Williams Birnberg & Andersen, L.L.P. : Attorneys at Law : Houston, Texas
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Alternate Dispute Resolution
Cost-Effective Ways of Resolving Costly Business Litigation

Much has been said over the last ten years about the rising tide of business litigation which many believe has resulted in a major negative impact on business and the economy. As a result both federal and state legislatures have looked for ways to resolve what some labeled a major crisis and passed various laws emphasizing and sometimes requiring the use of various ways of resolving litigation outside the formal court process. These options are known as Alternative Dispute Resolution ("ADR") and have provided the courts and parties with viable methods to resolve conflicts that have found there way into the court litigation stream.

In 1987 the Texas legislature passed the Texas Alternative Dispute Resolution ACT of 1987 (the "Act"). This act has provided some very viable alternatives for the businessman who is looking for a more economical way to get back to their business, put an end to their exposure as well as, what they perceive to be, run away litigation costs. Of all of the alternatives provided in the Act, two of the half dozen or so methods proposed, mediation and arbitration, have proven to be the most popular. While not every litigation case is suitable for ADR, it is believed that the great majority are. If you are in business and do not at least know about some of these alternatives, you could be "missing the boat" on helping your company "stay in the race" and become more profitable. Thus it behooves you to take a moment and learn about arbitration and mediation.

Many often confuse mediation and arbitration. Both have several things in common — both are private and confidential, they can either be binding or non-binding, and usually afford the participants a quicker more cost effective resolution of their case. The fundamental difference between the two is that arbitration is adjudicative, that is it is judgmental and in that regard much like a trial.

Arbitration has generally been defined as process in which parties voluntarily refer their disputes to an impartial third party neutral, an arbitrator, selected by them for an impartial decision based on the facts and arguments presented before the arbitrator. Some parties find particular benefit in having their case reviewed by an established expert in their industry or practice. Arbitration which involves a final determination of disputes has elements of the judicial process. Arbitration usually arises via a contractual relationship which begins either at the execution of a contract or at some later date after a controversy has arisen.
Person sitting at conference table
In an arbitration proceeding the parties submit their controversy to the arbitrator who acts like both a judge and jury and makes all findings of fact and law which findings are generally binding upon the parties. The arbitration is conducted in whatever style and fashion the parties and/or the arbitrator prescribes. In the more formal arbitrations the parties generally meet in a large conference room with the arbitrator or the arbitration panel sitting at the head of the table and the parties sitting on each side of the table. Generally after some preliminary introductions by the arbitrator and the parties, each side presents an opening statement followed by swearing in their witnesses and presenting their respective cases. After the proceeding is concluded (they usually take one day or less but in the big cases have lasted for months) the arbitrators generally make their award and send same to the parties within the next week. The parties agree in advance that the arbitrator's ruling, the award, will be accepted as final and binding. Unless otherwise provided in the arbitration agreement, the arbitrator is not required to give a reason for his/her decision and the award is generally not open to review of the courts for any error in the finding of fact or in applying the law. In contrast the court proceeding has a well established body of law which determines the rights and obligations of the parties within a traditional framework. These proceedings are governed by procedure and evidentiary rules and are subject to review by higher courts for any errors in applying the facts and the law.

There are several industries such as textiles, construction, and stock brokerage which have traditionally employed arbitration agreements in their business dealings since the early 1900s. More recently, various other industries such as banking and real estate brokerage have begun to use arbitration agreements in their contracts.

In a recent arbitration involving the sale and delivery of various textile products the manufacturer, Company A, complained that the textile mill, Company B, failed to ship all the fabric that was ordered, that some of the fabric that was delivered was either the wrong material or that it was defective and that various deliveries were late, arriving long after the anticipated delivery date for the finished goods. Company A requested relief from the arbitrator and asked that they not be required to pay Company B for the wrong shipments and the defective merchandise. In addition Company A asked to recover their lost profits and penalties that they suffered from not being able to meet their manufacturing deadlines. The textile mill counter-claimed that their goods were of first quality, that the goods were delivered on time, and that Company A should not only be required to pay for all the goods but should also pay for their out of expenses in having to hire a lawyer and arbitrate the matter. At the arbitration which was presided over by a panel of three arbitrators (one with expertise in textiles, one with expertise in manufacturing, and the third (the chairman) with knowledge of both) facts were presented regarding both parties performance under the contract and experts were brought in to give their opinion regarding the quality of the goods. The arbitrators, having had special knowledge about these goods and the climate at that time in the industry rendered their award which in part penalized Company B for late delivery but found that the quality of the goods was acceptable thus requiring the manufacturer to make a partial payment for same after receiving a credit for the late deliveries. This case from start to finish took approximately four months to conclude. None of the facts were made known to the public and, more importantly, to their competition. And both parties, as a result of being able to dispose of this case quickly were able to continue to do business with one another.

