Experts Compare The Advantages And Disadvantages Of Litigation And ADR

Tuesday, August 1, 2006 - 01:00

Editor: What factors help determine whether to use litigation or a form of ADR for resolving a dispute?

Brown: The vast majority of private ADR (i.e., ADR not compelled by law) is initiated by pre-dispute ADR agreements rather than under post-dispute submissions. Post-dispute ADR agreements are rare because after the dispute has arisen, the parties are polarized. At least one of the parties almost always sees some kind of strategic advantage in declining an offer to mediate or arbitrate.

Deciding whether to agree to use ADR before a dispute arises requires weighing the potential impact of litigation delay and expense. The average contract-based lawsuit takes approximately two years to resolve in court. The average duration of similar cases in arbitration can be as short as five or six months. If the extra 18 months of delay (and associated litigation expense) will impact the relationship between the parties or the economic health of either party, then ADR language should be included in the contract.

Decision-maker expertise is another factor to consider. Although state and federal judges are extremely skilled and experienced, they may not have specific experience in the particular subject matter of the dispute. Through contractual ADR, parties can specify that their neutral will be an expert in medical device patents, subrogation disputes, admiralty law, or equipment leasing, for example. For some disputes, perhaps no particular decision-maker expertise is required. However, both parties may be able to reduce the risk of unexpected outcomes by agreeing in advance to have a domain expert serve as the decision maker who resolves disputes arising under the agreement.

Finally, parties should consider the potential value in continuing their relationship after the dispute has arisen and been resolved. ADR methods can often reduce the degree of contentiousness associated with litigation. After mediation or arbitration, parties are less likely to be standing on scorched earth and are more likely to continue to do business with one another.

Casey: ADR is a likely alternative to traditional litigation when one or more of the following factors are present:

1. The parties have an ongoing business relationship.

2. The parties are about the same size and have comparable market shares (neither party will view a jury trial as a forum to emphasize differences in size and an attempt by one party to "drive out" the other is unrealistic).

3. The dispute is factual or at least does not involve unsettled legal issues.

4. Each party can afford to lose.

5. The parties have reputations as tough competitors who are honest and fair.

6. The parties have reasonably stable businesses; otherwise, the economic leverage of a trial properly timed may be desirable.

7. A dispute would be publicly embarrassing.

8. Valuable evidence exists only in the form of hearsay or unauthenticated handwritten notes inadmissible at a trial.

ADR is not likely to be a good alternative to litigation when:

a. The parties' principals are emotional and want to drive their adversary out of business.

b. One or both parties typically bet on long shots.

c. The parties have not already been involved in traditional litigation.

d. The dispute involves a small business owner who wants to "shoot craps" with a jury against a large corporation.

e. The client wants a test case to set precedent.

f. One party seeks injunctive relief.

g. The case depends on facts not in the client's possession, requiring the full discovery typically only litigation can provide.

Coffman: Although litigation and ADR both have advantages, ADR is generally faster and less expensive because there is far less discovery and no appeal.

Providing parties the opportunity in a non-adversarial setting to fashion mutually acceptable results not available in litigation, mediation is best utilized when the primary goal of the parties is preservation of a current or future business or personal relationship.

Arbitration might be a better option in situations where the parties want a final, binding decision rendered by a neutral with expertise in a specific industry, legal or technical area. Or, the parties are seeking maximum flexibility and, thus, want to customize the discovery process. Or, the parties will be seeking enforcement in a country that is a signatory to the New York Convention for the Enforcement of Foreign Arbitral Awards.

Litigation, however, may be the option of choice when a company wants to establish a legal precedent to discourage similar suits. Or, access to the full range of discovery allowed by the courts is necessary and cannot be obtained by mutual agreement of the parties.

Dreier: If both sides approach their dispute with a desire to put it quickly behind them, a good mediator can help them find a way to do so. Mediation also can accommodate such mutual interests as confidentiality, continued business, limited interference with corporate executives' schedules. Even where a party's attitude leaves no room for compromise, mediation can nonetheless help define and hopefully limit the issues to be decided.

Arbitration can help the parties avoid a "luck of the draw" selection of a judge with little expertise in the area of the dispute and submission to a jury with no such expertise at all. They can choose retired judges with specialized experience to serve as arbitrators who often can help resolve the dispute in a fraction of the time and expense inherent in the judicial process.

