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Alternative Dispute Resolution Thoughts on Early Case Assessment and Resolution
Written By: Schiff Hardin
Schiff Hardin LLP's Public Companies Group
Studies show that, despite intense focus in recent years on streamlining the litigation process and controlling its costs, businesses still spend upwards of $300 billion annually litigating disputes, and that the amount is escalating.1 This has resulted, in large part, from the expansion of pretrial discovery and motion practice, in an attempt to make the process more transparent and less susceptible to the practice of “trial by ambush,” as well as the explosion of business documents subject to the discovery process given the proliferation of electronically shared information. As a result, the dispute is often more about the discovery process than the substance of the controversy between the parties.
Cost containment efforts can also adversely affect the results obtained in litigation. A popular form of cost containment is using budgets to forecast and quantify the cost of each step in the litigation process and the aggregate cost of pursuing the matter to some definite point, such as through trial. Budgeting is a useful tool, as long as it is understood that it has all the flaws inherent in prognostication. The litigation is not in the control of any party. It is full of surprises and traps for the unwary. These unforeseen matters are often expensive and time-consuming, but addressing them is essential to prosecuting a party’s position in the litigation.
Litigation can be viewed as a series of battles, with all the risks and surprises inherent in a contest with an intractable opponent. Thus, if the state of play requires the equivalent of a “troop surge,” budget constraints are soon abandoned. On the other hand, for a party to send its team into battle with limited supplies or manpower is to court disaster. Thus, the vagaries of the litigation process may overbear the most dedicated efforts to rein in its costs.
An answer to this dilemma is to change radically the nature of the dispute resolution process by putting it back in the control of the business parties and making business imperatives the touchstone for dispute resolution decision-making. Most alternative dispute resolution (ADR) options do just that.2 These consensual forms of dispute resolution are founded on the belief that parties will act rationally and in good faith. For them to succeed there must be a modicum of trust between the parties.
Critics of consensual forms of ADR argue that business executives do not know or understand the law and how it frames the parties’ positions in a business dispute. Thus, they are not in a position to make a sound decision on the merits of the dispute and this leads to bad results. By and large this has been the approach taken by business executives when litigation is commenced, in that they delegate management of the litigation to the lawyers and are largely cut out of the litigation process. However, business executives make decisions about complicated matters regularly. They do so by applying their business judgment and experience to an issue and enlisting the assistance of whatever subject matter experts are required.
The closest example is the role of the business people in a corporate transaction. In this instance, the process is generally managed by the business executives, using subject matter and deal making experts to support their efforts rather than supplant them. Furthermore, the deal is either concluded or abandoned within a finite amount of time. The amount and kind of information to be exchanged is agreed upon by the parties and is exchanged in a relatively short period. During the transaction, disputes arise and are settled by the business managers. Thus, expensive transactions with myriad risks are negotiated and concluded in a short time period on the basis of limited information.
Dealmakers can walk away from a deal, so there’s often a greater incentive to compromise. In litigation, each side is assessing risk and outcome, not necessarily in the same way. That is why mediation can be a very useful tool in connection with the work of reaching a settlement in business disputes.
That is not to say understanding the legal positions of the parties is not relevant to the decision making process. However, it is but one aspect of the business dispute and should be regarded as such. The business executives can rely on legal subject matter experts regarding both the legal positions of the parties and the use of ADR to resolve business disputes. The decision maker should weigh that advice with all the other factors that impact the dispute in making a decision about the attractiveness of various resolution alternatives. Thus, in cases of consensual ADR like mediation, each party’s business managers can make decisions about what is needed to inform them sufficiently, enlisting the advice of the subject matter experts and giving them the task of obtaining the required information in a consensual manner without burying the ADR process in “discovery.” In fact, the information exchange should be more akin to deal due diligence than litigation-style discovery.
Critics further argue that business disputes involve a breakdown in trust and an animus between the parties that blocks any reasoned approach to early resolution. Many initial conversations with business managers about a dispute are all about giving no quarter to an adversary seen as untrustworthy and greedy. The managers’ attitudes, however, change once they learn the cost and risk of the litigation process. It is thus incumbent upon the advisers to pull the stinger from the dispute early on and get the focus back to business needs and principles.
There are many types of ADR techniques, ranging greatly in complexity and formality. For instance, mediation is a dispute resolution process employing a neutral third party to facilitate, but the parties ultimately decide whether or not to settle the matter. Details are worked out by the parties, but the mediation process is often invoked after some limited discovery, formal “briefs” are submitted and the parties, including principals, are convened to present their arguments and negotiate towards a settlement. Each party can discuss ex parte with the mediator confidential information that it would not disclose to the other party. In this way, the mediator can offer settlement options that would not have been considered by the parties without the mediator’s assistance in negotiating a solution.
A mini-trial is another form of ADR. It is often a more structured procedure, that gives both sides the benefit of hearing the other’s key witnesses and/or arguments and a third party’s reaction to them, without binding any party to adhere to the verdict of the third party.
