In today’s credit-driven society, disputes and complaints are an almost everyday occurrence. The time and resources expended to reach a reasonable solution to even minor disputes substantially increases the cost of doing business. Attorney’s fees and litigation costs are far from rare. In facing the dilemma of backed-up court dockets and mounting public frustration at the perceived inability to quickly resolve disputes through judicial processes, many states have turned to Alternative Dispute Resolution (ADR) for help.

As the name suggests, ADR is simply another way of achieving a resolution to a dispute without going to court. Since the results obtained through ADR are much quicker than fully litigating a dispute, ADR is also much less expensive. ADR may be binding or non-binding on the parties to the dispute, and two methods of ADR may be used: mediation and arbitration.

Mediation

Generally, mediation uses a neutral third party to facilitate settlement. The role of the mediator is not to decide the dispute, rather, the mediator is trained to bring the parties to the negotiating table and to recognize obstacles in the negotiating process so that a reasonable and mutually satisfactory resolution is reached. The mediator will oftentimes try to get the parties to look realistically at their positions and become more amenable to settlement. Additionally, since all communications with the mediator are confidential, each side may feel more comfortable with fully explaining their position; ordinarily, once a lawsuit has been filed, many parties are more reluctant to tip their hand and hurt their litigation strategy. A lawsuit is necessarily an adversary proceeding, and parties frequently are at odds with each other in this competitive, personal environment. Mediators will try to remove the dispute from the adversarial environment and work through personal differences to achieve settlement. If the mediation conference is unsuccessful, the mediator will simply declare an impasse and the parties are no worse off than they were before. While mediation may not actually result in a settlement, it will at least give the parties a new perspective on their respective positions, and additional settlement conferences are not uncommon. Owners and/or credit managers should, therefore, consider using a mediator during the early stages of a dispute; the suggestion is oftentimes amenable to the other party, and since mediation will take place before adversarial posturing, a continuing business relationship is not unlikely. Mediation can preserve business relationships: many disputes center on a misperception of law or contractual expectations, or even a simple difference of opinion compounded by an unwillingness to appear “weak.”

Court Ordered Mediation

Many jurisdictions are moving toward mandatory, court-ordered mediation for all but a few types of civil cases. While no decision is rendered by a mediator, and therefore the mediation is not binding on the parties unless agreed, mediation does encourage settlement before trial. Parties are ordered to physically attend the mediation conference and, although no settlement may be forced on any party, an expectation does exist that each will try in good faith to settle the dispute. However, in this setting, adversarial proceedings have already begun and although mediation is ordered well in advance of trial, the discovery process has already been finished; therefore, mediation may help a resolution to come more quickly, but litigation costs have already been substantial. For these reasons, mediation is more likely to be successful during the early stages of a dispute.

Arbitration

Unlike mediation, arbitration uses a neutral third party to render an actual decision. The arbitrator hears evidence, renders a decision on the merits, and then makes an award. Arbitration may either be binding or non-binding on the parties, and generally it is a contractual obligation. Many contracts now contain arbitration clauses, and the contract terms themselves will structure the manner in which the arbitration is run. The arbitrator conducts a hearing and decides the case, however, the proceeding is less formal than a trial. The Rules of Evidence are used as a guide and are therefore not inflexible. Each party in the dispute may present witnesses or affidavits, and each has the opportunity to cross examine the opposing party’s witnesses. Additionally, the discovery process is much more limited, therefore requiring less time in going through reams of documents and carefully wording requests and responses. Legal fees are reduced considerably.

Court-Ordered Arbitration

As with mediation, many courts are looking to court-ordered arbitration in order to reduce the court calendar. Arbitration in this setting is non-binding on the parties, but is mandatory for certain types of actions. Most of the actions excluded from mandatory non-binding arbitration are those which are simply not amenable to this form of ADR: class actions, real property title disputes, wills and trusts, evictions, or those involving family law issues. The remaining civil actions are usually ordered to arbitration for thosecases that are not in excess of a specified dollar amount. Why, you ask, would a court order a case to arbitration when the decision is non-binding? The answer issimple. The decision is taken as an indication of how a judge or jury might decide the case. The decision provides a sort of “benchmark” with which to gauge one’s case. It forces a party to take a hard look at its trial expectations and therefore encourages settlement negotiations. Additionally, and perhaps most importantly, if the decision of the arbitrator is not appealed, it becomes a final judgment of the court.

Contractual Flexibility

ADR, whether court-ordered or not, may be governed by contract. The contract terms, if approved by the court as fair and reasonable, will usually be given effect. It is therefore well advised for a creditor to give thoughtful consideration as to how the ADR process will be structured. The contract may provide for mediation very early in the dispute, and then if still not resolved, require binding or non-binding arbitration. Arbitration rules may be chosen, forums or locations designated, and the means of selecting a mediator and/or arbitrator may be decided. Additionally, costs may be allocated to the prevailing party. A virtual myriad of possibilities exist, and the handling of disputes may be custom-tailored to the creditor’s liking.

Few disputes are not responsive to ADR. Since business relations are hard-earned and frequently harder maintained, a substantial effort to preserve even difficult relationships should be made. If litigation costs and other expenses are reduced, the process is well worth the effort.