The costs of litigation can quickly escalate, especially if you’re facing a motivated and well-funded plaintiff who seems intent on aggressively pursuing litigation. Dealing with litigation can create a big burden upon management to respond, collect documents and be available to give a deposition, testimony or consultation.
“If you have experience with lawsuits, then you understand the cost and time pressures associated with them,” says Stephen L. Ram, Attorney with Stradling Yocca Carlson & Rauth. “That’s why attempting to come to a resolution with the other party ahead of reaching the courts makes sense for both parties.”
Smart Business spoke with Ram about resolving disputes without litigation and the legal protections that exist around conversations undertaken to come to an agreement outside the courts.
What are kinds of disputes do companies become aware of before a lawsuit is filed?
There are a number of common disputes that can come from vendors, contractors and shareholders that stem from some dissatisfaction with your business relationship. Most often, a company is made aware of them through a demand letter sent from counsel, or, as with many vendor disputes, a sales representative will be aware that some looming frustration is becoming more than a trifle and should be a concern for the company.
How do you approach a solution when one or both parties are emotionally charged?
It’s common to have a powerful initial emotional response to a dispute when it arises, particularly when a party makes substantial or possibly outlandish monetary demands. Understand that emotional reactions are natural, but consider what is best for the company and its shareholders and find a suitable resolution. Recognize that the other side has different pressures and emotions to which it’s reacting. Step back and be dispassionate and objective because a measured, discerning approach makes it easier for you to facilitate a resolution. Also consider the applicability of any insurance coverage and notify the broker or carrier after receiving a demand.
What needs to be considered when unequal information is causing or adding to the dispute?
Disputes generally arise because one party speculates the other has done them wrong or has done something suspicious. While there may be a grain of truth to the gripe, the other party’s speculation is usually accompanied by a lack of information or a misunderstanding regarding what actually transpired. Naturally, you will undertake your own formal or informal investigation into the basis for the dispute. There is an opportunity before this dispute boils over into a lawsuit to be open to what the other side needs and wants from you, and you can consider your willingness to share information from your own internal inquiry. Being open to this type of dialogue makes it easier to work toward a resolution.
When should a representative begin talking with the other side?
The decision of when or how to open a dialogue is unique to each situation. Most times, the initial dialogue should be between counsel to ensure confidentiality protections and avoid a blindsided attack. The first step is to gauge and engage the other party, which involves acknowledging the other party’s monetary or other demands. However, you also need to be clear that you do not intend to cave to those demands to manage their expectations, but state your willingness to work with them to reach a fair resolution.
Next, establish parameters for future dialogue. If the other side is requesting information or you would like to voluntarily provide information to correct misunderstandings, legal counsel can assist in determining what documents to provide, what level of detail to share, or perhaps to make a company employee available to tell the story of what happened or answer questions.
If you are going to make a member of management or another company employee available, the third step is preparation. Preparation involves understanding the parameters for the dialogue, understanding of the relevant facts and your story, and that person’s ability to bring back conversations that go astray, or refrain from going beyond the scope of the conversation. This conversation can be as simple as a phone call or as structured as mediation.
Are you putting yourself at risk by engaging in this type of dialogue?
There are legal protections for communications that are undertaken for the purpose of reaching a settlement of a dispute. These protections, available under state and federal law, dictate that what you say during these resolution conversations is not admissible in court to prove liability. This means you can share information that might legally amount to admitting to a breach of a contract, for example, in an effort to reach a compromise.
To invoke the protections of these statutes, you just need to tell the other side you are having the conversation in order to resolve the dispute. But for added protection, talk with outside counsel about what you’re planning, that you’re serious about reaching a resolution, and ask for a confidentiality or nondisclosure agreement. Convince the other side to put this protected dialogue in place, as well. The confidentiality under these statutes and a binding agreement offer comfort to both parties and help facilitate conversations. Still, there may be situations where it’s not advisable to share or only share limited information.
If a resolution cannot be reached, how should you proceed with management of a lawsuit?
Keep an open dialogue and don’t entrench yourself in an emotional reaction or overly rigid position. Allow the other side to see that you’re serious about defending or prosecuting, but hopefully cooler heads can prevail and a resolution is reached, especially if there is an ongoing relationship. An early resolution is usually far less costly and disruptive than one reached after protracted litigation.
Stephen L. Ram is an Attorney with Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4102 or email@example.com.
