Alternative Dispute Resolution.
Alternative Dispute Resolution
David P. Nicolette
LAW 529 Legal Environment of Business
Paul R. Blair
November 10, 2001
Abstract
The basic principles of alternative dispute resolution (ADR) are reviewed and discussed in relation to actual business disputes that were resolved through ADR.
Alternative Dispute Resolution
After a review of the usefulness and purpose of alternative dispute resolution (ADR), this paper examines represenative examples of business disputes that were resolved without recourse to court proceedings. The sample cases are examined by way of illustrating the fundamental principles of ADR.
An Alternative to What?
Even when all the participants act in good faith and none has dishonorable intentions, business contracts and transactions lead to conflict from time to time. Most conflicts are the result of differing interpretations of contractual obligations, differing assumptions that were inadequately addressed in the contract, implied responsibilities, or the scope of activities covered by a contract. Misunderstandings are common because of people's differing perceptions, backgrounds, assumptions, and priorities, as well as the natural ambiguity of human language, however carefully worded a contract might be (AAA, 2000).
It is safe to say that dispute resolution is a good thing for business, since it allows business relationships to continue without the distraction of the dispute. So, why alternative dispute resolution? Historically, the standard mechanism to resolve business disputes was to go to litigation. While this guarantees a resolution - or at least, an end - to a dispute, it tends to be time-consuming and expensive. It can also leave both parties dissatisfied, even if the dispute is technically resolved according to the letter of the law.
Hostile litigation can take so much time and use so many resources that neither side "wins" in a meaningful sense of the word. The prevailing disputant often enjoys only a Pyrrhic victory, since the cost of victory can be staggering (Corley, et al, 2001, p. 89). It is perhaps poetically just that the Pyrrhic War itself arose in part because one party in a contract dispute refused to accept a straightforward resolution. On their way to aid Greek city-states in resisting barbarian incursions, some Roman vessels passed too close to Tarentum, technically in violation of the treaty of 302 BC. Rome sent an embassy of apology to Tarentum, but while the ambassador was reciting the apology in the theater of Tarentum, he was ridiculed and his robe intentionally soiled. He vowed the robe would one day be cleansed in blood. Tarentum requested the aid of Pyrrhus of Epirus to fight Rome, who promptly imposed martial law on Tarentum iteself before carving his own niche in history (Gowen, 2001). How much simpler it would have been to accept the apology and be done with it!
Litigation may not be quite as bloody as war in all cases, but nonetheless commercial enterprises (and individuals) prefer to resolve disputes quickly and cheaply, so they can return to business as usual. Given that the disputants in most cases are not "out to get" each other, but are only trapped in a misunderstanding or disagreement about some contractual detail, it is possible to deal with civil disputes in a less heavy-handed manner than taking the case to court. Therefore, some other mechanism for resolving disputes is desirable as an alternative to the expensive and time-consuming process of litigation. A less formal procedure that nevertheless balances the rights and duties of the disputants in a neutral manner can be an effective alternative to court.
A Promising Start
It is a commonplace to say the United States is a litigious society. Conventional wisdom holds there are more lawyers per capita in this country than in any other. People quip that filing lawsuits, and not football, is the national sport. Foreigners criticize American culture on the grounds that we expend more effort forcefully asserting our "rights" than trying to live in harmony. And yet, anyone who has been involved in litigation knows the process is entirely unpleasant from start to finish. It is a national sport that nobody enjoys playing. Everyone knows the punchline to the joke that begins, "What do you call a thousand lawyers at the bottom of the ocean?"
It has long been recognized that the court system is overburdened with civil cases. Despite the rise of ADR, this continues to be true. Years may pass between the filing of a suit and its conclusion. Nevertheless, there has been steady progress in defining and adopting alternative methods of dispute resolution.
In 1925, the Federal Arbitration Act (FAA) made arbitration an alternative to businesses in dispute. Improvements to the act in 1947 made arbitration still more feasible (Corley, et al, 2001, p. 69). The U.S. Supreme Court issued a series of opinions starting in 1983 that paved the way for arbitration as an alternative to litigation in all kinds of commercial disputes by sanctioning the contractual requirement that disputes be submitted to binding arbitration (Hayford, 2000, p. 2).
