Advantages and disadvantages of alternative dispute resolution over litigation in international business - Assignment Example

?Introduction Alternative Dispute Resolution (ADR) is a general term used to describe different methods employed to resolve arising disputes instead of filling for litigation.1 The fundamental principle of ADR is that disagreeing parties should always try to avoid litigation when possible. ADR when applied to internal business, aims to resolve disputed expeditiously and fairly by limiting the process within the business managers together with their legal advisers and avoiding litigating lawyers, judges as well as courts. According to the American Bar Association, ADR is an “an array of non-binding and binding dispute resolution methods that entail the application of third-party neutrals to help the parties in contract controversies through a systematic settlement process” (ABA, 1999).2 Similarly the United States Code in section 571 explains that ADR comprises of the following aspects, conciliation, facilitation, mediation, fact-finding, mini-trials, arbitration and ombudsmen, the above aspects can be combined in ADR. As noted by Shamir ADR is applied in different civil law policy situations, and not just in global Institutionalized in a lot of court systems and justice systems around the world.3 Though ADR is accepted by globally, it has some disadvantages, thus this paper aims at examining the advantages of ADR over litigation. For clarity of the issue, the paper will begin by giving an overview of the concept of ADR. Use and Cost of litigation According to Nolan-Haley litigation has been mostly used as a traditional way of resolving disputes, whether they are local or international business transactions.4 Prior to the introduction and development of ADR process such as arbitration, the only formal method or resolving disputes between two or more parties was litigation. In the same way equity was introduced in the English legal justice system which came in stages to control the ruthlessness and inflexibility of the common law, is the way ADR was introduced to control litigation. Litigation is a costly process for businesses, particularly in cases that involve significant issues such as patent, infringement, breach of important business contracts, antitrust laws and securities. In these cases, a lot of money could be lost by a company. For example Real Networks Inc, a public traded company in its 2004 annual press report indicated that it has used about 15,000,000 in only one antitrust litigation case.5 This goes on to show how costly litigation is, and this aspect of court cases is well known to companies. It is because of such cases that ADR methods have become more popular as a way of resolving disputes. Indeed, records from the American Arbitration Association indicated that in 2005 alone, the number of cases forward to the body was 142,000, an increase from 159,000 recorded in 2004. However, the most common ADR method used to resolve disputes is arbitration, which in the past ten years has been highly used by various companies in resolving their disputes. Shamir explains that, the high costs of litigations are caused by the long duration related with litigation. In many cases, litigation goes on for years before a conclusion is made.6 This occurs owing to the slow system of the courts and judges in completing cases and the many adjournments made. Therefore as the cases drags on, the costs also keeps increasing. In other cases, the net expenses of litigation can be impacted by other factors like the sum of money under dispute, the nature of the legal representative , the nature of the dispute (if its local or international) and the length of case. This means that the total cost of the litigation can not be predicated correctly and this makes budgeting for such a litigation to be a tough call. A good example is a case that involved AMOCO CATs7, which ended up as a high profile case. The amount of money spend on that case from the time the case started to the end of the case was 12 million pounds. Again, in another case of Amoco V. British American Offshore, the legal expenses of that case stood at 12 million pounds.8 The above limitations in litigation and the perceived advantages of ADR are what prompted the enactment of Civil Procedure Rule (CPR) 1988, accordingly Rule 1. Article 4 (1) outlines that a court has the final objective by running the case. Rule 1. Article (2) explains the twelve varying examples of effective case management. Among these examples, one of them is to encourage the disputing parties to seek for ADR procedures in a situation where the court views ADR to be suitable. In deed, Rule 26.4 allows judges to act on their own, or through an agreement by the two parties, to terminate a court case if they view that the case can be best resolved by ADR process. However, if the parties concerned disregards the court and insists on litigation process, the court may be forced to punish them, by awarded them low amount. An outline of ADR The idea of ADR started many years before and it can be traced to ancient Egyptians. Shamir (2004) notes that the Romans and the Greeks applied ADR in the Middle Age era, likewise, the European kings and the pope also used the same method of ADR in resolving disputes. In the United States, ADR has been used since the colonial period. However, Martin-Miller (2005) explains that contemporary ADR period is traced to Warren Burger, the U.S Supreme Court Chief justice who in 1982 recommended it as a way of resolving overcrowding witnessed in federal Court System. However, the codification of ADR occurred in 1990 upon the enactment of the Administrative Dispute Resolution Act. The passing of this important piece of law reflected the federal government’s acceptance and preference for ADR use in resolving contract disputes. Objectives of ADR The main objective of ADR as noted by Shamir is resolving disputes without using litigation.9 Parties that decide to use ADR do so voluntarily and they reach this decision on their own, though ADR agreements reached between the parties are non-binding and if one party feels aggrieved can appeal against the agreement in court of law, lawyers who handle ADR cases reveal that very few cases at taken to the court. This shows that parties using