Over the past two decades, more and more businesses are including arbitration provisions in their contracts with vendors, suppliers, employees and other counterparties. Behind this trend is the fact that the court system can be slow, cumbersome, very expensive and confusing to business managers. Arbitration generally cuts through all this and delivers a result much quicker and at a lower dollar cost, facilitating decision making by managers because disputes are resolved faster.
However, including arbitration clauses in contracts is not always the right call, says Eric N. Macey, a founding partner at Novack and Macey LLP.
“While arbitration is generally quicker and more cost effective, that is not always the case, and arbitration results are not necessarily generally better,” says Macey. “In fact, they can be very, very mixed.
Smart Business spoke with Macey about the problems that can arise with arbitration and how to avoid them.
What kinds of problems are inherent to arbitration that aren’t necessarily present in a typical court case?
One is the issue of what I call ‘rent-a-judge.’ When you file a lawsuit, the court system assigns a judge to your case, and you don’t pay for that judge. In arbitration, if the parties don’t agree on an arbitrator, you have to have some method to select that person. This can be set out in your contract’s arbitration provision, or you can use third-parties such as JAMS or the American Arbitration System to select an arbitrator.
Sometimes the selection of the arbitrator becomes a long, drawn-out dispute in itself. Moreover, you and your adversary have to pay the arbitrator for his or her time. And in some instances, your arbitration may call for three arbitrators — one selected by you, one selected by your adversary and the third selected by the chosen arbitrators. Now you are contributing to the fees of three arbitrators, and they typically are not inexpensive.
What other problems can arise?
Another concern is that court proceedings offer you a full range of procedural safeguards that you don’t have in arbitrations. There are no rules of evidence in arbitration, and there are no rigorous procedural rules for pretrial disclosures, which can create significant problems.
For example, you don’t necessarily have the right to take depositions of individuals involved in the dispute in arbitrations. Consequently, you can get to the hearing and have no idea what that individual is going to say if he or she is called by your adversary as a witness. This wouldn’t happen in a court proceeding.
Another example is the issue of hearsay. Hearsay is just ‘rumor’ testimony, that is, what someone else told you, and under the rules of evidence, hearsay is inadmissible. The person who told you something must be the one to testify about it. An arbitrator or panel of arbitrators are not bound by these rules of evidence, so they are free to admit hearsay.
Thus, in an arbitration, if your opponent testifies that a supplier in China said one of your managers did something that hurts your case, that testimony may be admissible. A court would doubtfully admit such testimony.
If the arbitrator or arbitration panel makes a mistake, can you appeal, as with a court decision?
Yes, but the rules for modifying or vacating an arbitration award are very, very limited. Courts favor arbitration and give arbitrators a lot of deference in upholding their awards. It typically is not up to a court to determine whether the arbitrator followed rules of evidence or procedure, or even followed the law. What matters to a court reviewing an arbitration award is whether the award was within the scope of the arbitrator’s authority set out in the parties’ contract and whether the award is reasonably consistent with the terms of the contract.
When should businesses include arbitration provisions in their contracts and when should they keep them out?
As a rule of thumb, the more sophisticated the contractual relationship, the less likely I would want to include an arbitration provision. For example, if you are hiring a new CFO and negotiating a three-year employment contract, an arbitration provision makes sense. Alternatively, if you are selling a product line or division with innumerable financial terms and warranties and representations, I would leave out the arbitration provision.
Here is another example. If I am entering a one-off contract to buy product that is not cost prohibitive, I would include an arbitration clause, but if it is a contract to purchase variable amounts of a product over time that is integral to my business with fluctuating pricing and quality standards, I would opt to keep the clause out.
What can business managers do to avoid some of the problems you have raised?
Arbitration is based on a private contractual relationship. The key issue, then, is the arbitration provision in your contract. That provision governs your entire arbitration process. So when you are negotiating the contract, don’t just add a standard arbitration provision and think everything will take care of itself, because it won’t.
You need to consider whether the provision covers such things as the selection of arbitrators, the location of the arbitration, whether any pretrial procedures should be included, whether the provision should prevent the arbitrator from issuing awards for punitive damages or loss profits, whether the arbitrator has to provide reasons for his or her decision and how quickly the arbitrator must render his or her award. These are just some of the items that need to be thought through as part of an arbitration provision.
Eric N. Macey is a founding partner at Novack and Macey LLP. Reach him at (312) 419-6900 or firstname.lastname@example.org.
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