Although the FAA deals with matters of interstate commerce, the value of arbitration as an alternative to litigation has been recognized by state legislatures, and many states now require arbitration before disputants may go to litigation, in certain types of cases (Corley, et al, 2001, p. 69). Today it is common for business contracts to include clauses requiring arbitration to be tried before litigation, should a dispute arise.
Some contracts specify non-binding arbitration, in which disputants agree to give arbitration a try before going to litigation, although they do not go so far as to agree in advance to accept the arbitrator's decision. Most of the growth in arbitration has been due to contract-based agreements to accept arbitration and to purely voluntary arbitration, when disputants simply agree to accept the decision of an abritrator even in the absence of a previous contractual agreement to do so (Corley, et al, 2001, p. 70).
It is a short step from voluntary arbitration to mediation, another alternative method of dispute resolution. With mediation, a neutral third party acts as a dispassionate intermediary to ensure clear communication between the disputants, and to help keep the negotiations focused on the facts rather than on mistrust or perceptual errors that hinder agreement. Unlike a judge or an arbitrator, a mediator has no authority to impose a decision; this tends to lead to outcomes that are acceptable to both disputants (Hayford, 2000, p. 3).
Better even than mediation is direct negotiation of a settlement by the ...
This is a preview of the whole essay
It is a short step from voluntary arbitration to mediation, another alternative method of dispute resolution. With mediation, a neutral third party acts as a dispassionate intermediary to ensure clear communication between the disputants, and to help keep the negotiations focused on the facts rather than on mistrust or perceptual errors that hinder agreement. Unlike a judge or an arbitrator, a mediator has no authority to impose a decision; this tends to lead to outcomes that are acceptable to both disputants (Hayford, 2000, p. 3).
Better even than mediation is direct negotiation of a settlement by the disputants themselves. In this case, attorneys may be present during negotiations to act in an advisory role, but the disputants take an active, direct role in finding an amenable resolution to their dispute.
It is interesting to note that the less formal and heavy-handed the resolution procedure, the more effective and efficient it can be, provided both parties engage in the process in good faith. This fact is increasingly recognized by businesses. For example, the Securities Industry Conference on Arbitration (SICA) reported a shift in emphasis from arbitration to mediation in the period from 1999 to 2000; that is, a change in preference from a more-formal to a less-formal dispute resolution method (Bresiger, 2001).
Today, most disputes still go to litigation, but court is seen as a last resort in more and more civil disputes. It is really only necessary to go to court when one of the disputants refuses to act in good faith to seek a fair resolution. Court remains a necessary last resort, however, since without it people would have no alternative but to follow the precedent set in Hatfield v. McCoy, 1865-1889 (McCoy, 2001).
ADR has become a popular professional specialization for attorneys. It offers a mechanism for dispute resolution that takes a positive approach to the problem, respects all parties' sensitivities, and seeks to find an amenable and balanced conclusion. When both parties believe they are doing what they should do, and yet a conflict exists, they need help in finding a fair resolution. ADR offers means to that end. For attorneys, ADR offers an approach to civil practice that yields non-monetary rewards through helping people, as opposed to the relatively hostile and negative environment of litigation.
ADR is fully mainstreamed in the practice of law, and is maturing as a professional discipline. Organizations dedicated to monitoring ADR practice and ensuring professionalism and neutrality provide training, referrals, oversight, and liability insurance (ACR, 2001). With the emergence of the global economy, ADR has become an international practice for multinational businesses (International ADR, 2001) and is being pursued as an alternative to war in disputes among nation-states and as a tool for the promotion of human rights (LWOB, 2001).
