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Business and personal conflicts have to be settled one way or another (short of the protagonists shooting each other)!

Where parties are unable to settle, a lawsuit generally ensues, and that leads to an enormous expenditure of time and money for all concerned.

To avoid this result, certain alternative processes, principally mediation and arbitration have come into vogue, and in many commercial contracts, the inclusion of clauses obliging the parties to mediate or arbitrate have become boiler-plate.

This brief review looks at some of the pros and cons of litigation, mediation and arbitration, with a view to assessing whether litigation is always the worst method of dispute resolution.

Traditionally, the disadvantages of litigation are high costs and lengthy delays, with settlement conversations occurring rather late in the game. In some cases, the costs of litigation can exceed the amount at stake, because once litigation commences, it has a tendency to take on a life of its own, especially where large companies are doing battle.

Where small and medium sized businesses are having a dispute, this factor is often not an issue, because owner-managers tend to keep an eye on their litigation costs. However, the “cost” issue often gets clouded by emotional or psychological costs. In plain English, the parties don’t sleep at night as a result of the stress and aggravation.

Finally, the truth is that in many litigation cases, the ultimate outcome is unpredictable, especially where complicated facts are involved. Litigation for the clients becomes “Vegas”.

By contrast, mediation is a non-binding process where parties agree in advance by contract to attempt to negotiate a settlement by breaking down communication barriers and engaging in creative bargaining that may or may not turn on strict legal issues. In contrast to the winner take all mentality that prevails in litigation, the parties try to develop a “win-win” negotiation.

Sounds great, no?

Well, mediation is not always useful. Frankly, unless the parties have a genuine interest in settlement, mediation will not be useful. Most of the time, parties who really want to settle can do so without a mediator. In my experience, mediation is useful principally in circumstances where the parties (or their lawyers) cannot communicate with each other, usually as a result of too much animosity having developed.

On the other hand, arbitration is a different kettle of fish. Basically, it is the process whereby a dispute is referred to an impartial third person chosen by the parties in advance. The parties agree irrevocably to be bound by the decision of the arbitrator, with no appeal.

The points in favour of arbitration come quickly to mind:

The parties pick the arbitrator, usually a retired judge or a senior litigator in whom they have full confidence. This adds to the predictability of the process, because the parties are not at the mercy of a system that appoints a judge who may or may not be experienced in relation to the issues in dispute in the case.

In addition, the rules of procedure or evidence in the arbitration process can be tailored to fit the circumstances, including more or less extensive discovery rights, or rights to examine and cross-examine witnesses, and so on.

Moreover, the arbitration process itself is private, which is often a source of concern for litigating parties.

So, in case you are embroiled in litigation and asking “Where do I sign-up?”, consider this:

Arbitration can be very expensive, at least as expensive as litigation. To choose but one issue, imagine a complicated construction case, involving claims of latent defects, delays caused by the owner, delays caused by the contractor, payment of work claimed by the contractor beyond the alleged scope of the contract (“extras”), and so on.

In such a case, the parties may feel more comfortable with a panel of arbitrators, one chosen by each protagonist and a third “neutral” arbitrator chosen by the other two. The cost of this type of panel might exceed $1,500 or more per hour, and believe me, the number of hours can add-up fast. This is in addition to the costs of one’s own lawyer, the venue, the transcription of stenographic notes, or what have you.

Well why not just agree on one arbitrator, you ask? Wouldn't this reduce the costs?

The answer is yes, but on the other hand, would you be willing to have the fate of your case decided by one person, with no possibility of appeal? People make mistakes and allowing a “one-person” arbitration panel to decide the outcome of a high-stakes case based on complicated facts and circumstances without any appeal being possible, may be a fool-hardy type of risk to take.

The lesson to be learned is that neither mediation nor arbitration are panaceas. They may be a worse alternative to litigation. In fact, sometimes the very threat of litigation is sufficient to get parties negotiating and talking to each other. Clauses imposing compulsory mediation or arbitration are not “boiler-plate” and have to be carefully thought-out before being inserted willy-nilly into commercial agreements. Each case is a cause d’espèce and must be reviewed on its own merits.  What are the issues that are likely to arise in a particular contractual situation? Who would be best-suited to solve each type of issue? Where should the process take place? What are the rules governing evidence and procedure for each type of issue? Is there a persuasive effect that litigation may have on the behaviour of the parties in a default scenario? These and many more issues should be carefully considered before opting for the ubiquitous mediation or arbitration clauses one so often encounters these days.

Barry Landy is a senior litigation lawyer at Spiegel Sohmer who focuses his practice on commercial litigation and is also experienced in the area of media law.