Quick Links: Return To Entrepreneur’s Resource Center

Using Alternative Dispute Resolution

Digital Library > Legal Issues and Taxes > Alternative dispute resolution (ADR) “Using Alternative Dispute Resolution”

Litigation leads to expensive, messy, public confrontations with uncertain outcomes. However, alternatives exist for disputing parties. Mediation or arbitration can bring faster and cheaper resolutions with concern for privacy and relationships.

OVERVIEW [top]If you are like thousands of other small business owners and employers interested in avoiding exorbitant legal fees, court costs and lost worker hours, consider using mediation or arbitration the next time you have a dispute with a customer, supplier or employee. Mediation and arbitration are designed to avoid expensive and messy litigation procedures and to maintain privacy and confidentiality for all parties. These alternative dispute-resolution mechanisms offer significant advantages compared to the courts and are becoming popular with cutting-edge companies.

Most people will agree that virtually every problem has a practical solution. Yet through the process of litigation, disputing parties typically become entrenched and cannot see their way to a compromise. Instead, lawsuits become a means for one party to impose its will on the other. The process is costly for all involved, and the outcome is uncertain, regardless of the time, money and effort expended. Mediation (and, to a lesser extent, arbitration) offers everyone a better chance to resolve a problem with less acrimony and cost.

In this Quick-Read you will find:

  • When it’s best to use mediation to resolve a problem.
  • Why arbitration is not always the most effective mechanism to use.

SOLUTION [top]

In the current litigious climate, your company should have a system in place to resolve disputes quickly and consistently. As part of your overall legal strategy, make sure your employee manuals, contracts and work agreements include rules for hearing and settling grievances. It is always best for any conflicts to be handled in the privacy of a business suite instead of a crowded public courtroom.

Mediation

In mediation, a neutral intermediary (the mediator) defines the conflicting interests of the parties, explains the legal implications and attempts to help the parties reach and prepare a fair settlement. This mediator (usually a trained lawyer, business person or retired judge) is retained not to make decisions for the parties but to assist them in reaching a realistic agreement. For more on finding a mediator, read “Don’t Litigate: Mediate.”

Settlements are typically reached more quickly and cheaply this way because opposing counsel was not hired to fight it out in court. Mediation is more likely than arbitration, and much more likely than litigation, to result in both parties feeling satisfied with the outcome.

Arbitration

If mediation proves unsuccessful, consider arbitration. Arbitration is a more formal mechanism for resolving disputes but still differs from litigation. Hearings are conducted by arbitrators rather than by judges and are not limited by strict rules of evidence. The arbitrator can consider all relevant testimony when making an award, including some forms of evidence (for example, questionable copies of documents) that would be excluded in a regular court.

Attorney fees are reduced because the average hearing is shorter than the average trial (typically, less than a day versus several days). Time-consuming and expensive pretrial procedures, including depositions, interrogatories and motions are usually eliminated, as are stenographic fees, transcripts and other items. The decision to fall back on arbitration can be made at any stage in the litigation process.

Some lawyers believe that juries tend to empathize more with certain kinds of people, such as fired employees and older individuals. Arbitrators are usually successful lawyers and business people whose philosophical orientation may not automatically favor such individuals. Also, arbitration rarely results in the award of punitive and other damages.

Disadvantages of arbitration:

  • Some lawyers believe that arbitrators are more likely than judges to split close cases down the middle to provide some degree of satisfaction to both parties. This tendency to compromise, if true, benefits claimants with weaker cases.
  • You cannot appeal if your company loses the case or disagrees with the size of the award.

REAL-LIFE EXAMPLE [top]

A 42-year-old African-American male, who worked at a major Wall Street firm as an accountant, perceived that he was passed up for promotions during his nine-year tenure with the company, despite his exemplary work. Instead, less experienced and less trained white males were regularly promoted ahead of him.

The man consulted an attorney about filing a lawsuit with the Equal Employment Opportunity Commission alleging race discrimination. He also asked his attorney to alert the newspapers to the story about illegal treatment of its minority executives by the company. Rather than take this route however, his attorney requested a mediation session according to the company’s published rules and policies. He worked with the company’s lawyer to select a neutral mediator. The mediation took place at the offices of JAMS, a popular mediation service organization. After the employee and his attorney presented his case (which the company denied), the mediator would not allow the employer to bully the employee into submission or act as though it enjoyed a stronger negotiating position.