Differences in ADR Methods
The options available to businesses for dispute resolution may be seen as points on a spectrum. The spectrum offers businesses choices that suit various situations and relationships. Key points on the spectrum may be defined as follows:
* Negotiation
* Mediation
* Non-binding voluntary arbitration
* Binding voluntary arbitration
* Binding mandatory arbitration
* Litigation
Of these, all are examples of alternative dispute resolution methods with the exception of litigation, which is the method to which the others represent alternatives. Viewing dispute resolution methods as a spectrum of alternatives reveals a continuum of characteristics:
* Toward the negotiation end of the spectrum, the parties are proactive in anticipating potential disputes and dealing with problems early, while methods toward the litigation end are reactive in nature, attempting to recover from damage already done;
* Disputants are in more direct contact with each other toward the negotiation end of the spectrum than toward the litigation end;
* Disputants retain more direct control over the process toward the negotiation end; as they move toward the litigation end, they increasingly surrender control to legal professionals;
* Disputants have a greater say in the ultimate outcome toward the negotiation end; as they move toward the litigation end, they are increasingly subject to the decisions of others;
* Procedures are less formalized toward the negotiation end; procedures are more rigorously formal toward the litigation end;
* Disputes may be resolved in less time toward the negotiation end;
* Disputes may be resolved at lower cost toward the negotiation end; and
* The resolution is less likely to cause long-term damage to the disputants or to their business relations toward the negotiation end; litigation or binding arbitration may result in an outcome that is unsatisfactory to one or both disputants.
Clearly, the characteristics of dispute resolution nearest the negotiation end of the spectrum of options are more desirable to businesses, and those toward the litigation end are less desirable. Thus, the selection of an option for dispute resolution depends in large part on the perception of each party about the other's intention to act in good faith. The less trust one side has in the other, the more likely they are to choose an option that surrenders control and increases time and cost in order to ensure a solution will be forcefully imposed.
It is in the interest of smooth business operations and profitable business relationships to encourage the use of ADR methods as close to the negotiation end of the spectrum as possible in each case. Even in many cases that require binding arbitration by law, the disputants may meet informally and decide how they wish to resolve the conflict, and then present their decision to the arbitrator for consideration. In this way they can attempt to gain some degree of control over the outcome, and streamline the procedure. The option to resort to a more formal approach always remains open, if resolution cannot be reached otherwise.
Applicability of ADR
The application of ADR to civil disputes makes intuitive sense, but is it applicable to other types of disputes? Law may be categorized in a variety of ways, depending on how one wishes to analyze it. For purposes of this section, let us consider law under the categories enumerated by Corley, et al (2001, pp. 10-11):
* Private Law, including Contract Law, Tort Law, and Property Law
* Public Law, including Constitutional Law, Administrative Law, and Criminal Law.
The most intuitive application of ADR lies in the realm of Private Law, and especially in Contract Law and Tort Law.
Contract Law
The focus of this course is on the legal environment of business, and in that context Contract Law is of primary interest. Clearly, the full range of ADR alternatives may be applied to Contract Law, as has already been mentioned.
Tort Law
ADR also applies very well to Tort Law. In this area, binding or non-binding arbitration can be a valuable alternative to the court system for resolving disputes between businesses and customers who feel they have been harmed by a product or wronged in a business transaction.
Family Law
Although this lies outside the scope of the course, an area of law to which ADR applies very directly and effectively is family law. The most productive ADR method in this area is mediation. Most intra-family disputes are solvable short of divorce or feud. What is needed is an impartial observer who can sort the facts from the emotions and help the parties arrive at a mutually acceptable resolution. Mediation is a powerful tool for conflict resolution in such disputes.
Property Law
It is possible that ADR could apply in disputes over property ownership or property usage rights, especially when the property in question has a long history of changes of ownership and/or is located in a region whose property law has changed during a time period relevant to the dispute. The true solution to a property dispute may lie in satisfying the disputants' concerns, notwithstanding the letter of the law. Whether ADR can be used in a property dispute depends on the details of the situation. It seems likely that in most cases a property dispute between individuals is motivated by emotional issues, and would lend itself to ADR methods closer to the negotiation end of the spectrum, while a property dispute between corporations is motivated by greed, and may require methods closer to the litigation end simply because the dispute arises in the context of aggressive competition rather than a simple misunderstanding. In any event, some form of ADR could be applied to a property dispute.
Intellectual Property Law
The above pertains to disputes about physical property, such as real estate. A very interesting and complex area of property rights concerns intellectual property. There are many points of confusion and popular misconceptions about the legal implications of intellectual property rights. The pertinent issues span a number of categories of law, including copyright law, patent law, trademark law, trade secret law (Brinson and Radcliffe, 1994), and contract law. Because most potential causes of conflict amount to misunderstandings about the details of the laws governing intellectual property rights, rather than deliberate criminal acts, this area is rife with opportunity to apply ADR methods.
