Innovative Alternative Dispute Prevention and Early Resolution Techniques (Practical Law Company)
January 17, 2012
by Melissa Lorenzo-Hervé, Practical Law Company
To avoid and control costly disputes, contracting parties are increasingly employing various preventive techniques. These include incentives to encourage cooperation, equitable risk allocation, partnering, standing neutrals and collaborative lawyering. They are also using early resolution devices such as litigation pre-nups, step negotiations and expert non-binding evaluations.
“These prevention and early control methods become popular whenever they are used, because they make good sense,” says Jim Groton, a neutral with the International Institute for Conflict Prevention & Resolution (CPR Institute). “The high rate of customer satisfaction is due to the profound advantages these methods provide to companies.” The management time spent preparing for the more traditional forms of dispute resolution and dealing with the impact of interrupted contracts can be directed instead into more proactive activities. “Companies that regularly use these techniques function more nimbly because they can dedicate capital and employee resources to their actual business needs,” he says.
For in-house counsel, the possibility of reducing the corporate legal spend is a major motivating factor. Introducing innovative ways of preventing disputes, or resolving them quickly and inexpensively, can also demonstrate in a very practical way how a legal department can help move the business forward. “If I can prevent one potential problem from escalating into a dispute that would otherwise have to be litigated, I have covered my salary for the year,” says Nancy Vanderlip, corporate counsel at HID Global Corporation. “If I can prevent two or more problems from escalating into litigation, I have added positive value to my company.”
This Article examines three types of alternative dispute prevention and early resolution techniques that can be adopted by in-house counsel with relative ease:
- Appointing a standing neutral.
- Establishing a peer review panel program for employee disputes.
- Implementing a planned early negotiation process.
A standing neutral is a trusted, independent expert advisor (or a panel of three advisors) chosen by contracting parties to help resolve any disputes that arise between them during the contractual relationship. This technique is typically used in the context of a business relationship where long-term cooperation is paramount, such as projects undertaken in the construction and oil industries. It is seen as a first response technique, designed to prevent any problems from escalating into adversarial disputes.
Contracting parties who have arranged for a standing neutral are incentivized to concentrate on fixing the problem rather than fixing the blame. They use their mutual knowledge to reach a solution between themselves, instead of relinquishing control to the neutral. “The mere act of appointing a standing neutral is like a magic bullet for reducing or even eliminating disputes between parties to a contract,” says Groton, who experienced first-hand the effect a neutral’s presence has on the parties’ behavior when he was appointed as a standing neutral for a real estate developer and hotel chain company in contract to build a luxury hotel. Throughout the construction phase, Groton could keep current with the progress of the project by using a webcam streaming live video from the construction site. Despite the typical construction problems that emerged during the project’s building phase, the parties were able to resolve all problems between themselves. Not once did they need to consult with him.
When differences of opinion do arise, the parties’ continuous access to the standing neutral allows them to quickly obtain a recommended course of action that is minimally disruptive to the business relationship. “This encourages teamwork and leads to improved performance by all parties,” says Groton.
The process of incorporating a standing neutral for the duration of a project typically involves the following steps:
- Identifying potential neutrals. During contract negotiations, the parties to a long-term business transaction compile a short list of experts in the relevant field, including potential neutrals they may know personally and others recommended to them by colleagues.
- Selecting and briefing the neutral. After the parties select a neutral, he must clear a conflict check. The parties then inform the neutral of the purpose and scope of the deal and contractual relationship, briefing him on the expected timeline and providing him with all deal documents relevant to the parties’ relationship.
- Entering into a written agreement with the neutral. The parties and the neutral enter into a written agreement (see Box, Form of Agreement for the Standing Neutral). The agreement states the neutral is paid only for the time he spends becoming and staying familiar with the contractual relationship and, only when necessary, hearing the parties explain a dispute and resolving it. The agreement may also provide for the frequency with which the parties are to periodically update the neutral on the progress of the project, along with any incident and project management reports.
