Strategic Considerations for Business Lawyers: Resolving Disputes through ADR or Litigation August 22, 2016 This Note illustrates the importance of making well-informed, strategy decisions before deciding whether or not to pursue litigation or ADR to resolve business disputes. It also underscores the importance of including thoughtful and well-drafted dispute resolution clauses in contracts, especially in complex business transactions where the parties wish to resolve disputes without upsetting their ongoing relationship. 1 Business lawyers understand the importance of drafting clear, unambiguous contracts, and it is argued here that drafting an arbitration clause that anticipates the types of disputes that are likely to arise is well worth the upfront investment. While parties would prefer not to think about a breakdown in the relationship, the consequences to a long-term commercial relationship of litigation can be devastating to both sides, win or lose. This risk can be mitigated by the inclusion of a clear dispute resolution mechanism in the parties agreement and as discussed below, the preference for arbitration versus litigation reflects the author s bias for certainty and the speedy resolution of commercial disputes. Does Litigation Ever Make Sense? Litigation may be required in some circumstances, despite its perils. While the litigation process is costly, time-consuming, and may thrust you or your company into the public eye, some disputes may warrant the significant investment of time and money. For instance, you may wish to litigate all the way to the U.S. Supreme Court if necessary if your company would benefit from a favorable court decision that resolves an important issue or unsettled area of law. If a statute or regulation is impeding your business strategy, or threatening your license to operate or compete, the benefits of litigation may outweigh the costs. In these scenarios, many companies general counsels look for opportunities to support a trade association or other business organization s amicus curiae brief, as the most cost-effective way to address a significant business concern. 2 Contributing to the expenses of a brief, together with invest in your government relations professionals and/or lobbyists to influence the courts or legislative action, may be preferable to becoming embroiled as a litigant. 1 A more detailed discussion of this topic, which includes an overview of the pros and cons of ADR, is set forth in an article, written by E. Norman Veasey and Grover C. Brown, An Overview of the General Counsel s Decision Making on Dispute Resolution Strategies in Complex Business Transactions (The Business Lawyer, Spring 2015, Volume 70, Issue 2, pg. 407-436). 2 Business organizations, such as The Chamber of Commerce of the United States of America ( the Chamber ), Business Roundtable ( BRT ), and the National Association of Manufacturers ( NAM ), regularly submit briefs as Amici Curiae in support of business interests. Other advocacy organizations, such as the American Antitrust Institute ( AAI ), advocacy organization, often submit amicus curiae briefs supporting competitive principles.
Absent these concerns, the choice to litigate or pursue ADR through mediation or arbitration requires careful analysis of a number of factors. Factors to Consider Agreement to Arbitrate. Does your contract provide for ADR? If not, will your opponent agree to mediate or arbitrate? If not, you may have no choice but to pursue litigation, but you may be convinced to insist that future contracts contain an appropriately drafted, and well-negotiated arbitration agreement. As explained below, the benefits of incorporating an unambiguous dispute resolution clause into your commercial agreements are significant, particularly if you do not wish disputes with your business partner, vendor or customer to destroy an important ongoing business relationship. In agreements for the purchase or sale of assets or businesses, dispute resolution clauses can be narrowly tailored to address post-closing disputes, or broadly to cover the essence of the agreement, including representations and warranties and specific performance. 3 Timing and Confidentiality Concerns. Often commercial disputes are time-sensitive, and the parties wish them to remain confidential. One or both factors may argue in favor of ADR. If time is of the essence, the parties may wish to go straight to arbitration rather than mediating first. In mediation, decision-makers can come to the table, and through a process of discussion and exchange of information, agree to resolve their dispute. Likewise, both parties may wish to keep their dispute out of the public eye, and will agree to enter into a confidentiality agreement that governs what the parties may say about the dispute, how they will respond to press inquiries, or even a leak. This may be particularly important if one or both parties are publicly-traded and have SEC disclosure obligations to consider. While you may ultimately need to enforce an arbitral award in court, what information becomes a matter of public record is significantly less than if you had tried the case to conclusion in a court of law. Early Case Assessment. Assuming you have a choice to make whether or not to litigate or pursue an ADR option the first strategic consideration is to understand what a victory or a loss in court might mean for the parties. Will customers, shareholders, and current employees be affected? Will a loss make it difficult to