ADR is a general term that encompasses any means of settling a dispute through the assistance of an outside neutral. Of these, by far the most important are mediation and arbitration. (Other types of ADR, like engaging a panel to issue a non-binding verdict following a “mini trial,” are much less common).

In mediation, the parties engage a mediator to help broker a settlement at some point in the litigation process. In arbitration, the parties engage an arbitrator who hears the evidence and then acts as judge and jury, eventually issuing a binding judgment.

Thus, while mediation and arbitration both involve the assistance of a third-party neutral, they are fundamentally different from one another. So the question of why use ADR is really the two distinct questions of why mediate and why arbitrate.

Why mediate?

Every litigant sees a case from his or her own perspective. Good counsel aim to be more objective, but they are not immune from the natural human inclination to see the case from the prospective of their clients. Nor are lawyers as a rule especially effective at communicating the weakness of a case to their clients: after all, clients like to hear good news, and the lawyers work for them.

Mediation seeks to ameliorate these problems by having a neutral lawyer read a summary of the evidence from both sides and sometimes hear oral statements from the parties. Then the two sides move to separate breakout rooms, and the mediator shuttles between them in an effort to broker the settlement.

Good mediators don’t just convey settlement offers — anyone can do that. Rather, they help to encourage settlement by speaking frankly to each side about the strengths and weaknesses of the case, the amount of a possible recovery, and the costs of further litigation. At the end of the process, both parties hopefully walk out of the mediation with a signed settlement that they may not be happy about but can live with.

At its best, mediation can help parties reach a settlement that they would have trouble negotiating on their own. Why then shouldn’t parties mediate every case as soon as a dispute arises? After all, whether you are the plaintiff or the defendant, you can save a lot of time and money by settling right away instead of on the courthouse steps (or while the jury is out)! Sometimes courts even compel mediation in an effort to get the parties to settle.

The first reason is lack of information. When a dispute comes up, each party typically doesn’t know much about the other party’s case. (Sometimes, they don’t even know much about their own case). The strengths and weaknesses of each will become apparent only through the discovery process of document productions, interrogatory answers and depositions.

By the same token, lawyers will often not have a full picture of the other side’s legal arguments until summary judgment.

In many instances, in-house counsel would be wise to skip the arbitration provision in their contracts or put off mediation, at least for the time being.

This can make it hard to mediate early, despite the obvious advantages of settlement before costs begin to pile up. Parties are essentially being asked to settle “blind,” which can be quite risky as either a plaintiff or a defendant.

Moreover, the mediator has less ammunition to try to move parties away from their entrenched positions, making the mediation more likely to fail (and potentially making settlement harder later on).

Mediations after significant discovery (or the denial of a motion for summary judgment) tend to have a better shot at success.

The second reason mediation may not make sense is that — even after discovery — the sides are just too far apart to reasonably expect mediation to be successful. Sometimes it is entirely rational for the parties to be far apart. For example, the case may turn on a novel legal issue the courts haven’t addressed before. Or the evidence may be too finely balanced to predict how a jury is going to view it. In such instances, it can be a hard sell to convince either party to settle for half a loaf and call it a day.

Arguably just as common is a situation in which one party is so convinced that it is right that it is not willing to compromise, regardless of the evidence. There’s not much the other party can do in such an instance besides go to trial. A mediator isn’t going to be able to bridge the gap where a plaintiff’s demand is for $10 million and the defendant’s offer is for $5,000.

Why arbitrate?

Arbitration generally begins long before a dispute arises, when the parties to a contract agree to a provision by which they agree to submit any conflicts they might have to an arbitrator rather than go to court.

Parties are free to agree to arbitrate after a dispute arises as well, but this is much less common, since once the contours of a dispute become apparent, one party will usually conclude that it is more advantageous to proceed in court. (This is why it is highly unusual for tort litigation to be resolved by arbitrators.)

In either case, arbitration has several possible advantages over traditional litigation.

First, arbitration is confidential: The case documents and trial are not open to the public, as court proceedings are. This is often the biggest attraction of arbitration for businesses that do not want their confidential documents or ex-employees’ allegations of wrongdoing appearing in court documents.

Second, arbitration can be cheaper than litigation, primarily because it usually involves less discovery. Whereas in court parties can generally seek production of documents about any matter relevant to the claims at issue, in arbitration the scope of document productions tends to be narrower. Interrogatories are uncommon, and depositions tend to be confined to the parties themselves, rather than to anyone who might know relevant information.

On the other hand, arbitration isn’t guaranteed to be cheaper than traditional litigation: The parties need to pay the arbitrator, which isn’t the case in court, and the summary judgment procedure — which can eliminate or narrow many disputes prior to trial — is disfavored.

Third, arbitrations are decided by a trained lawyer, rather than a jury (although a waiver of jury trial provision in a contract can achieve a similar affect).

Finally, arbitration is usually faster than traditional litigation, often being completed in a year or less rather than the two or three common in court.

What then are the drawbacks that in-house counsel should consider as they are negotiating contracts with business partners and employees?

Arguably, the biggest drawback is that there generally is no appeal from the decision of the arbitrator. Of course, the winning party loves the lack of appellate rights. But the losing party is out of luck, even if the arbitrator got the law entirely wrong.

This allows the arbitrator to decide cases based on what he or she believes is the “right” result as opposed to what the law says. This makes arbitration less predictable than traditional litigation.

Also, in-house counsel will need to consider a few drawbacks particular to arbitration agreements with employees and consumers. Under the terms of the Federal Arbitration Act and many state analogues, these agreements are usually enforceable and, as an added bonus, can prohibit class action lawsuits.

However, the law does permit courts to refuse to enforce arbitration agreements that are unconscionable, for example because they require plaintiffs to foot too much of an arbitration bill. As a result, companies often end up being required to pay for the whole cost of arbitrations in which they are the defendant. They also can be drawn into costly and time-consuming side litigation about whether the arbitration provision they crafted is enforceable in the first place.

Conclusion

In sum, ADR can be a useful tool in a variety of situations. But it is not a panacea. In many instances, in-house counsel would be wise to skip the arbitration provision in their contracts or put off mediation, at least for the time being.

The key in any instance is having good advice to determine what the best choice is for the business.

Michael Brier is an attorney at Gesmer Updegrove in Boston, where he maintains a diverse litigation practice with a particular emphasis on complex business and employment disputes.