Managing Risk in Litigation

 

Litigation is a very common American pastime.  There are more lawyers in some U.S. cities than there are in entire countries such as Japan.  However, for individuals and business enterprises litigation is always very expensive and emotionally disruptive.  Can either of these unwelcome features of a lawsuit be avoided?  No, not entirely.  In our country anyone can sue someone else more or less at will.  Litigation avoidance is a first principle of risk management.

The possibility of litigation can and should be anticipated, especially in business.  Business relationships invariably involve contracts that are, or should be, in writing.  By far the best opportunity to preemptively manage litigation risk is at the contract drafting phase, a moment in time when no dispute yet exists.  Creation of a coherent, pragmatic alternative dispute resolution(ADR) provision in every contract is essential.  Too often, however, the ADR clause is an afterthought.  Over the years I have seen many ADR clauses as a mediator or arbitrator.  Few have been excellent.  Some have been unintelligible.

A carefully prepared ADR contract provision should concisely outline a protocol for resolving a dispute quickly and efficiently.  For example, a contract requirement that the parties mediate their dispute within 30 days of a written demand for mediation by one of them sets a course for swift resolution that will limit financial and emotional expense and may also salvage the business or personal relationship.  Years of destructive litigation in court cannot achieve either goal.  And when a dispute reaches court, the parties no longer retain any control over the outcome.

With mediation as the first ADR step, the parties continue to retain negotiating control of the outcome.  In addition to being by far the least expensive form of ADR, mediation will very likely  resolve the dispute, especially if managed by an experienced, capable mediator.  However, if mediation fails, arbitration should be a specified next phase and should occur within a time frame specifically identified in the ADR contract clause.

 

Among other things, the arbitration provision should limit discovery, provide for mandatory exchange of documents, identification of lay and expert witnesses and arbitrator selection, all within 30-90 days of a party’s demand for arbitration.  The demand for arbitration should be required to be made within 10 days of a failed mediation.

Arbitrator selection is critical as most arbitrations are binding, meaning that there is no appeal.  (Historically, courts have been reluctant to scrutinize arbitration awards, although that is changing in the consumer and employment fields.)   The arbitrator should be equally adept in the subject matter of the dispute and as an efficient and fair manager of the arbitration process.  If the arbitration isn’t responsibly managed, it is likely to be every bit as expensive and time consuming as litigation in court.

Thus, preemptive decision making always presents the best opportunity for effective business and personal risk management.  The time taken to anticipate and contractually plan for disputes requires a small fraction of effort and expense compared to the cost of having to react defensively to litigation asserted unexpectedly by third parties.  It comes down to planning now versus suffering later, possibly for years.  Two cases that I’ve been involved with in just the past week have been litigated for 5 and 1/2 and 8 years respectively!  Exactly.

 

Gregg Bertram M.A., J.D., LL.M. is the President and Founder of Seattle-based Pacific ADR Consulting.

 

Category: 

Comments Join The Discussion