recruit new employees? While your legal claim may be strong, will a favorable decision in five years achieve your goals? Is there an outcome, short of a court decision, that would be preferable if it could be achieved in six months or a year? Financial considerations must also be taken into account. What is the upside and the downside, and what are the consequences to various stakeholders of a win or a loss, and at what cost? The amount in dispute is also quite relevant, as are estimated litigation costs, and, the aggregate amount should be considered not only in relation to your revenue, cash flows and profits, but also in relation to your opponent s financial resources. At the end of the day, your relative financial position may affect your bargaining power and ability to stay the course through the end of a lengthy litigation process. Even at this stage, it may be worthwhile to obtain a second opinion from a neutral. This evaluation may help you see your opponent s strengths more clearly, and the weaknesses in your own case. It will highlight what kind of information you will need to prove your case, or to 3 See the American Arbitration Association s clause drafting tool at www.clausebuilder.org. 2 P a g e
disprove your opponent s case. This may also be the stage where parties may wish to engage a neutral expert to help resolve a technical or accounting issue. This evaluation and findings of fact may later be incorporated into the arbitration process, or as stipulations in the litigation arena. Key Litigation Questions. In an effort to highlight the importance of making a detailed prelawsuit, pre-arbitration evaluation of your dispute, consider the following questions, which represent only a fraction of the many questions you will face in order to make a well-reasoned decision: Where should the case be filed in the U.S., or another country? Is there a statute of limitations that could bar your claims or defenses? If you file your case in state court, will you have a home court advantage that could work in your favor? Will your opponent remove the case to a federal court, or seek to consolidate it with other pending litigation? Will there be a jury trial or could a judge grant summary judgment based on undisputed facts? If tried to a jury, how will your claims or defenses by viewed, compared to your opponent s positions? If an administrative tribunal has jurisdiction over your case, what procedural and substantive limitations apply to your case? What law applies to your case? Statutory or common law, settled or unsettled principles? What types of evidence will you need to prove your case? Will you be required to spend significant sums to produce documents, or attend endless depositions? Are attorneys fees recoverable by the prevailing party? If you lose or attorneys fees are not awarded, what are the likely expenses through trial, appeals, final judgment and enforcement of the award? What are the risks that, even if you succeed, the losing party will not be able to pay? The answers to these questions, and many others, may not be known until much more legal research is conducted and a full factual inquiry is made. However, these questions highlight the complexity of your decision. In the end, filing a lawsuit must be weighed against the benefits of attempting to resolve your dispute through a streamlined process, with limited discovery and a final and binding decision by a panel of neutrals experienced in addressing matters such as yours. ADR Options Are Negotiations Possible? The parties may have already attempted to resolve their dispute in negotiations. Sometimes bringing new representatives to the table can break the log-jam, or even an informal exchange of information. Some contracts have negotiation clauses which require the parties to consult and negotiation with each for a specific period of time. This may, or may not, be useful, especially if the breach by one party of the contract may impose immediately adverse consequences on the other. Assuming that the parties have exhausted this early ADR option, they may wish to attempt to resolve their disputes through mediation prior to arbitration. 3 P a g e
Mediation. If the parties have agreed to mediation, pursuant to a standalone agreement or included in an arbitration clause, it must be understood that, like a mandatory negotiation period, may delay resolution. Mediation is, by definition, a voluntary process that may be terminated at any time. Some ADR organizations, such as the AAA Commercial Rules, have adopted rules that call for mediation as a first-step in the arbitration process, but permit parties to opt out unilaterally. Mediation may also be the vehicle used to reach an agreement to arbitrate, which, if unsuccessful, litigation ensues. Arbitration. For a court to uphold an arbitration provision, the parties intent to arbitrate should be specific, and thoughtfully drafted to cover the types of disputes that are either excluded or included. The parties should ensure that their respective lawyers are familiar with the arbitration rules of the organization identified to administer the mediation or arbitration, and that drafting considerations take into account such issues the number of arbitrators, the location of the proceeding, among other items. 