- Referring disputes to the neutral. During the course of the project, if a problem or dispute arises among (or is foreseeable to) the parties and they are unable to resolve it themselves, they consult informally with the neutral. The neutral issues either a prompt expert non-binding recommendation or a binding decision, together with the reasons for his conclusion. The contract can require that the neutral’s advice and decisions be admissible evidence in any subsequent arbitration or litigation.
- Sharing the costs of the neutral. The fees and expenses of the neutral are generally split evenly between the parties.
Employment-related conflicts are commonly resolved through an out-of-court settlement and release, together with a confidentiality agreement. To some extent, this approach encourages litigation and leads to higher settlement payments. The smart response to this trend is for legal departments to lay the groundwork for managing employees’ complaints or disputes internally as soon as they surface.
While in-house counsel at a global aerospace manufacturing company, Vanderlip created and implemented a peer review panel program for resolving employee disputes. The program empowered an internal peer review panel with wide-reaching authority to make decisions on disputes referred to it by aggrieved employees (the panel could, for example, reinstate a terminated employee).
The peer review panel provided aggrieved employees with an opportunity to be heard. “It is a way to have one’s day in court without actually pursuing litigation,” explains Vanderlip. Providing an outlet for employees to air grievances among colleagues can serve as an effective safety valve. “The parties bring an end to their dispute in a matter of weeks or months, instead of a year or more spent in litigation, and the company stands a better chance of retaining the employees,” she says. In addition, the company avoids the inefficiency, cost, negative press and disrupting polarization of the workplace that often accompany lawsuits.
Vanderlip’s objective was to provide an environment in which employees could resolve issues within the company at no cost to them. “A company can establish this kind of program to address all types of workplace disputes, providing employees with an array of choices for resolving issues without resorting to filing a lawsuit or a complaint with a government agency,” she explains.
The program was so successful that in her tenure with the company not a single employee who went through the peer review process filed a lawsuit, even if they were unhappy with the panel’s decision. “The program provided a forum for addressing employee concerns quickly, constructively and without damaging the employment relationship, which benefits both the employee and the company,” she says.
The core stages of implementing a peer review panel program for employee disputes are as follows:
- Setting up a cross-functional team to design the program. The company sets up a team consisting of members of the legal department and the human resources department, in addition to staff from any other groups that may be helpful in designing the program. The team is usually best led by a member of the legal department.
- Drafting a peer review panel policy. The legal team drafts a policy in line with state and other jurisdictional regulations and industry norms. The policy is written broadly enough to be useful for any employee who wishes to resolve most common workplace grievances without hiring a lawyer or filing a complaint with a governmental agency.
- Recruiting employee volunteers for the peer review panel. The human resources group is tasked with publicizing the program and recruiting volunteers for the peer review panel (alternatively called the dispute resolution board) that hears employee complaints and recommends solutions. Ideally the group of volunteers should include rank-and-file employees as well as supervisors.
- Training employee volunteers. Once there is an adequate number of employee volunteers willing to be available for panel selection, they are trained on how to:
- apply (not create or modify) company policies;
- uphold disciplinary action or reverse it; and
- maintain strict confidentiality.
Periodic refresher training should be required of all volunteer panel members.
- Selecting panel members. Whenever an employee requests a hearing before the peer review panel, the panel members are selected by choosing names at random (preferably with a mix of managers and team members).
- Ensuring proposed resolutions are legally appropriate. The legal department ensures that any resolutions proposed by the peer review panel are in line with local and federal regulations as well as the company’s peer panel process. For example, an employee’s release of claims requires adequate consideration from the employer and is typically done only when an employee separates from the company.
- Documenting proposed resolutions. The legal department documents the resolution the peer review panel proposes to any employees, recording whether the aggrieved employee agreed with it.