ADR processes nearly always end up being contented with the outcome. However, the objective of ADR is not sharing out the spoils equally. In deed, in many cases ADR processes lead to some kind of a compromise that is reached using a specific negotiation process. ADR gives a satisfactory end result and a fair way of resolving with a dispute. Types of ADR There are various types of ADR processes that are used, these includes arbitration, mediation, conciliation, ombudsman and Med Arb. We shall only explain the first four methods. Explaining different types of ADR Arbitration: this is considered as the first and the earliest ADR procedure. In this procedure the parties in dispute takes the dispute to a third party for resolution, instead of taking the dispute to the normal court. However, the arbitrator has to be impartial to resolve the issue fairly without favoring one side. At the same time, the arbitrator has to resolve the case basing on the facts given to him. As observed by Christian in many cases, the decision reached by the arbitrator legally binds the parties, and thus one party cannot take the case to the court if it’s not happy with the final outcome.10 As explained by Christian, there are different forms of arbitration, though they share common aspects, such as mutual agreement among the parties seeking arbitration; the process is confidential and less formal; the final decision is made on the basis of the existing facts and not to based on any party; the outcome of arbitration is final and legal binds the parties.11 Many corporations that have disputes normally use arbitration to resolve their disputes; this could be employment rights cases, consumer disputes or any other issue. Arbitration process is regulated by the Arbitration Act of 1996, which outlines the rules to be followed. Parties can always choose the arbitrator as along as they agree. The manner in which arbitration is carried out is well spell out by the AA. However, the cost of arbitration, which has been also going up with time is paid by the concerned parties, which is different in the litigation process where the parties do not pay the judges or the courts hearing their case. Thus, Christian points out it are because of the additional charges that the parties have to settle that at times makes arbitration to be costly.12 Local arbitrations carried out within a country are less costly compared to arbitration occurring at the international stage, or even normal litigation. But, as noted by Kate when it comes to international arbitration particular involving cross-border business tractions, then it becomes very expensive.13 In study down by Price Waterhouse Cooper (PWC), in conjunction with the school of international arbitration of Mary University of London, it established that 65% of company lawyers of top companies viewed arbitration to be more costly compared to transnational litigation.14 The issue of high cost of arbitration is thought to arise from various factors that have to be considered prior to reaching the overall cost, because many still argue that arbitration is much cheaper. Mediation: this is the second ADR process used to resolve disputes. In this method, a thirty party comes in to act as a medium in which the two differing parties will correspond and negotiate with an effort of reaching a common agreement on the dispute. The parties may meet in the presence of the mediator and talk or they mediate may shuttle between the two parties and pass what each party wants to another party. Thus, in mediation the parties are expected to reach an agreement themselves, through the mediator. Accordingly mediation is seen as a mere negotiation, and the process is voluntary and private. However, the outcome of mediation is not legally binding, though in many cases the outcome is respected. If the parties in dispute fail to reach an agreement, they can seek for other methods such as litigation. Conciliation: this is similar to mediation, how whereas the mediator can not suggest his own resolution, the conciliator can propose the basis of a compromise, and offer possible grounds for the final agreement. Therefore conciliation gives a more interventionist responsibility. However, the conciliator has to be fair and impartial. The process is private and the settlement reached can only be made public if all parties agree. Mini-Trial: in this kind of ADR the parties in the dispute presents their individual cases (as time limited submissions) to a selected penal of top official from each side, which are given the powers to resolve the issue. An independent chairperson is selected who usually acts as the mediator between these two groups. If the parties fail to agree, then they call in the chairperson to determine the case. Advantages of ADR There are several advantages that ADR has over litigation; the following section will examine these advantages. Quicker and less costly Takes shorter time: This is first advantage of ADR, indeed methods used in ADR such as arbitration offer a considerable reduction in terms of litigation compared to litigation in business transactions that normally result in analysis of written evidence as well a professional witness testimony. For instance, if a dispute occurs due to patent infringement, then ADR can offer considerable savings. This can be illustrate by data from American Intellectual Property Law Association, which in 1995 alone indicated that the net expenses of patent infringement case in an American court ranges from $500,000 to $1.9 million. However, when such dispute is resolved through arbitration, the amount of claim reduces to $99,000 and $500,000. More so, a dispute resolved through arbitration is generally settled within a shorter period than it would take in a normal litigation situation. The dispute avoidance structures for example partnering can as well be an effective way in this relation. For example, in Lacey v. Murrow Bridge in Seattle, which was an $88 million project, it was done one year ahead of planned time and under 2% of the set amount. 