Businesspeople and corporate counsel often seem not to pay much attention to their choice of dispute resolution mechanism when negotiating a contract. They often appear to treat dispute resolution as just part of the contractual 'boilerplate'. If they give much thought to it, it is probably to plug in a choice of litigation jurisdiction or arbitration provision from a previous contract. More likely, they do not consider the issue at all and the contract ends up saying nothing about dispute resolution. This means that any disputes which arise will be resolved by litigation, which is often the worst possible alternative, at least in Canada.
This update reviews the basic characteristics of the most common dispute resolution mechanisms so that businesspeople and corporate counsel can make better-informed choices on this issue.
It is helpful to consider negotiation, mediation, arbitration and litigation as lying along a continuum. The negotiation end of the continuum is characterised by values such as acceptable results, flexibility and efficiency. The litigation end of the continuum is characterised by values such as the risk of unacceptable results, expense, delay and publicity. When viewed this way it is not hard to see which end of the continuum most businesses prefer to be on.
Negotiation is the parties' compromise towards an agreed resolution of their dispute. It has several advantages over other dispute resolution mechanisms. By definition, it produces an acceptable result. If both parties do not agree, there is no resolution.
Negotiation is infinitely flexible – it can accommodate anything that parties can dream up and agree on. In particular, it can accommodate solutions based on the parties' ongoing business interests, rather than just their strict legal rights and obligations.
While negotiation can be complex - and therefore expensive and time consuming - it is usually more cost and time efficient than the alternatives. Negotiations and their results are generally confidential, which is important in sensitive business contexts. For these reasons, negotiation is almost always the best dispute resolution mechanism, and there are good reasons why most disputes are resolved by negotiated settlements. A business should always try to negotiate the resolution of a dispute (whatever the contract says). It should never close the door on negotiation.
However, negotiation is not perfect. It requires compromise, so it is highly unlikely that either party will get everything that it wants.
It also involves significant uncertainty. Because both parties must agree on a solution, they each have a veto over that solution. There is always the possibility that the other side will say no to any reasonable resolution. In that case, negotiation will not work - so what then?
Mediation is negotiation facilitated by an agreed neutral party - normally a trained and experienced mediator.
Ideally, if the parties are rational and competently advised, they should be able to negotiate a resolution of their own. But sometimes this is not the case. Other times, something about the situation produces a negotiating impasse. In such situations mediation is a useful tool to achieve a negotiated resolution.
Essentially, mediation has the same advantages and disadvantages as negotiation. The differences are of degree rather than kind. Most importantly, there is some kind of 'magic' about mediation. It is hard to explain, as the reasons for motivation may be different in each case, but the vast majority of commercial disputes which are mediated are resolved through this process. Involving a neutral party in the process greatly facilitates resolution, so mediation is more certain to produce an acceptable result than negotiation.
However, one problem with mediation is that the parties must not only agree on a resolution, but have also agreed to mediate in the first place, and then agree on a mediator. In certain cases parties are unable or unwilling to do this.
A practical downside of mediation is that competent, experienced mediators are neither cheap nor readily available, meaning that mediation can be less cost and time efficient than negotiation. But if it achieves an acceptable result, then the cost and time may be worth it.
Arbitration is a fundamentally different kind of dispute resolution mechanism (which is why mediation-arbitration hybrids can be tricky). In arbitration the conflicting parties agree to give a neutral party the power not to facilitate an agreed resolution of their dispute as in mediation, but to imposea legally binding resolution on them, whether they agree with it or not.
Arbitration is essentially 'private litigation', but in the hands of experienced counsel it can have advantages over litigation.
Arbitration is usually based on the parties' legal rights and obligations, not their business interests. Contrary to popular belief, arbitrators do not (or at least should not) just 'cut the baby in half'. Rather, they find the facts based on the evidence and apply the relevant law to those facts. Arbitrators then determine the parties' legal rights and obligations and resolve the dispute as that law requires, based on those facts. This process presents the opportunity for a party to win the dispute outright. Of course, it also presents the risk of losing outright.
Arbitration has significant potential advantages. The parties have input into the choice of decision maker. This can give comfort that the result will be acceptable, if not necessarily ideal.
Arbitration has tremendous procedural flexibility. Experienced counsel can tailor its procedures to focus exactly on what is needed to resolve a particular dispute. This can result in significant cost and time efficiencies compared with litigation.
Arbitration provides certainty. It is virtually certain that the arbitrator will resolve the dispute. It also provides finality. It is very hard to appeal an arbitral award, and relatively easy to enforce one around the world.
Like negotiation and mediation, arbitration is generally confidential.
However, the fundamental nature of arbitration involves one potential big disadvantage: the possibility that the decision imposed on the parties by the arbitrator is unacceptable to one (or both) of them. This is unavoidable. It is inherent in the nature of arbitration, unlike negotiation or mediation.
In addition, while arbitration is flexible and promotes efficiency, it is much closer to litigation than negotiation or mediation. Therefore, cost and time efficiencies suffer by comparison.
Negotiation and mediation on the one hand, and arbitration on the other, are fundamentally different kinds of dispute resolution mechanism. Each has distinct advantages and disadvantages.
Business people and corporate counsel should consider carefully the kinds of dispute which are likely to arise under the contracts which they negotiate, and to choose a dispute resolution mechanism (or combination of mechanisms) which is best suited to resolve such disputes. If a poor choice is made, then they may end up being committed to an inappropriate mechanism. If no choice is made, then by default litigation is chosen. There is usually a better choice.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.