The concept of each party using a “settlement counsel” is a relatively new development in ADR. In the settlement counsel ADR context, the business disputants negotiate between themselves with the benefit of each party having advocates who are hired to facilitate the settlement negotiations of the parties and use their creativity to find win/win solutions to the dispute rather than ways to overbear the opponent and create a “win” only for their particular client. This ADR technique is often used in tandem with the litigation pre-trial process. The settlement counsel use the information gathered in preparing for pre-trial discovery to educate the clients and to facilitate settlement of the matter.3 How much information is gathered and exchanged, and how early in the process settlement counsel-assisted negotiation takes place is very fluid, and essentially needs to be determined on a case-by-case basis.
Advance preparation is important to implement ADR effectively. First, the parties need to embrace alternative dispute resolution/early dispute resolution as a matter of business policy. Once a dispute arises, approaching the opposing party to explore early resolution may be seen as a sign of weakness. Having embraced early dispute resolution as of matter of policy before a dispute arises blunts that notion.
One way to accomplish this is to include in the underlying business agreement or contract a provision requiring mediation of future disputes before resorting to arbitration or litigation. Another method, in the absence of a binding contractual provision, is to have adopted the ADR Pledge of CPR (International Institute for Conflict Prevention & Resolution). Since the 1980’s CPR has been a leading proponent of ADR as a means of settling business disputes and has introduced the Pledge, which companies and law firms can adopt to signal their willingness to explore ADR when a dispute arises. CPR explains the Pledge: “The CPR Pledge is not intended to impose judicially enforceable rights or obligations, nor does it constitute a waiver of any substantive or procedural right or obligation. Rather, the Pledge is a statement of policy aimed at encouraging greater use of flexible, creative and constructive approaches in resolving disputes.” CPR also notes that over 4,000 operating companies and 1,500 law firms have signed the Pledge. Signing the Pledge gives a company a pre-stated policy of favoring ADR rather than litigation.
To implement ADR effectively, businesses should also have in place, prior to the onset of any dispute, a team of business managers (including the company’s inside counsel) and outside dispute resolution specialists (usually lawyers) who are experienced in alternative dispute resolution/early dispute resolution. As discussed, it is beneficial to include facilitators who are not responsible for the management of the litigation, such as settlement counsel or a mediator. In each case these facilitators are charged with finding ways to resolve the matter, not “win it.” In order to accomplish this, however, it is necessary to have such resources organized and available prior to the onset of a dispute.4
It is also useful to think through how early dispute resolution can proceed when litigation has been commenced. Such a situation calls for prompt action. Otherwise, the litigation process is apt to garner all the energy and time of the client and its advocates until months or years of expensive discovery and motion practice have occurred. Preparing for early ADR may involve discussing with a dispute resolution firm ways in which to use efficiently two tracks, litigation and ADR, simultaneously. This is particularly true if a disputant wishes to use a different lawyer in the ADR track from those who are managing litigation on its behalf. Unfortunately, it is often the case that party-controlled ADR simply adds burden and expense to the ongoing litigation. This is because it is used as an adjunct to the litigation, i.e., the parties take a brief time out in the legal proceedings to explore settlement through ADR. The time out is often taken well into the litigation process, after much time and money have been expended and a business relationship adversely affected. In such a case major benefits of early resolution through ADR have been lost.
ADR should be viewed as being separate and apart from litigation. It is more of a deal than a contest. There is a saying that disputes are not settled “until one becomes two.” Thus, the dispute resolution process becomes a search to understand the positions and goals of both sides in the dispute. In this way, each party can attempt to accommodate the goals and positions of the other rather than fending them off. ADR techniques take the implications of this aphorism seriously. Thus, ADR is basically about ferreting out the merits and understanding the implications of the opponent’s positions and understanding the business goals of the opponent. It is designed as a cooperative process, whereby the parties agree on what information is necessary to the decision- making process and how to access it consensually and efficiently. Again, such a process requires rational and trustworthy behavior on the part of all the parties to the dispute.
When treated in this manner, the process can be used earlier in the dispute to greater effect, actually save time and money and better position the disputants to repair the business relationship. In the end, the dispute may not be resolvable early and without enlisting a third party-controlled decision-making process such as litigation.
Nevertheless, the more effort put into early, consensual dispute resolution, the better informed the parties will be and the more focused the ensuing process will be. Thus, the benefits flowing from an attempt at early dispute resolution, even though unsuccessful in that the dispute did not settle, outweigh the cost and time involved.
1 E.g., Dispute-WiseSM Business Management: Improving Economic And Non-Economic Outcomes In Managing Business Conflicts, American Arbitration Association (2006).
2 The standout exception is arbitration. This form of ADR is aimed at giving the parties more control over the process. But, ultimately a third party will decide the matter.
3 For a wide-ranging discussion of ADR processes see the Web site of the International Institute for Conflict Prevention & Resolution (CPR) http://www.cpradr.org.
4 For a more detailed discussion, see Lawyering with Planned Early Negotiation: How You Can Get Good Results For Clients and Make Money, John Lande, 2011 American Bar Association.
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© 2012 Schiff Hardin LLP