The reason for arbitration's popularity are not only the confidentiality and informal nature of the proceeding but also time and money that is saved along the way. Arbitration can generally be concluded within four months of its initiation while the costs associated with arbitration are less than those in a standard litigation as discovery is either non-existent or kept to a minimum. Generally if a person or company proceeds to arbitration they can usually expect to pay an administrative or filing fee (usually between $100-$300) and an hourly fee of the selected arbitrator ($125-$600/hour). In addition to confidentiality, many see the major benefit in arbitration as having a final binding resolution. In contrast, some view not having the benefit of extensive discovery as placing them at a major disadvantage. In addition the costs in client and attorney preparation time in arbitration proceeding are viewed as similar to those in litigation.

Mediation is thought to be much more unique than arbitration and recent studies have shown that it has generally been preferred by disputants and their attorneys and therefore is more frequently used to resolve litigation cases than arbitration.

Mediation has been defined as a process by which a third party neutral acts to assist or facilitate resolving a dispute between various disparate parties. The main reason for its popularity over arbitration is thought to be the fact that mediation is non-binding and non-judgmental.
"Let us never negotiate out of fear, but let us never fear to negotiate."
— John F. Kennedy, Inaugural Address, 20 January 1961
In mediation the parties work together with the assistance of a mediator who helps facilitate meaningful discussion between the parties in an effort to arrive at a mutually acceptable solution. Like arbitration, mediation is confidential and generally affords the parties with a more expedient way to end their controversy. Unlike arbitration there is usually enough discovery to help both parties resolve their case. Mediation can be arrived at through voluntary agreement between the parties, by court order, or by agreement contained in a contract. Generally most mediations are successful in helping the parties settle their differences. Although some very large cases may take several mediation sessions before they are resolved, most mediations can be concluded in just one day and some only take a half day. In addition to paying an administrative cost (ranging form $100-$300 per party) the only other cost is that of the mediator (ranging from $350-$500 per party for a half-day & $500-$2000 per party for a full day). The savings in time and money in comparison to a long hard-fought litigation can be dramatic.

Prior to most mediation proceedings the parties are required to prepare and submit confidential preliminary information to the mediator including, but not limited to: what the issues are, who the decision maker will be who will be attending the mediation, what the latest negotiation positions of the parties is, any other information and/or documents that will provide the mediator with sufficient information to effectively assist in the process. It is imperative that each party attend the mediation or bring a representative to the mediation that has sufficient settlement authority to be able to resolve the case.

Although there is no legal requirement to do so, it is very beneficial to the process if both parties make a bona fide attempt to negotiate in good faith. In most mediation proceedings one can expect the process to begin with a joint session which, after introductions of all the parties, proceeds with opening statements by each side. All statements made during the mediation are confidential and private. Nothing that is said during the mediation can be used for or against anyone if the case goes to trial. And, neither the mediator or the parties can be called upon to testify regarding the mediation. The only thing that a mediator may divulge to the court, without permission of the parties, is whether the case settled. The mediation session is thought to be very conducive to meaningful communication as it is usually the first time in the litigation process that all the parties have had the opportunity to sit down together and confer with one another knowing that nothing that is said by anyone can be used either for or against them if the case does not settle and ends up in court.

After the preliminary session the parties will generally divide into separate groups and meet individually in another confidential session with the mediator to explore what each side feels are the strengths and weaknesses of their case. This meeting is referred to as the "caucus." By working with both parties in the caucus the mediator has the opportunity to explore some of the very intimate and fundamental details that may be bothering each side without their weakening their position by divulging same to the opposition in the open session. By using the caucus, the mediator usually has the benefit of a much broader picture and generally is able to identify and separate the parties' real interests from their legal position at trial. The mediator then proceeds to facilitate settlement discussions between the parties by asking tough questions and playing "devils advocate" with the parties. After extensive negotiations the parties often arrive at a settlement agreement which sometimes they are equally satisfied with but more often is a settlement that neither party likes but they do it to compromise and therefore reduce their respective risks and to bring the matter to a "final resting place." After the parties reach a settlement agreement it is reduced to writing and signed by the parties and their counsel. This agreement is binding upon the parties, has the same force and effect as any bonafide contract would, and may at the court's discretion be incorporated in the court's final decree.