4 Under most organization s rules, including the AAA, parties are free to modify the procedures, but in drafting the contract clause, lawyers should be aware of what the rules permit. For example, the AAA s Commercial Arbitration Rules and Mediation Procedures, in effect since October 1, 2013, permit dispositive motions, and the exchange of information between the parties. Parties may also seek emergency relief (allowing for temporary injunctions) and sanctions for abusive conduct. 5 The essence of the arbitration process is as follows: Informal procedures, utilizing those established by an ADR organization such as the American Arbitration Association ( AAA ), in which rules of evidence (that would otherwise apply in court) are not strictly applicable. No motion practice or formal discovery, unless specifically agreed by the parties. No requirement for transcripts of the proceedings or for written opinions of the arbitrators, unless the parties agree to the contrary. Production of relevant information and documents is typically permitted, subject to the agreed arbitration rules, which, in the case of the AAA commercial rules, may be altered by mutual agreement of the parties. Impartial and knowledgeable neutrals, selected by the parties, render a final and binding arbitral award which is enforceable in court. Court review of arbitral awards is limited by applicable state or federal arbitration laws, and the grounds for vacating an award are extremely limited. Various Arbitration Techniques. Parties with long-term relationships who are involved in disputes that require a determination of value such as goods, services, real estate, a purchase price, or the value of a breached contract term or loss may opt for final offer arbitration. This type of arbitration is commonly referred to as baseball arbitration because baseball 4 See Drafting Dispute Resolution Clauses: A Practical Guide (pg. 7), at www.adr.org. 5 The AAA s Commercial Arbitration Rules and Mediation Procedures provide for a streamlined, cost-effective arbitration process for cases with claims greater than $75,000. The rules also provide arbitrators with additional tools and authority to manage the process effectively, including enforcement powers, and the ability to take action with respect to non-paying parties. 4 P a g e
players and other sports and entertainment figures have used this process successfully to resolve salary disputes. In this process, each party submits a number to each other, and if they are close enough, may settle without a hearing. If they cannot agree, the arbitrator must, after considering the evidence, pick one of the submitted numbers. These processes, and a number of variations on the same premise, force parties to consider what outcome they would be willing to live with, and incentivizes both parties to submit reasonable numbers. Another common tool that parties prefer when they wish to limit their downside risk is referred to as high-low arbitration, or arbitration within agreed monetary limits. This helps parties close the gap between their respective monetary positions, and the range provided both sides with some degree of certainty. Like an insurance policy, it limits the downside risk. There are several variants of this type of arbitration, but in each case, the parties agree in advance about the range of award that is the maximum and the minimum amount of the award. If, prior to the hearing, the arbitrator is not told the range, and her award is higher or lower, the range number dictates the award. This type of arbitration is sometimes referred to as blind bracketed arbitration. Another variant requires the arbitrator to decide only the issue of liability, with predetermined sums agreed by the parties to be paid by the loser to the winner. In situations in which the parties have claims and counter-claims, the arbitrator may be asked to determine the net number awarded to one or the other party. These techniques can quickly bring the financial aspect of the dispute into sharp focus; and, seem to work better in situations in which liability has been established. Assessment of Attorneys Fees. An ancillary but important consideration fees and expenses of the arbitration, including attorneys fees can be agreed by the parties, although the drafter should be wary to specify what the term prevailing party means. Under AAA commercial rules, the parties share administrative expenses and the arbitrator fees, but are silent as to attorneys fees (except for AAA international rules). The Role of the ADR Neutral. Many disputes are resolved before an arbitrator is called upon to make a final award. The role of the neutral is to help the parties shape an effective process, that achieves their goals. The options and techniques are too numerous to cover in this Note, but clearly the process is most successful when counsel for each side works collaboratively to facilitate the process, and respects the arbitrator s authority and timetable. Arbitration can become expensive if the parties insist on production of documents, depositions and numerous briefs, and the hearing may then begin to resemble a trial. If permitted to truly facilitate and limit the process, the role of the neutral will be to achieve a fair result more quickly and at a much lower cost. A neutral who understands underlying the business transaction or arrangement, as well as the financial issues at stake, can help the parties avoid the significant costs that a full-blown litigation would cost, and guide the process most effectively. If you are interested in learning more about this topic, do not hesitate to reach out to the AAA or other ADR organizations for information and guidance at www.adr.org. 5 P a g e