15 The arbitration involved regular meetings at different levels involving the owner of the project, the contractor and also the subcontractors. An official speedy procedures, that involved fast-track arbitration through Dispute Review Board was also created.16 Nonetheless, it is worth noting that, difficult cases can as well take many years to resolve in arbitration, duration that maybe more than when the case would have been handled in a court. The parties have more control over their proceedings: The second advantage of using ADR is that, parties control the manner in which the proceeding goes. This is unlike in the court-based cases, where sometimes the courts direct that case documents be made public to the public, removing any confidentiality, a necessity in ADR process. The privacy and confidentiality used by ADR process, ensures that important information is not leaked to the public, which may taint the image of the company. More so, as observed by Nolan-Haley there are some cases in mediations whereby the differing parties do not have to disclose certain information to one another, since this would weaken their bargaining powers. 17 In the course of ex parte sessions, Nolan-Haley notes that the mediator could act as a non-threatening waterway for the exchange of information.18 In addition, ADR methods such as negotiation and mediation are normally less confrontational as opposed to court trial since they are carried out in a less formal setup than a courtroom. Nolan-Haley explains that arbitration proceedings, parties enjoy bigger latitude as compared in a litigation situation.19 The parties in using ADR can select a neutral environment. Nolan-Haley further explains that, anybody who understands the litigation recognizes that strategic importance of selecting the best court in which to bring litigation.20 Consequently, the selection of the court to file a case may disadvantage the other party. In addition to this, the parties can as well have control regarding the pertinent procedures. Shamir explains that the parties are free to decide the level of formality to govern and control the degree to which litigation can be used in resolving their disputes.21 Lastly, the parties can also chose a neutral and a more professional to resolve their dispute, and not necessarily a judge. ADR is more flexible: According to Shamir the advantage that ADR has over normal litigation is its flexible outcomes.22 For example, arbitrators have higher flexibility in decision making as opposed to judges, owing to the fact that they are not limited to certain law by using the stare decisis, as in the case of common law judges. In his article titled “Alternatives to litigation of international disputes” Nelson suggested a bargaining concept to apply in problem-solving model in negotiation.23 Their concept centers on the possibility for a joint and not individual benefit. Thus, mediation as an approach of ADR is based on positive total solution and not on zero-sum solution. For example, if a famous case of orange is used, where two people all have a lawful claim to an orange, and where none of the two is ready to accept getting a half an orange, if this case is resolved basing on judicial paradigm, then each of the two will b e given half of the orange. However, if the two decides to invite a mediator to resolve the issue, each one of them will be asked why he/she wants the orange. If one person answers that he wants to make juice from the pulp, and the other answers that he wants to make a perfume from the rind of the orange, the mediation process would give a solution that is fair to the two and with satisfies their interests on the basis of adversarial process. As pointed out by Nohan-Haley mediation can successful reorient the warring parties towards one another, and this is best achieved not by rules, but through assisting the parties to attain a fresh and mutual viewpoint of their association, viewpoint that will attract their attention towards one another.24 Similarly, mediation is as well known to empower the parties, because the parties are more independent in mediation compared to how they would be in litigation process. Nohan-Haley adds that, the outcome of a mediation process binds the parties only when they agree with each other.25 However, some have argued that coercion is used in mediation and in other ADR processes thus a big disadvantage of the ADR process. The section below examines disadvantages of ADR processes. Selection of decision maker: The beauty of ADR in resolving disputes is that the parties are free to choose their own unbiased decision make. In resolve their disputes, parties normally select a person who have experience or expertise in dealing with disputes. However, in a litigation situation the presiding judge or the jury would possible not be experienced in the issue bringing the dispute. Maintain relationships: ADR is a facilitative process and not adversarial process like litigation. ADR permit the differing parties to work as a team in resolving their dispute and reaching an agreement. However, when disputing parties resort to litigation, the matter takes another course. The parties can loss their tempers during the court proceeding over very minor issues. At the same time the opposing lawyers can worsen the situation. Even when the cases end, the relationship between the parties would be permanently changed. It very rare for the parties to work together as before, maybe in a situation involving a manufacturer and distributor who still need each other for their business survival. However, in many situations, the relationship of the parties ends the moment the case is taken to court. Limitations of ADR processes Despite of these clear advantages, there may not be achieved because of some limitations that ADR has. Accordingly some of these limitations are discussed below. All parties have to consent: the biggest disadvantage of ADR processes is that all differing parties have to agree so that the process can be binding and implemented. However, in normal litigation, the powers of the court (imperium) can be applied to force the disagreeing part to resolve a disagreement, even if it’s by default. As explained by Kate such kind of agreement can happen ex ante, this can be through application of contractual provision provided before the issue leading to the dispute started, or it could be through ex post, whereby the two parties consent to arbitrate following a dispute arising.26 Accordingly, parties should be ready to come to the negotiation table with open minds and in good faith for ADR process to