PLANNED EARLY NEGOTIATION FOR SETTLEMENT
Planned early negotiation (PEN) is a dispute resolution model that prioritizes collaborative negotiating as soon as a dispute arises. It separates settlement talks from any potential or actual litigation and is not based on the traditional adversarial approach.
PEN succeeds when both sides share a willingness to cooperate with each other and exchange information to reach a reasonable resolution to a dispute neither wants to litigate. The stance taken by the lawyers involved is therefore key to the success of this approach, as are face-to-face negotiations. In-person meetings involving parties and lawyers together keep the parties focused solely on their goals to resolve the problems at hand and reduce the risk that a party misses out on the context of the talks.
Lawyers representing parties who are open to settling a dispute can offer to conduct their settlement conversations through the steps set out in the PEN process. This starts with an early case assessment that analyzes the business concerns, costs 3and amount of time involved in each of the potential ways in which the dispute might be resolved, such as mediation, expert determination and settlement.
If a party determines that settlement talks fit into its overall strategy for quickly and cost-effectively ending the dispute, its lawyer approaches the other side for a thorough discussion on planning the settlement negotiation. During these preliminary talks, the lawyers from both sides analyze the potential for any third-party claims and liens that may interfere with settlement negotiations. The settlement negotiation process is then organized into several steps and often involves a written agreement to negotiate (sometimes called a participation agreement).
Each party decides whether to hire specialized settlement counsel to conduct the negotiations, separate from any litigation counsel being retained. Often only one side has separate settlement counsel. When this happens, the side using its litigation counsels to negotiate a settlement while continuing its casework is spread very thinly. Separating settlement counsel from litigation counsel allows each team of lawyers to focus on their respective strategies without confusing their individual goals. Moreover, settlement counsel can negotiate more persuasively if he can explain to opposing counsel that his client’s litigation team continues uninterrupted in their work. “The settlement process is not used to derail litigation,” explains Jim McGuire, a neutral (mediator and arbitrator) with JAMS. “There is no need for unilateral disarmament. However, pursuing settlement and litigation simultaneously may allow for a temporary cease-fire.”
In his work as settlement counsel at Brown Rudnick, McGuire represented a small inventor-manufacturer of an improved type of snow blower new to the market. When a large competitor company reverse-engineered the snow blower to produce its own version, McGuire’s client had a complex patent suit on its hands. Knowing that litigating its claim in court would be prohibitively expensive and drag out for years, the small manufacturer realized it would be best to have the large company make and market the tool. McGuire used PEN techniques to persuade the other side to engage in a settlement process, including mediation. That resulted in a settlement within 90 days and a non-exclusive patent license for the large company. “It was a win-win that went smoothly and fairly, leading to a new business agreement both parties appreciated,” concluded McGuire.
A PEN system, especially one that involves a specific time period in which to complete the negotiation (three to six months, for example) allows business arrangements to continue, helps preserve relationships and reduces costs and delays due to litigation or arbitration The client can remain in control of the outcome of the dispute by ensuring that all feasible options are considered without running afoul of any court filing deadlines, should the dispute ultimately end up in litigation. As McGuire has experienced, “Litigation counsel have to engage in backward-looking behavior, asking, ‘What happened?’ while settlement counsel engage in forward-looking behavior, asking, ‘What do you want to happen?’”
The main steps involved in setting up the PEN process are the following:
- Performing an early case assessment. As soon as a dispute arises, outside counsel together with the client, or inside counsel together with the CEO and other executives, assess whether settlement talks are appropriate, and whether the negotiation process should be conducted using PEN mechanisms, such as a timeline and a written participation agreement.
- Planning the negotiation process. Lawyers and parties from both sides meet in person (once or several times) to plan the negotiation process, which includes:
- addressing each party’s concerns;
- dealing with potential obstacles to the negotiations;
- setting an agenda for meetings between the parties; and
- drafting a participation agreement that contains timelines for the negotiations and describes how, when and to what extent the parties will exchange information.
