Sometimes, lawsuits are the only avenue to resolving a dispute. But litigation can oftentimes be avoided through alternative dispute resolution (ADR).
ADR offers several advantages over the traditional adversarial process, says Damany Ransom, an associate in Baker Donelson’s Atlanta office who concentrates his practice in the area of business litigation.
Smart Business spoke with Ransom about the advantages and disadvantages of ADR over litigation and its growing popularity.
Why is ADR becoming more popular?
Businesses are increasingly recognizing that while disputes are inevitable, litigation is not. There are several ADRs. The most common include arbitration, mediation, settlement negotiations, early neutral evaluation, conciliation, facilitation, mini-trials and summary jury trials. While these methods aren’t always appropriate, they each offer advantages over the traditional adversarial process.
What are the advantages of arbitration over litigation?
Arbitration is a private, adversarial dispute resolution process in which the parties choose one or more arbitrators to hear their dispute and render a decision or an award after a hearing. Arbitrations can be binding or nonbinding depending on the terms of the parties’ business agreement. Also, arbitration agreements can provide, among other things, who will hear and decide the dispute. Therefore, when the subject matter is highly technical, arbitrators with an appropriate degree of expertise can be selected.
Arbitrations are also desirable because they’re less formal than litigation and often include streamlined procedures and rules of evidence. For instance, arbitration may begin with a simple letter to the arbitrator explaining the dispute and referring to the contract’s arbitration provision. Technical pleading requirements aren’t an issue, there’s no requirement for transcripts and the proceedings aren’t public record. Moreover, although the arbitrator can require the production of relevant documents and depositions of witnesses, discovery isn’t extensive. In certain types of disputes, such as those involving securities, the arbitration process is more involved and may be lengthy and expensive. However, in comparison to formal court litigation, arbitration generally provides a more economical and efficient method of dispute resolution.
What are the disadvantages?
One disadvantage is that arbitrators often charge for their services. Their fees can be high, but vary depending on the arbitrator. There are also filing fees associated with arbitrations. Depending on the rules applicable to the dispute, those fees can be higher than court filing fees. Additionally, review of arbitration awards is extremely limited. In fact, if arbitration is binding, the parties normally give up most court protections, including the right to trial by jury. Also, pre-hearing discovery in arbitration is far less broad than pretrial discovery in litigation. This avoids expensive and burdensome discovery, but there generally is less opportunity to obtain information about the other side’s case. Thus, arbitration may not be suitable where one party wants to pursue extensive discovery and conduct a thorough investigation of the facts. Similarly, because arbitration rulings don’t create law, a party may not want to submit to arbitration where it seeks to establish legal guidelines for future conduct.
What is the difference between arbitration and mediation?
Mediation is an even less formal alternative to litigation and is one of the most preferred forms of ADR. The objective of mediation is to reach a voluntary agreement between the parties, rather than to determine their respective rights and liabilities. In its simplest terms, mediation is a flexible, nonbinding process in which parties submit their dispute to a neutral third party who helps negotiate a settlement. The mediator who is trained in negotiations facilitates communication between the parties but has no power to impose a solution. The mediator helps to identify issues, explore solutions and negotiate an amicable agreement for all or part of the dispute. The mediator is not the decision-maker, and so, unlike arbitration, mediation leaves control of the outcome with the parties.
How does a company know if its case is more suitable for arbitration or mediation?
Determining which is most appropriate is a fact-specific exercise. For instance, mediation may be preferable where the parties have important relationships they want to maintain (i.e., business partners, supplier-distributor, licensor-licensee, etc). It may also be beneficial where they want to control the outcome and the risk of an unfavorable court decision or adverse precedent is high. Mediation may not be useful, however, where one party is unwilling to compromise.
Arbitration may be appropriate where the parties want a decision-maker with training in a particular area to decide the dispute and would like to avoid the time and costs of litigation. However, it may not be proper where the parties want to maintain control over how their dispute is resolved or want to win in litigation to send a deterrent message to potential adversaries.
DAMANY RANSOM is an associate in Baker Donelson’s Atlanta office who concentrates his practice in the area of business litigation. Reach him at (678) 406-8734 or firstname.lastname@example.org.