Miller: The factors include whether a court is needed to resolve a novel legal theory. Since ADR is not a precedent-setting forum, ADR is not a good choice.

What will be the cost? Mediation before extensive discovery usually costs less than litigation. If the anticipated litigation costs exceed the settlement values, consider ADR.

As a general rule, ADR is confidential while litigation is conducted in a public forum that may bring publicity.

ADR may preserve a business or employment relationship because the parties have more control in an ADR forum than in a courtroom. In a successful mediation, the parties agree on the outcome. In arbitration, though the outcome is imposed after a hearing, the parties select the arbitrator, the rules to be followed, where, when, how long the hearing will be.

Simon: LAW or JUSTICE: What do you want? This is the single most important factor in selecting, in your contract, which forum is to decide disputes. If you demand LAW, whether or not justice necessarily flows from there, then eliminate arbitration. If you want JUSTICE to the point of potentially disregarding the terms of the contract, then think arbitration, and look to the selection of a non-attorney arbitrator.

The difference is not as diabolical as it sounds. It is essential to determine who you want to decide your disputes: judge or practitioner. In highly technical contracts, judges may have very little knowledge of the subject matter. Thus, the idea of the judge dispensing "justice" may not be reality. However, having a non-legal practitioner decide the case, may mean that time spent in contract negotiations might have been a futile undertaking, as that arbitrator might not read all that was written or know how it would be legally interpreted.

After you decide that you want a combination of LAW and JUSTICE , then determine the credentials of the potential arbitrator. I will use my specialty, construction law, as an example. While the intent of both parties is to have a happy relationship, the converse must be considered while drafting the dispute resolution provision. You do not want the arbitrator to be blindly selected by a third party. Therefore, put the parameters of the arbitrator's qualifications in your ADR provision, especially if you want an arbitrator with specific knowledge of your industry. In construction, you might stipulate that the arbitrator be from the American College of Construction Lawyers and involved in "X" construction arbitrations. That arbitrator, without guarantees, should be one who knows and listens to the law, as well as has substantial contact with the construction industry, in order to blend justice and law. This should not be an obstacle during contract negotiations. Decide up front who you want to decide your future and take affirmative steps towards that goal.

Smith: Specialized industry customs and practices weigh substantially in choosing between litigation and ADR. Experienced neutrals with targeted industry experience can limit the risk of awards/decisions/results outside the range of reasonable industry expectation. There is a greater potential for a skewed outcome based on misunderstanding by a judge or jury that lack that experience. An example of such a dispute is a contractor claim for additional compensation under an AIA form of construction industry contract. Those agreements typically require mediation and arbitration pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association. Those rules provide for the selection of neutrals from a pre-screened, trained and experienced list within the construction industry. ADR, in those circumstances, is more likely than litigation before a judge or jury to be within the range of reasonable industry expectation.

In disputes where the law is settled and case law established, litigation may yield a more predictable and certain outcome than ADR. A dispute concerning a sale of goods covered by the Uniform Commercial Code ("UCC") is an example of such a dispute. UCC sales provisions tend to be clear and case law interpreting those provisions is typically substantial. Litigation allows a right of appeal, albeit at additional expense.

When it is anticipated that disputes which may arise will include multiple parties, it can be difficult to join all those parties in an ADR proceeding. In those situations, while litigation may be chosen as the ultimate dispute resolution forum, it can be helpful to require, as a condition precedent, mediation including all potentially involved parties, if possible.

Tilton: Most companies prefer resolving disputes without using a formal resolution mechanism. Recognizing that a negotiated settlement may not occur, companies generally select an appropriate dispute resolution mechanism on a case-by-case basis and consider a number of factors when making that decision. PricewaterhouseCoopers recently sponsored a study, conducted by the School of International Arbitration, Queen Mary, University of London, on corporate attitudes and practices regarding international arbitration. Among other items, the study explored companies' preferences related to dispute resolution mechanisms and the perceived advantages and disadvantages of international arbitration.

While the specific features of a dispute resolution mechanism can create either an advantage or disadvantage depending on each party's individual situation, in the study the most widely recognized advantages of international arbitration over transnational litigation were flexibility of procedures, enforceability of awards, privacy of proceedings and the ability to select knowledgeable and neutral arbitrators.