Constitutional and Administrative Law
In the Public Law arena, it seems obvious that Constitutional Law and Administrative Law would not benefit directly from ADR, since they are principally a matter of legislation enacted in the abstract from society, and sometimes as an attempt to structure society from without. However, in an indirect way these categories of law may be influenced by the legal environment of a society that routinely and widely practices ADR. Precedents, principles, and values may become apparent over a period of time through the direct action of individuals and other legal entities in the society as they formulate contractual agreements and deal with disputes outside the court system. The phenomenon is likely to become more apparent as ADR methods close to the negotiation end of the spectrum become commonplace and routinely expected, replacing the habitual use of the court system as the default mechanism for dispute resolution. The emergent principles and precedents can then be regarded as indicators of underlying societal or cultural values that ought to be reflected in the Constitution and in the administrative procedures of the government.
Criminal Law
It may seem counterintuitive to apply ADR to Criminal Law. The forceful nature of court proceedings seems a natural fit in cases that definitely have a "bad guy" who is not acting in good faith. Yet, there is serious interest in applying ADR methods to criminal cases. Organizations such as the Victim-Offender Mediation Association encourage the development of so-called "restorative models of justice," in contrast to the traditional punitive models found in modern societies (VOMA, 2001). In a sense, this represents a "return" to a concept of justice that predates the large-scale hierarchical command structures of modern states, as suggested in studies of justice systems in "primitive" cultures (Clairmont and Linden, 1998). Although this angle on ADR is beyond the scope of the present paper, it is sufficiently interesting to mention briefly.
Another way in which Public Law can be viewed is as a form of social engineering or social control (Corley, et al, 2001, pp. 9-10). In that context, some forms of ADR are mandated by statute to avoid overloading the court system (Corley, et al, 2001, pp. 69-70). Typically this amounts to mandated binding arbitration as a preliminary step that must be taken prior to entering formal litigation.
ADR in Action
An attempt to identify past disputes my company has resolved short of litigation has not borne fruit. The legal department at my company appears to be engaged principally in encouraging recalcitrant customers to pay past-due bills by issuing boilerplate demand letters printed on scary attorney's letterhead. The company's internal information channels do not indicate that our attorneys perform any other forms of legal work. My own experience with ADR is quite limited, so I will rely on personal observations and published accounts of well-known cases to provide examples of the application of ADR in practice.
To sue or not to sue: That is the question
"He will win who knows when to fight and when not to fight." So wrote the Taoist military strategist Sun Tzu, in his treatise, The Art of War (Giles, 1910). Sun Tzu wrote that quite some time ago. One would think people had begun to catch on by now. Alas.
The following is not actually a case that was settled short of litigation, but it does at least describe an object lesson in the value of avoiding an adversarial approach to dispute resolution. Along with several others, I worked as an independent contractor on an information systems project through a consulting firm in the early 1990s. It sometimes happens that a client refuses to pay a bill for consulting services. Unfortunately, that occurred on the project in question. Lacking any other source of funds to pay the contractors, the consulting firm apologetically informed us that we would not be remunerated for the preceding three months' work.
My response to the situation was to keep in touch with the consulting firm and to inquire about the status of the matter from time to time, without making a big issue of it. I also maintained personal contact with technical professionals at the consulting firm, exchanging general information with them on a professional basis and occasionally joining them for lunch, where we did not discuss the question of old invoices.
One of our colleagues decided to take a somewhat different approach, which he believed would be more effective in resolving the matter. After a dramatic, emotional, and noisy confrontation with the CEO, he filed suit against the consulting firm to recover the money he was owed. As luck would have it, the CEO was an individual who enjoyed confrontation and "battle," and sought them even when it was not strictly necessary.
For example, as we were returning from an overseas trip on one occasion, he replied to the customs officials' routine query about the amount of cash he was carrying by offering to let them guess, and if they guessed correctly he would give them half. They took him somewhere for a private interview. Two hours later, he sauntered to the gate just in time to make the connecting flight. He had been willing to risk legal and financial penalties for the opportunity to screw with the officials simply because he did not like to be questioned, and he had a couple of hours to kill. Incidentally, he was carrying $1.87 in cash.