A few years ago, after a long and prosperous relationship, a company had a falling out amongst its top executives and as a result it lost some very essential employees and some very valuable clients. One of the key officers who we'll call Mr. Jones, was brought in and trained by the founder, who we'll call Mr. Smith. Smith's training of Jones was so effective that Jones soon became instrumental in helping to build the old company into a very lucrative one. After several years of working together Mr. Jones became dissatisfied with the company's progress and not reaching his very high financial expectations. Thus, Mr. Jones quit and opened a competing business which soon became very competitive with his old company managing in its growth to lure several of the old accounts to his new company. Mr. Jone's new company not only provided him with a greatly enhanced financial position but also offered him a variety of new challenges and business opportunities he never had access to before. Mr. Smith was irate. Not only had he trained Mr. Jones and taught him "everything he knew" but Jones also, in direct violation of his employment agreement, began competing with his old company. As a result Smith sued Jones to recover over $2,000,000 in lost business and, in addition to his claim for breach of contract, included, among other things, tortious interference with the company's business relationship, theft of trade secrets, and defamation.

After each party had spent over $25,000 in the preliminary "sparing" over aspects of their case which included initial investigations, pleadings, discovery, and legal maneuvering, the court ordered the parties to mediate their differences. Initially both parties filed formal objections to the mediation as they felt it was a colossal waste of time as they both believed that there not only was there a lot of money at stake, but more importantly, each felt that there a valuable principal at stake. The court denied their objections and thus the parties chose an experienced third party neutral known as a mediator who they believed would be impartial, understand the issues, and had a reputation for successfully assisting both sides in similar cases in trying to find a solution.

After the mediation was commenced both parties presented their case to the mediator who, after two days of negotiations, was helpful in facilitating a solution that both parties could live with. Even though neither was totally ectatic about the result they each agreed that settling their case was far more beneficial emotionally and financially then continuing to trial where it was estimated that the trial would have lasted for at least two weeks and, in addition to the money already spent, would have cost each party another $50,000-$100,000. In addition to these tangible "out of pocket" costs, a huge price would have been exacted on both companies by each of their key executives being away from their respective businesses at a very critical time of the year and by the tremendous stress and pressure that a public trial would have created. By solving their case themselves in a confidential environment both parties were able to save enormous tangible and emotional costs and most importantly they were able to resolve their case in such a way that enabled Smith to recover some of his costs and Jones was able to provide Smith with a form of joint venture arrangement that provided both companies with more benefits and opportunities that they originally had.

The price for this mediation was very inexpensive in comparison to the tangible and intangible costs that were saved. The mediation, which continued for two days, cost each party $3000 for the mediation services as well as their attorneys fees and two days of their time (instead of two weeks). These costs were a mere fraction of what it would have taken to try the case where both parties would be at risk of an unfavorable jury verdict or judicial decision. Thus each party took advantage of the opportunity to decide their own fate rather than be at the mercy of what "12 strangers" (the jury) might think of their facts and what a judge might think about some of the "legal technicalities."

It is generally felt that the most likely times to settle a dispute is either: (1) at the preliminary stage before a lot of time and expense has been added, (2) when sufficient but limited discovery has been completed, or (3) on the eve of trial — the day or week before the trial setting. As you may suspect not every case is a candidate for mediation and no procedure is perfect. There are a variety of cases that for various reasons are generally not suitable for mediation. For example a case where the parties are trying to make new law or overturn an existing la, a case where one of the party's claim or defense is frivolous, or a case where one party or both believe passionaltely that they will get a huge verdict and thus vindicate their position.

While not applicable to every litigation case, ADR is certainly worthy of consideration as a valuable tool to achieve an amiable resolution of an existing conflict. A large portion (approximately 95 percent) of all cases are resolved prior to trial. In many cases the effective use of ADR can greatly enhance this process and not only result in a significant savings of time and money but also promote a viable business relationship that would have never existed if a contentious trial had ensued.

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