- Arranging payment incentives. If employing settlement counsel, a client can design that counsel’s payment structure to include incentives, such as a bonus for an arrangement reached within a certain time period (the payment structure can be the traditional hourly model with or without a bonus based on a percentage of recovery, a flat fee or simply a percentage of the recovery). A timeline or deadline by which a settlement agreement must be reached may also be decided at this point.
- Entering into an agreement to negotiate. The lawyers from both sides orally or in writing agree to negotiate. A written agreement is preferable, even if parts of it may not be legally enforceable. This gives the negotiation talks more legitimacy, distinguishes them from previous discussions and serves as guidance if a problem arises during the talks. (For model agreements, see John Lande, Lawyering with Planned Early Negotiation, ABA Publishing, Appendixes P and Q (2011).)
- Attending client preparation meetings. Each side’s lawyers meet with their clients to discuss how to best achieve their goals for each negotiation meeting and conduct the talks patiently and collaboratively. Lawyers experienced in PEN procedures commonly conduct client preparation meetings that last half a day, break for the other half and then resume for another half-day. This helps the lawyers and clients manage their expectations and control their emotions to negotiate constructively.
- Ongoing updates. Corporate counsel and outside counsel continue to focus on other tasks while settlement counsel provides regular updates on how the negotiations are progressing.
FORM OF AGREEMENT FOR THE STANDING NEUTRALThe following sample language is excerpted from The Standing Neutral: A ‘Real Time’ Resolution Procedure that also Can Prevent Disputes, which appeared in Alternatives, vol. 27, no. 11 (Dec. 2009):
- The parties will, either in their contract or immediately after entering into their contractual relationship, designate a Standing Neutral who will be available to the parties to assist and recommend to the parties the resolution of any disagreements or dispute which may arise between the parties during the course of the relationship.
- Appointment. The neutral will be selected mutually by the parties. The neutral should be experienced with the kind of business involved in the parties’ relationship, and should have no conflicts of interest with either of the parties.
- Briefing of the Neutral. The parties will initially brief the neutral about the nature, scope and purposes of their business relationship and equip the neutral with copies of basic contract documents. In order to keep the neutral posted on the progress of the business relationship, the parties will furnish the neutral periodically with routine management reports, and may occasionally invite the neutral to meet with the parties, with the frequency of meetings dependent on the nature and progress of the business venture.
- Dispute resolution. Any disputes arising between the parties should preferably be resolved by the parties themselves, but if the parties cannot resolve a dispute they will promptly submit it to the neutral for resolution.
- Conduct of hearing and recommendation. As soon as a dispute has been submitted to the neutral, the neutral will set an early date for a hearing at which each party will be given an opportunity to present evidence. The proceedings should be informal, although the parties can keep a formal record if desired. The parties may have representatives at the hearing. The neutral may ask questions of the parties and witnesses, but should not during the hearing express any opinion concerning the merits of any facet of the matter under consideration. After the hearing the neutral will deliberate and promptly issue a written reasoned recommendation on the dispute.
- Acceptance or rejection of recommendation. Within two weeks of receiving the recommendation, each party will respond by either accepting or rejecting the neutral’s recommendation. Failure to respond means that the party accepts the recommendation. If the dispute remains unresolved, either party may appeal back to the neutral, or resort to other methods of settlement, including arbitration (if agreed upon by the parties as their binding method of dispute resolution) or litigation. If a party resorts to arbitration or litigation, all records submitted to the neutral and the written recommendation will be admissible as evidence in the proceeding.
- Fees and expenses. The neutral shall be compensated at his or her customary hourly rate of compensation, and the neutral’s compensation and other reasonable costs shall be shared equally by the parties.
- Succession. If the neutral becomes unable to serve, or if the parties mutually agree to terminate the services of the neutral, then the parties will choose a successor Standing Neutral.
Copyright © 2012 Practical Law Publishing Limited and Practical Law Company, Inc. All Rights Reserved.
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