Other factors considered in choosing between litigation and ADR include: sophistication and perceived independence of the judicial system; likelihood a dispute would involve multiple parties (outside the contractual agreement); desire to maintain an ongoing business relationship; importance of relying on or establishing precedent; amount of discovery desired; and need for interim relief. Interestingly, the speed and cost of the proceedings were not perceived to be advantages of international arbitration in our study.

Welge: Mediation, arbitration and other forms of ADR should be considered by the parties as an option in nearly every kind of dispute. Among the factors to be considered are cost, time, parties' role, ongoing relationships, underlying issues, solutions and attorney's role.

All forms of ADR, even arbitration, are less costly than litigation, particularly if ADR is pursued early in the life of the dispute. Litigation costs consume about two thirds of the total expense of resolving a conflict in the courts. Trial amounts to one third of the cost. ADR, especially mediation, is far less expensive. Generally, the parties need less discovery to prepare for resolution than they do to be ready for trial.

Time is an equally important consideration. ADR can help end conflicts in a fraction of the time necessary to litigate and try cases. Even in the age of the "rocket docket," most court cases can take at least one year to get to trial. Most ADR methods involve a time investment measured in weeks or months.

In ADR, the parties have a more active role and more process control than they do in litigation. Studies have shown that litigants feel alienated and "out of the loop" during court-controlled litigation. Parties have a more participatory role in ADR processes.

Preservation of ongoing relationships, particularly between business entities, is another important consideration. Those relationships can be preserved in mediation, for example. Litigation and trial tend to do irreparable harm to ongoing relationships.

One of the key elements of ADR processes, like mediation, is the ability to address underlying issues and interests, as well as surface positions. Moreover, ADR enables the parties to reach more creative and flexible solutions than litigation. The attorney-advocate's role in ADR is more collaborative and more problem-solving than in litigation.

On the other hand, if a party needs extraordinary relief, such as a restraining order or an injunction, judicial precedent, or just wants retributive justice, these avenues are not available in most ADR processes. The courts are in a better position to provide that kind of relief.

Editor: Please give an example of a recent dispute in which ADR was effectively used.

Coffman: Alternative Dispute Resolution's benefits are speed, flexibility and party input as can be seen in a recent example of how one of the AAA's administrative processes helped to deliver on the benefits associated with ADR. Several law firm partners, who were disputing their respective shares of contingent attorneys' fees of $1 million and who wanted to resolve their matter quickly, filed an arbitration case with the AAA. Our Enhanced Neutrals Selection Process was utilized to meet the parties' criteria (neutral availability, expertise in the issue at hand, absence of conflicts, etc.). The parties agreed to an arbitrator from the pool vetted by the AAA, and the hearings were held in the parties' desired timeframe, with resolution of the matter in less than 5 months, from filing to award. By choosing arbitration, the partners received a truly party-driven solution that met the needs of those involved. This is a fundamental component of ADR.

Dreier: A good example is a case I mediated between a film manufacturer and a camera company. Each claimed seven-figure damages based on product defects and delivery failures related to sales of the other's products under their own names.

After nearly two days of negotiations, I approached each with a proposition concerning future sales. I proposed that each cut their price (but still making a substantial profit), and buy the other's product at a substantially reduced figure as a way of funding the amount each claimed from the other. We determined the amount of camera bodies and film purchases required so that the total claims would be satisfied from the savings that each would realize from these purchases. As neither was dealing with the other when mediation began, both viewed the settlement as a real savings and left the mediation with a satisfied feeling.

"Outside the box" solutions like this, which cannot be supplied by judges and juries, are the hallmarks of effective mediators. Like catalysts, mediators help the parties understand where their best interests really lie.

Miller: A current employee claimed that she was demoted because she was a "whistle-blower" with federal statutory protection. The respondent answered that the claimant's position was changed due to a reorganization.

The ADR session was attended by the claimant, her attorney, the respondent's attorney, a personnel manager and the claimant's manager. The matter settled in one session held prior to discovery. The presence of the manager was important because he had both knowledge of the matter and the authority to settle it. In addition, confidentiality was important to both parties.

The use of ADR allowed the parties to speak to each other, to suggest terms and ideas together and to hear the other side's needs.

Tilton: Arbitration has often been used successfully in purchase price disputes. In a recent matter, the choice of arbitration provided flexibility to the parties not only for scheduling, but also from the standpoint of limiting the issues to be resolved by the tribunal. The speed with which the decision was rendered reduced costs and the amount of management distraction and also helped preserve the working relationship among the parties and allowed them to quickly resume their ongoing business transactions.