Making Peace

Alternative dispute resolution could help your business avoid costly lawsuits.
Magazine Contributor
7 min read

This story appears in the August 1997 issue of Entrepreneur. Subscribe »

I'll sue your socks off!"

"Oh yeah? See you in court!"

Those are fighting words. And whoever carries them out dooms everyone involved to months or years of legal wrangling, rancor, bitterness and staggering expenses. America's court system promises justice for those who've been wronged, but resorting to the courts can turn everyday disputes into legal nightmares.

That's why a growing number of businesses are turning to alternative dispute resolution (ADR), a concept that includes mediation, arbitration and various hybrid forms of resolving disputes. Although the forms of ADR differ considerably, their goal is the same: to allow disputing parties to work out their differences more quickly, more amicably and less expensively than they could through the courts. Whether for contracts between businesses or agreements between employers and employees, people are consenting ahead of time to submit any future disputes to mediation, arbitration or both.

"Working out a solution can be educational and constructive instead of confrontational and destructive," says Bill Corbett of the University of Montana School of Law in Missoula, who teaches ADR and serves as an arbitrator for business disputes. "Business owners learn that instead of litigating disputes, it's in their best interests to work it [through]. If they can't mediate, it makes sense to arbitrate."

One reason is the sheer cost of litigation. A minor lawsuit is still likely to cost $10,000--even if you win. And the risk of getting hit with a large judgment is greater if it's an employment case that falls into the hands of a jury because jurors are typically unsympathetic to employers. Add to that the time involved in preparing for trial, plus the time and stress of slugging it out in the courtroom, and it's no wonder businesses are seeking a better way.

Just My Type

Forms of ADR vary widely, from simple negotiated settlements to complex binding arbitrations that fall just short of an actual trial. Disputing parties may agree to whatever means of settling disputes they prefer, but here are the most common forms:

Negotiation: In the simplest form of ADR, the two parties (or their lawyers) talk out their differences and agree on a settlement. Skilled negotiators can forge creative, win-win solutions.

Mediation: When two parties want to work out their own solution but need a little help, they can hire a neutral third party trained in listening, asking questions, and helping people decide what to do. The goal is to produce a written agreement that both parties sign to settle the dispute. Usually the parties share the cost.

Arbitration: An arbitrator hears a case much like a judge does, then issues a decision. Unlike the court system, though, the parties have control over who will hear their case. Often it's an expert in the appropriate field who is deemed neutral by both parties. In nonbinding arbitration, the arbitrator issues a recommendation that the parties may accept or reject. In binding arbitration, the arbitrator's decision is legally binding and very difficult to appeal.

Mini-trial: Less common, the mini-trial gives both parties a sense of how their case would play out in court. For instance, if two business owners have a contract dispute, they might agree to watch while their lawyers argue the case as they would in court, with a limited number of key witnesses. The process takes a few hours. The experience has been that the CEOs then sit down and settle the case," Corbett says. "After hearing the strengths and weaknesses of their case, they're not as ensconced in their own positions."

Summary jury trial: In this option, the parties bring in a jury of citizens to hear a shortened trial and make a nonbinding decision. This gives the parties a sense of how a real jury would decide the case so they're better prepared to settle it. In both the summary jury trial and the mini-trial, the lawyers have to go through the process of discovery, with its document searches and depositions. Still, control of the decision is in the hands of the parties.

Sign Here

Any time two parties enter into a contract, they can include an agreement to submit any disputes to a specified type of ADR. Suppose your business enters a service agreement with a supplier. Would you want a dispute over payment to escalate into a lawsuit, with all its high costs and hard feelings? If it did, what are the chances you'd be able to continue your business relationship?

In the interest of ironing out problems as quickly and cheaply as possible, consider including an ADR clause in the service agreement. It might specify that in case of a dispute, you'll attempt mediation, using a mediator approved by both parties. Then, if you can't come to an agreement through mediation within, say, 30 days, it might require arbitration. Have your attorney help you draft the ADR clause or review the one offered to you by the supplier to make sure there are no surprises.

While both mediation and arbitration are faster, more flexible, more confidential and less expensive than litigation, there are disadvantages. One is that it's very difficult to appeal the decision in a binding arbitration. Nonbinding forms, on the other hand, may fail to resolve the problem, so you could just be wasting your time. And while the court system offers such protections as excluding hearsay evidence, ADR has no such rules.

If you haven't included an ADR clause in your contract, it's still possible to move that way after a dispute arises. Suggest to the other business owner that it might be in everyone's best interest to mediate or arbitrate.

Given the potential nightmares that arise from employee lawsuits, a growing number of employers are requiring mediation or arbitration of employee disputes. The Federal Arbitration Act of 1925 provides the legal basis for this requirement, and recent court decisions have upheld arbitration of discrimination cases. Lawrence Kipperman, an attorney with Sidley & Austin in Chicago, says that ADR can be advantageous for employees, too. "What's in it for them is a quick resolution of claims, getting their day in court without having to spend time in discovery and years waiting to go to court," he says.

However, requiring arbitration of claims means losing the option of a jury trial. If you're establishing an ADR policy, it's critical to explain it to each employee and have them sign a document agreeing to submit any future claims to arbitration. Otherwise, a court is likely to find the policy unenforceable because the employee had no chance to bargain. Corbett advises explaining the ADR requirement individually, perhaps when going over employee benefits. Use a separate form to record the date of explanation and the employee's opportunity to ask questions. That way, your employees can't later say they never knew they were waiving their right to a jury trial.

So that the agreement is fair, be sure the employee has a means of investigating the arbitrator's background and an opportunity to challenge any apparent bias, Kipperman says. The employee should have the right to obtain enough information to build a case. Having a watertight ADR agreement prepared may cost you several hundred dollars or more, but it's nothing compared to the cost of a lawsuit going to trial.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business

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