Business people and corporate counsel often seem not to pay much attention to their choice of dispute resolution mechanism when negotiating a contract. They often seem treat dispute resolution as just part of the contractual “boilerplate”. If they give much thought to it at all, they probably plug in a choice of litigation jurisdiction or arbitration provision from a previous contract. More likely, they don’t consider the issue at all. So the contract ends up saying nothing about dispute resolution. That leads to any disputes which arise under it being resolved by litigation. As we’ll see, that’s likely the worst possible alternative. This article reviews the basic characteristics of the most common dispute resolution mechanisms, so that business people 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 characterized by values like acceptable results, flexibility and efficiency; the “litigation” end by values like risk of unacceptable results, expense and delay, and publicity. Looked at that way, it’s not hard to see which end of the continuum most businesses would prefer be on.
Let’s start with negotiation. There is no mystery about what negotiation is: the parties compromise toward an agreed resolution of their dispute. Negotiation has several advantages over other dispute resolution mechanisms. By definition, it produces an acceptable result. If both parties don’t agree, there’s no resolution.
Negotiation is infinitely flexible – it can accommodate anything the 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 certainly 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. That can be important in sensitive business contexts.
For all those reasons, negotiation is almost always the best dispute resolution mechanism. There are good reasons most disputes are resolved by negotiated settlements. Businesses should always try to negotiate the resolution of a dispute (whatever their contracts say). They should never close the door on negotiation.
Not that negotiation is the perfect mechanism. Again, by definition, it requires compromise. So it’s highly unlikely either party will get everything they want.
It also involves significant uncertainty. Because both parties must agree on a solution, both have a veto over that solution. There’s always the possibility the other side will “just say no” to any reasonable resolution. (To answer one client’s question: No, the court won’t order a party to agree to a resolution.) In that case, negotiation just won’t work. What then?
Mediation is “just” negotiation facilitated by an agreed neutral, 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 that’s just not the case. Other times, something about the situation produces a negotiating impasse. In those situations, mediation can be a very useful tool to achieve a negotiated resolution.
Mediation has essentially the same advantages (acceptability, flexibility, efficiency, confidentiality) and disadvantages (necessity to compromise, uncertainty) as negotiation. The differences are of degree rather than kind.
Most importantly, there is undoubtedly some kind of “magic” about mediation. It’s hard to explain, and the reasons for it may be different in every case, but there is no doubt that the vast majority of commercial disputes which are mediated are resolved through that process. There is just something about involving a neutral in the negotiation that greatly facilitates resolution. So, mediation is more certain to produce an acceptable result than negotiation.
One problem with mediation is that, not only must the parties agree on a resolution, they must also agree to mediate in the first place, and then on a mediator. Sometimes they can’t, or just won’t.
A practical downside of mediation, compared to negotiation, is that competent, experienced mediators are not cheap, nor readily available. So mediation can be less cost and time efficient than negotiation. But, if it achieves an acceptable result, that cost and time may be well worth it.
With arbitration we move to a fundamentally different kind of dispute resolution mechanism. (This is why the mediation-arbitration hybrids can be so tricky.) In arbitration the parties agree to give a neutral the power, not to facilitate an agreed resolution of their dispute, as in mediation, but to impose a 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 important advantages over litigation.
Arbitration is usually based on the parties’ legal rights and obligations, not their business interests. Contrary to popular belief, an arbitrator does not (or at least should not) just “cut the baby in half”. They find the facts based on the evidence. They apply the relevant law to those facts. They then determine the parties’ legal rights and obligations and resolve the dispute as the law requires, based on those facts. That process presents the opportunity for a party to win the dispute – to “hit a home run.” Of course, that necessarily also presents the risk of losing – of being the pitcher who gives up that home run.
Arbitration has significant potential advantages. The parties have (at least) input into the choice of their decision maker. That can give comfort that the result will be at least acceptable, if not necessarily ideal.
Arbitration has tremendous procedural flexibility. Experienced counsel can tailor its procedures to focus on exactly what is needed to resolve the particular dispute. That can lead to significant cost and time efficiency compared with litigation.
Arbitration provides certainty. It is virtually certain that the arbitrator will resolve the dispute.
It 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 big potential disadvantage: the possibility that the decision imposed on the parties by the arbitrator is unacceptable to one (or both!) of them. There’s no avoiding that. It’s inherent in the nature of arbitration (and litigation), as opposed to negotiation or mediation.
In addition, while arbitration procedures are very flexible, and promote efficiency, they are much closer to those of litigation than those of negotiation or mediation. Cost and time efficiency therefore suffer by comparison.
Litigation is fundamentally the same kind of process as arbitration: a neutral has the power to impose a legally binding resolution on the parties. But instead of the parties agreeing on that neutral, they’re appointed by the state, in the person of a judge.
It is crucial to understand that litigation, warts and all, is our society’s default dispute resolution mechanism. If the parties don’t agree on another mechanism, their dispute will be resolved by litigation, in any jurisdiction whose courts are willing to take it on. While litigation has its place, it should be obvious from a consideration of its advantages and disadvantages that it is not usually the best option.
Litigation generally has only one significant advantage: certainty. As with arbitration, the process will almost certainly resolve the parties’ dispute. But that’s it. There are generally no other advantages to litigation.
On the other hand, there are a host of disadvantages. The parties have essentially no input into their choice of decision maker. Their dispute is resolved by whoever the relevant court’s bureaucracy assigns to it. In Canada, where (outside Toronto) there is no specialized roster of experienced commercial judges, that can be a real problem in complex commercial cases.
As with arbitration, there is the possibility of an unacceptable decision being imposed.
Litigation procedures, despite some recent tinkering designed to make them more efficient and user-friendly, are relatively inflexible. The mandatory disclosure of relevant documents to the other parties, which is such an essential part of litigation, can be a real burden in the email age. Litigation is usually the most expensive and time consuming dispute resolution mechanism.
Compared to arbitration, there is a lack of finality. Either party can appeal a trial decision as of right. Then the parties have to do it all over again (not quite) in an appellate court. Enforcement of a judgment around the world is more difficult than enforcement of an arbitral award.
Absent a sealing order, which the courts are reluctant to grant in commercial cases, the parties’ dispute will be played out in public, with all the evidence, arguments and results available to anyone who cares to look (and circulate on the internet), including the media.
All in all, not a pretty picture. One to be avoided if possible.
Negotiation and mediation on the one hand, and arbitration and litigation on the other, are fundamentally different kinds of dispute resolution mechanisms. Each has distinct advantages and disadvantages.
Business people and corporate house counsel should carefully consider the kinds of dispute which are likely to arise under the contracts they negotiate, and chose a dispute resolution mechanism (or combination of mechanisms) which is best suited to resolve those kinds of dispute. If they don’t chose wisely, they may end up being committed to a mechanism which is inappropriate for the disputes which do arise. If they don’t chose at all, then by default they chose litigation. There is usually a better choice.