JUNE 2011 NEWSLETTER

The Advantages of Alternative Dispute Resolution (ADR) to a Closely Held Business

In recent years, alternative dispute resolution (“ADR”) has become the buzz words for business disputes. ADR generally means providing a solution to a dispute other than through the traditionally federal, state or county instituted court systems. There are generally two types of ADR: 1) mediation; and, 2) arbitration. Normally mediation is a nonbinding, informal proceeding to facilitate the parties to resolve their dispute independent of a binding judicial determination. Arbitration, on the other hand, is a contractual arrangement where parties decide to be bound by the decision of a third party (ies) in a non‐governmentally instituted court proceeding. Mediation may facilitate a resolution, but does not
require one, whereas arbitration is generally a more cost effective binding judicial solution outside of the traditional court system.

Mediation:
Mediation requires the two parties to the dispute to choose a third party, the mediator, who will facilitate non‐binding negotiations to resolve the dispute. Mediation provides a highly cost effective forum to resolve a dispute when parties are not too far apart especially when the parties desire to have a future relationship. Mediation avoids the bridge burning of a more formal legal action. The resolution of a dispute is sometimes frustrated by a lack of communication. The mediator can talk to each party individually asking them what they have to offer, what they desire, and what would be an acceptable resolution. Then the mediator can meet with all parties in a common room and commence communication. Further the mediator may even suggest creative solutions creating a win‐win resolution such as negotiating better terms or the promise for future business. Fostering communication may help reignite the business relationship between the two parties. Many times a relationship breaks down from a lack of communication. Similar to stories of how separated couples will start divorce proceedings within hours of an argument, the negotiations may allow each party to voice their frustrations and act as a safety valve to reduce the pressure of the business relationship.
Last, if a final resolution cannot be achieved, at least the parties will better understand the issues and the other party’s point of view. After communicating, the parties will better learn each side of the dispute and may act more reasonably realizing the counterparty has a rational and reasonable point of view even if adverse to your own. Further, mediation may also bring the crucial issue to the surface to achieve a creative solution. For instance, two heated parties may realize the myriad of anger and hostility boils down to a breakdown in communication and the simple interpretation of a specific term such as what is meant by supplying a “high quality” or “satisfactory” goods in that industry.
The downside to mediation is that although, it may facilitate a resolution, it does not necessitate one, thus, the parties are not necessarily required to be cooperative.  Mediation, in some instances, may spur more anger and hostility if the counterparty does not negotiate in good faith to bring about a solution.  As a result, many contracts may allow the parties to waive such mediation for a more definitive binding dispute procedure such as arbitration or a traditional court proceeding if mediation would be futile.

Arbitration:
Benefits:
Arbitration is a highly attractive alternative to traditional court proceedings especially as:

(1) disputes become highly specialized and industry specific;

(2) there is a necessity for a timely resolution; and,

(3) the parties are from multiple jurisdictions. Parties to a contract may agree to arbitration prior to or after the dispute arises.

Parties may explicitly agree to binding arbitration to achieve certainty of:
1) the expertise of a decisions maker, the arbitrator, who has a deep understanding of the subject
matter;
2) the avoidance of a runaway jury verdict;
3) a cost efficient and timely resolution;
4) a prior chosen law and forum; and,
5) procedures of the hearing.

A major advantage of arbitration is the ability to choose an arbitrator who has a thoroughly deep knowledge of the area of litigation. For example, for a dispute between a hydraulic press supplier and purchaser about whether purchaser’s specifications were met, a traditional judge needs to learn terms of art such as the “stroke”, “stroke control”, “shut height”, “daylight”, and the “bolster.” A judge would need to be educated on these terms requiring numerous experts. Furthermore, the judge will never have the practical knowledge that an expert arbitrator has. Even with months of study, the judge is far shy of the possible 30 plus years of the day to day experience in the hydraulic press industry of the expert arbitrator. Choosing an expert arbitrator ensures the decision maker fully understands the subject matter and improves the accuracy of the decision.

Another advantage of a chosen arbitrator is that in jury trials in a traditional court there is always the risk of a runaway jury. An injury of a plaintiff employee, whose story appeals to an urban jury, may be rewarded with five times what the reward deserved. A pre‐chosen arbitrator or one chosen by both parties avoids the risk of the decision maker being swayed by sympathy for either party.

In addition, arbitration is generally more cost and time efficient. With field specific arbitrators, this may reduce the need to pay for additional expert testimony to educate the decision maker. With the judicial system backlog and red tape of formal court proceedings, decisions can be made sooner, and will reduce the administrative burden to litigate a dispute. This is especially important for closely held businesses that require a speedy resolution and do not have hundreds of thousands of dollars to spend on litigation.

Additionally, arbitration provides certainty as to choice of law and forum (location) of the arbitration. Different courts may be divergent in their law. For example, State A may, absent an explicit agreement, place the risk of lost or damaged goods on the purchaser while State B may place the burden on the seller. Two parties can agree that State A law should apply, thus providing more certainty that the purchaser will be liable in absence of a contrary term. Also, the parties could agree to the location of the proceeding for administrative convenience. This and the choice of law are especially important with multi‐state and international transactions where the laws may be even more divergent or the local court may be biased towards its citizens, workers and businesses.

Finally, the parties may alter the court procedures to make it less formal or less invasive. Many traditional courts require formal rules of evidence, service (notice to the counterparty), or liberal discovery (allowing expensive, time consuming, burdensome discovery of documents from the counterparty). For example, if the local court of the counterparty requires service only through an authorized legal official such as a sheriff, then this rule is highly formal and costly. In arbitration, the parties can agree that service by certified mail is adequate. This avoids the administrative burden of overly restrictive procedural rules.

Enforcement of an Arbitration Award:
One downfall to arbitration is that the arbitrators do not have the same power as traditional courts to seize assets to enforce a judgment. However, if a losing counterparty refuses to honor the arbitration award, the winning party may have it enforced in a traditional court. Under the
international treaty of the New York Convention and the Federal Arbitration Act, arbitration awards are honored and respected in the United States and internationally. Awards are only rarely turned aside. Usually this is for a due process violation (failure to provide notice or a one‐sided proceeding) or a public policy violation where it “violates the basic notions of morality and justice.” Further, arbitration awards are generally not overturned on the substance of the decision unless there is “manifest disregard of the law” where it would be obvious and readably perceivable for the arbitrator to award differently.

Conclusion:  
Generally, arbitration provides the advantage of a better informed decision maker, the avoidance of a runaway jury, a more efficient and timely proceeding, and an ability to control the law, location and procedure of the tribunal. Further, arbitration awards are usually enforced and rarely overturned by traditional courts. They provide a speedy and cost effective alternative to the traditional court system especially with where business relations require the speed of time.
In summary, ADR methods provide a highly efficient, accurate, and timely alternative resolution to business disputes.