The employee’s attorney had agreed to mediation hoping to negotiate a formal arrangement guaranteeing his client regular promotions and raises with retroactive back pay. The result of the mediation was more than satisfactory, however. The employee accepted a lucrative severance package exceeding one year’s pay together with other financial incentives, including continued medical and health insurance paid for by the employer and a favorable letter of reference. In exchange, the employee agreed to a promise of confidentiality and, most importantly, signed a comprehensive General Release. The company did not have to spend an enormous amount of money fighting the case in court and risk the bad publicity that most likely would have ensued.

DO IT [top]

  1. Draft employee manuals and work rules requiring that all unresolved complaints first be mediated.
  2. Include a clause in all employment contracts and agreements with customers, suppliers and relevant third parties requiring that any disputes be resolved first by mediation and then by binding arbitration.
  3. Contact the nearest office of the American Arbitration Association (AAA) to learn more about mediation and arbitration rules. The AAA is most often selected to assist parties in these processes. It is a public-service, nonprofit organization that offers dispute-settlement services to employers and business executives. Services are available through AAA’s national office in New York City and 25 regional offices in major cities throughout the United States.
  4. Speak to an experienced business or labor lawyer to review your company’s current policies, procedures and practices. Discuss when arbitratio n is appropriate for your company and when going to court might be more advantageous.
  5. Always get a competent legal opinion before you involve the company in any dispute or litigation. The lawyer should advise what legal work needs to be done, how long it will take, the chances of success and how much it will cost. Some attorneys neglect to give honest appraisals. Clients are then misled and spend large sums of money on losing causes. Be wary if the attorney states, “You have nothing to worry about.” Prudent attorneys tell their clients that airtight cases do not exist and that the possibility of unforeseen circumstances and developments in litigation is always present. That is why you should always consider mediation, arbitration and out-of-court settlements.
  6. Before proceeding with litigation, request an opinion letter from your lawyer that spells out the pros and cons of the matter. Even if you are charged for the time it takes to draft it, an opinion letter can minimize misunderstandings with your lawyer and help you decide whether to proceed with a lawsuit or accept a mediated settlement.

RESOURCES [top]

Books

Alternative Dispute Resolution in Business by Lucille M. Ponte and Thomas D. Cavanaugh (West Educational, 1998). A textbook with extensive examples. “Best Business Practices” tip sheets at the ends of chapters summarize what’s important to the businessperson.

Harvard Business Review on Negotiation and Conflict Resolution (Harvard Business School, 2000). See the closing chapters: “Five Ways to Keep Disputes Out of Court” by John R. Allison, and “Alternative Dispute Resolution: Why It Doesn’t Work and Why It Does” by Todd B. Carver and Albert A. Vondra.

Internet Sites

Explore the Benefits of Alternative Dispute Resolution

American Arbitration Association

Arbitration Can Be a Cheap, Quick Alternative to Lawsuits

Dispute Resolution: ADR Links. New Mexico State University Department of Criminal Justice.

Article Contributors

Writer: Steven Mitchell Sack

Related Articles...
Trend Watch 2001

9 forces that will shape your company’s future.

Read More ...
Your Move — 5 Truths About Growth

Digital Library > Building and Inspiring an Organization > Growth “Your Move — 5 Truths About Growth” I believe our economic well-being depends on increasing the number of growth companies. Growing companies create jobs, and jobs help create self-sufficient people in healthy communities. But growth has both a dark side and a silver lining. To help you find the positive

Read More ...
Use Networking Skills to Open Doors

Every entrepreneur knows how valuable networking skills are. Are yours up to par? Take some time here to hone your style, and pick up more lasting, effective contacts.

Read More ...
Can We Talk? Web Chat Becomes Service Tool

Web chat originated as a community builder, allowing people to communicate in real time over the Internet. Yet the technology has also become an important customer service tool in the e-commerce arena.

Read More ...
Lillian Vernon’s Million-Dollar Mistake

“Lillian Vernon’s Million-Dollar Mistake” A fantastic failure taught this consummate catalog entrepreneur as much, if not more than, her many successes. Lillian Vernon is the stuff of entrepreneurial legend: The mail-order business launched on her kitchen table is now publicly traded with 1998 revenues in excess of $250 million.A Valuable Lesson But she and her Lillian Vernon Corp. learned perhaps

Read More ...