Wednesday, July 20, 2011

Arbitration, Mediation or Litigation – which is best to resolve disputes?

On there was a discussion about what was the best approach to resolve conflict. I may be old school, but my belief is in a law suit the only ones that win are the lawyers. In arbitration the only one that wins are arbitrators. That's why most business people first try to solve the problem between the parties.  The way to do that is to have an escalation process that takes the dispute out of the hands of individuals that are personally involved and have it be heard by people who don't have that personal involvement and frequently can take a look at it from a different perspective because they have different metrics they are measured against.

Most companies that I've worked for have tried to avoid arbitration clauses. Some felt that with arbitration companies would be too quick to file for arbitration rather than try to resolve the issues internally. Others were concerned that the results wouldn't be strictly on the facts. If we ever did agree on one, and that was very infrequent, it could only be used after the results of a full escalation failed to reach agreement and it would not exclude the parties ability to litigate it (meaning non-binding arbitration). I also look for waiver of jury trials as a way ameliorate the downside of litigation. I want things decided on the facts, not emotions. Mediation is a possible interim step in the event management of both companies can't come to agreement. I've been negotiating contracts for over 40 years around the world and I haven seen mediation commonly used or requested as part of contracts. That may occur because once things are escalated up to individuals at the highest levels and the matter is discussed without agreement, they may feel that mediation may not produce a different result and will only add expense

There are ways to try to avoid disputes. Clearly written documents can dramatically reduce the frequency of disputes. Some disputes may arise through contract terms if they are poorly written, but the vast majority of disputes arise as a result of poorly written purchase specifications, statement of works, scope of work or service level agreements or problems between drawings and specifications. Individuals that write those documents need to learn how to write them in way where it is clear exactly what is required. My July 4, 2011 blog "writing purchase specifications, statements of work, scope of work" provides suggestions on how to do that. Spending time qualifying suppliers in advance and making calls to check customer references is also a good way to avoid disputes. You do that to try to weed out Supplier that make frequent claims as a way they do business. Getting a low price from someone that will look for every loophole to make claims isn't going to yield the best final cost.

When you can avoid disputes what is the best approach? Some individuals view mediation as a waste of time, especially if it starts after the parties have already exhausted all internal methods. Mediations are not binding so there is no finality to the process. The parties can continue to disagree. Most arbitration clauses do not call for the results to be binding upon the parties.  Arbitration can be done before a panel of arbitrators from the industry. There are rules. The two can mitigate help mitigate any power imbalance. Unless its binding arbitration also doesn’t settle the dispute.

I’ve never been a fan of mediation or arbitration as a way of resolving disputes. The reason is I believe that it’s too easy for the parties to pull the trigger to start an arbitration or mediation.  My preferred method is to have required escalation of a dispute to management levels within both companies as the first means to resolve the dispute.  If the parties then fail to agree I want them to look to only litigation.

What litigation does is move the parties beyond the talking stage where “talk is cheap” into a real money stage. It forces both parties to review the strength of their positions and their chances of winning against the potential cost of the litigation. As the parties do diligence to prepare for the litigation or defending against the litigation they will frequently uncover information that they previously had not discovered they may have an impact. I once read that something like ninety-eight percent (98%) of all cases filed never go to court. Some are settled because the expense of litigation can provide further impetus to agree to something less/more to avoid that expense. Others are withdrawn after the parties determine their chances of winning are less or that it’s simply not worth the expense.      

In the early stages of my career I was doing construction contracting and our contract included litigation as the only option. I had an excavation contractor make a claim of several hundred thousand dollars based upon their need to buy soil to meet the agreed grades.  I reviewed the claim and determined that there were a number of actions that the contractor had taken that caused to problem. They had taken a large amount of soil off site (most likely to sell) and that was documented by our daily site reports made be our site engineer.  Further against the architect’s instructions the uncovered large amounts of soil that got wet and became unusable. So I refused to pay the claim. Their first response was that they would take it to arbitration where they expected they would get half of the amount. I then told them there was no provision for arbitration in the agreement and if they wanted to pursue the claim it would need to be through litigation. They hired outside counsel that was in contact with me and I shared with them all the facts that I had and all the rationale behind my position to not pay on the claim. A week later I received a call from their Counsel asking me if we would settle for eight thousand dollars. I put them on hold and called our litigation lawyer and the business and both agreed that to settle the claim we would pay the eight thousand dollars. I then told their lawyers that upon signing a release of all claims we would pay them the eight thousand dollars. They agreed. I then asked them an “off the record question” about the amount of the charge as I was curious about the amount. They explained to their client that they would recover nothing under the claim and the settlement amount was the amount of their bill.   

Which approach is best? Each approach has their advantages and disadvantages and what works best usually depends upon the legal system in the applicable country. Litigation works best when cases may be heard promptly. Arbitration may be a better solution if courts are clogged with huge backlog of cases and they take extended times for a case to be heard.

In the on-line discussion an individual who was from India strongly advocated arbitration. Another individual from the U.S strongly advocated litigation.  I thought about why they would have such different opinions. It had been a long time since I was in India and when I was there the average life span of a case was about ten (10) years. I decided to Google it to see what it was today and the average lifespan of a case in India is now closer to fifteen (15) years. I then thought about the lifespan of cases in the US district court. The longest I could remember was a multi-billion dollar infringement claim by SCO against IBM. That lasted a 7 years including all appeals. Most take far less time. If I was in India and had a case life span of 15 years I'd probably agree that in India arbitration probably is the best way. If I was in the U.S I would think litigations was best.

In my career I’ve always said that your view of the world and what’s best will always depend upon where you sit.  For example, in procurement there is a top down view that the managers have. There is a bottom up view that the workers have and there may be a cross view that people like supplier and commodity managers may have. What seemed right always was dependent upon the view you had.  The same applies to contract management. What may be the best solution in one location may not be the best in others.


  1. John,

    This is a great 360 degree view of the pros and cons of using the various methods of ending a dispute through Arbitration, Mediation or Litigation. The case examples used help clarify for the reader the potential outcomes of choosing one method versus another.


  2. Thanks for the enlightenment, John.
    You have weighted the pros and cons and hence we are able to consider the best route.
    Warm Regards,