Who has time for a lawsuit? Who can afford big legal bills? No one who’s trying to run a company, that’s for sure. Nevertheless, getting sued is a very significant risk for small businesses. That’s why more of them are turning to alternative dispute resolution (ADR) proceedings, otherwise known as arbitration and mediation.
The consensus in the business community is that litigation is “too much, too time-consuming, and too expensive.” To defend a claim through the entire arc of litigation could take years and thousands of dollars in attorneys’ fees and expenses, which you are unlikely to recoup, win or lose. Even when lawsuits are settled out of court, which happens much more often than not, settlements usually occurs only as the trial date approaches and after most of the costs have been incurred.
Although not without its shortcomings, ADR generally promises reduced legal fees, litigation expenses, and diversion of resources. In most cases it also offers speedier resolution; more creative, business-driven solutions that are based on parties’ real interests rather than on attorneys’ legal posturing; and greater privacy and confidentiality.
Arbitration is akin to a non-jury trial before a judge. The parties to an arbitration proceeding waive their rights to litigate in court and instead agree to have an impartial arbitrator resolve their differences. After a hearing, the arbitrator makes a decision (called an award) that is binding on the parties and rarely subject to judicial review.
Mediation is not a legal proceeding. Unlike arbitration, the impartial party’s role is not to decide who wins, but to bring the parties closer together. Adversaries who choose to mediate instead of litigate mutually choose a mediator who will enable discussion between the parties and recommend an equitable resolution. If they fail to agree on the mediator’s recommendation, the parties will often proceed to binding arbitration.
Here is a closer look at some of the specific advantages of ADR:
Lower Cost. In the courts, win or lose, you most likely will not recoup your attorneys’ fees and related expenses. So you’re faced with a cruel choice: Either pay your attorneys to defend you or pay an otherwise frivolous plaintiff some portion of his or her alleged damages up front to resolve the matter quickly. Either way you lose. With arbitration and mediation, both sides agree to split the fee of the presiding party.
In most cases, they also agree that the prevailing party will recoup all of its attorneys’ fees and expenses from the unsuccessful adversary.
Evidence. In the courts, parties are limited as to the types of evidence that can be presented. Arbitrators generally use a more liberal standard to determine the admissibility and relevance of evidence, thus ensuring a more complete factual record from which the arbitrator will draw the award.
Expertise. Your case in the court system will be decided either by a judge, who may have little or no background with respect to the nuances of your specific industry, or by members of a jury, whose personal views may influence their decision. In arbitration, you will benefit by having the case decided by someone who understands the special and unique issues involved in your dispute and your industry.
Preserving Business Relationships. The likelihood of preserving your business relationship with your adversary is greater if you elect to resolve your dispute through ADR. Specifically, mediating or arbitrating disputes tends to allow issues to be resolved without the antagonism that can develop in traditional litigation. Thus, a profitable ongoing business relationship has a better chance of being preserved and continued.
If you are faced with the prospect of a lawsuit, should you automatically choose ADR? No. While it’s usually the better course, there are some disadvantages. With mediation, you may still end up in court if there’s no resolution and the mediation agreement does not provide for automatic binding arbitration thereafter.
An arbitrator’s award, while binding, may be subject to judicial review, albeit under very limited circumstances. Be aware, too, that an arbitrator will not necessarily follow the rule of law when resolving your dispute; what seems fair to an arbitrator may not be the same as what a judge would have decided.
Many commercial contracts now include a binding arbitration provision. Whether or not you accept such terms can be critical to your business and should be discussed with your lawyer. If you agree to such a provision, make sure it specifies the type of disputes that will go to binding arbitration, the procedural rules or laws that will govern the arbitration and whether damages will be limited by type or amount.
It should also note where the arbitration is to be held, the time frame in which to initiate arbitration and the process for selecting an arbitrator. If your agreement fails to address these issues, you may spend as much time arguing over how a dispute is to be arbitrated as you would trying to resolve it.
ADR offers an attractive alternative to court; just make sure you know what you’re getting into.
Steven Davi is an associate in the commercial litigation department of Farrell Fritz in Uniondale, N.Y., concentrating in labor and employment law. Mr. Davi has practiced extensively before state and federal courts in both New York and New Jersey as well as before the United States Equal Employment Opportunity Commission and various state fair employment practice agencies.