This was the sort of man the contractor was trying to intimidate with the threat of a lawsuit. It's too bad he wasn't up on his Sun Tzu. It would have saved him a great deal of expense and trouble. When he made the threat to sue, the contractor was promptly invited to "get in line," because his suit would not be the only one in the pipeline. The CEO also kindly advised the contractor that the firm's attorneys ate punks like him for breakfast, and that he would never see any money from the project.
To make a long story short, after several months the consulting firm paid me in full for my invoices without even being asked, although the client had never paid the firm. In the course of the next few years, I was retained by the same firm several times, and was given professional references by their senior management for other engagements. I credit this relatively positive outcome to my decision to allow things to run their course naturally, rather than beating my head against the wall.
In contrast, the colleague who adopted an adversarial position and filed suit never received payment for his work and was not engaged on any additional assignments by the firm. His suit eventually asphyxiated when he ran out of money to pay his attorney.
Who you callin' "crappy," Crappy?
The dispute between Canadian Tire Corporation and Mick McFadden over the right to use the Internet domain name, "CrappyTire.com" may be more relevant to the e-business focus of the MBA program than the preceding anecdote, and it is definitely more amusing.
Canadian Tire Corporation is affectionately known as "Crappy Tire" by many of its devoted customers. For that reason, Mr. McFadden chose the domain name "CrappyTire.com" for his Canadian Tire protest site on the World Wide Web. It is a common business practice for companies to wrest the domain names of protest sites away from their owners on the grounds that the names contain some portion of a company trademark. It's easier than dealing with the underlying reasons for the protest. Canadian Tire filed just such a claim against Mr. McFadden.
The dispute was submitted to the Arbitration and Mediation Center of the World Intellectual Property Organization (WIPO) in Geneva, Switzerland, and was decided by arbitrator Ross Carson, an intellectual property attorney from Ottawa, Canada. The selection of Mr. Carson as arbitrator illustrates one of the principles of successful arbitration: The arbitrator must be well qualified to understand both sides of the issue accurately and fully. Since both disputants were Canadian and the matter was mainly of interest to Canadians, Mr. Carson's knowledge of Canadian intellectual property law and his familiarity with Canadian culture and values were essential qualifications for the task. Mr. Carson is also a licensed automobile operator.
Canadian Tire's attorneys argued the "spontaneous public adoption of a name ... becomes distinctive of the plaintiff's goods" (Newsbytes, 2001). Following the strict and fair set of rules WIPO has defined to govern arbitration of this kind (WIPO, 2001), Mr. Carson concluded "the spontaneous use of 'Crappy Tire' by the public is as a trade name or corporate name and not as a trademark or service mark," and "The Uniform Domain Name Dispute Resolution Policy does not extend to business names not associated with wares at the time of sale or used in association with the advertisement of services" (Newsbytes, 2001; ICANN, 2001).
Thus, although Canadian Tire Corporation greatly desired to be associated officially with the name "Crappy Tire," Mr. McFadden's prior claim to the name was upheld. Thanks to the availability of professional arbitration, a lengthy and expensive process of litigation was avoided.
Conclusion
The development of alternative dispute resolution (ADR) as a rigorous and well-defined professional practice offers businesses a spectrum of options for dealing with disputes from which they can choose the most appropriate approach to a given dispute. As ADR becomes better understood and more widely practiced, business executives are learning to anticipate potential disputes in advance so that they can be avoided through proper construction of contract language. They are also learning to use procedures short of litigation to deal with disputes, such as negotiation, mediation, and arbitration.
The history of ADR to date strongly indicates it can be a highly effective and beneficial alternative to litigation in many cases. While ADR initially found success in contract disputes between businesses, in handling consumer claims against businesses, and in family law practice, applications of ADR in other areas of law are becoming recognized and seriously explored. These developments may have far-reaching implications not only for the legal environment of business, for for that of society as a whole. ADR may be the long-sought cure for our excessive litigiousness, and that would be a "win-win" outcome all around.
References
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Alternative Dispute Resolution