succeed. Failure of good faith implies that one party could be using ADR process to buy time or to get confidential information of the other party. Sometimes ADR is not appropriate: in the words of Nelson ADR processes such as arbitration and mediation are useful when the driving force behind the parties is economic benefit and one party can pay the other party damages in terms of money.27 But, in cases where one of the two parties involved in a dispute wants to vindicate its legal rights, then ADR is not an effective way of resolving such an issue. More so, ADR cannot adequately resolve a dispute in situations where there is power balance among the two parties since it is hard to achieve a win-win resolution. In addition, mediation does not have specific procedural and proper constitutional protections as contained in the adversarial justice, for example the right to be represented by a counsel and the right to jury trial. Thus, as noted by Nelson in the absence of these important procedural protections, there is no assurance that whatever has been agreed upon is a fair agreement.28 In addition Nelson explains that if the two disagreeing parties are not willing to negotiate because of one party not being ready to negotiate because of its strong feeling in the dispute, then ADR process becomes inefficient.29 In relation to arbitration, many companies have voiced their concern on varied aspects. Some observers have pointed out that efficiency of the process could be unsuccessful if the arbitral processes are carried out by a group of arbitrators who do not have enough time, therefore resulting in additional costs and delays. Other professional assert that success of the process is attained by compromising the level of justice, and whatever arbitral awarded becomes hard to appeal it, this may be used by arbitrators to award unfair arbitral. Case scenarios where ADR is most appropriate Rock Corporation employed one of the key staff of its competitor or. The computer then claims that the staff who was employed by Rock Corporation left with confidential techniques of the company’s product design that he is using in his new company, which means that he has violated the employment contract he signed with them. Initial investigations reveal that what the competitor company is claiming is basically true. The question one may ask is, whether this case should be taken to court or resolved by ADR processes? The above case is a clear example where ADR is required. Supposing the issue is taken to the court, Rock Corporation could be heavily suffer in terms of it public image. More so, it is unlikely that Rock Corporation will not win the case in the court basing on the prevailing facts. Even if the Corporation wins, the case will take a long time to be resolved and the expenses of the case would be too costly. Thus, litigation would not be the best way to resolve this situation and the two corporations would resolve their dispute in a better way of they opt for ADR. Second case WAM Corporation bought a piece of land with the objective of building there another distribution center. Since the corporation has lost the lease it held on its current location, it urgently wants to begin building its center. However, a dispute arises between WAM Corporation and the company which sold the land to WAM over the boundaries of the piece of land, this occurs dispute the fact that, the land was surveyed before WAM bought it. WAM Corporation is ready to purchase the disputed part of the land at $50,000, supposing the section is established to be not theirs. However, the company is considering taking the matter to the court to ascertain the rightful owner of that disputed section of the land. Will the court be the right place for this case? This is a minor case that can be resolved quickly. However, the issue is preventing WAM Corporation form building its distribution plant. Supposing the issue is taken to the court, it could take years to reach a conclusion. But, if the matter is taken to ADR, a solution could be reached quickly, in the satisfaction of the two parties Conclusion It is clear that litigation is a costly way of resolving disputes particularly those involving international business contracts, which have continued to be linked with court cases or trial. It is against this background that experts advice companies to go for ADR processes rather than litigation. High costs is the main disadvantage of litigation process, however there also other disadvantages that include time (takes months or years for a court case to be decided upon), dealing with foreign court and the publicity issue. Fees used in litigation process entails court charges, defenses costs, lawyers’ fees, money used in fact finding process, depositions, and other costs that arise in course of the litigation. ADR provides consensual ways if resolving disputes in a manner that was viewed as more beneficial and likeable compared to litigation particularly in business transactions, and particularly those involving international or multinational companies.30 As discussed in the paper, ADR is cost effective, flexible, quick, maintains relationships and parties are free to select their decision maker. Even though in some situations ADR is viewed to have some similar attributes with litigation, one aspect that differentiate ADR with litigation is the cost involved, it has been found to be much cheaper than in litigation. Bibliography American Bar Association (ABA): Special Committee on Alternative Dispute Resolution. (1999) Alternative dispute resolution: A practical guide for resolving government Amoco (UK) Exploration Company and others V. Teesside Gas Transportation LTD and Imperial Chemical Industries PLC and others: (Consolidated Appeals) 4th April 2001 UKHL18. Amoco(UK) Exploration Company V. British American Offshore Ltd. Court of Appeal Commercial Court 16th November 2001.(2001) EWHC48 (Comm) B, Christian: Arbitration and mediation in international Business. 2nd edition 2002 D. Kate: International arbitration getting pricier but still growing law society Gazette. 16th October 2008. F. Vicuna: International Dispute Settlement in an Evolving Global Society, United Kingdom, University Press at Cambridge UK.2004. (p. 114). J. Nohan-Haley: Alternative Dispute Resolution in a nutshell: West Publishing, St Paul, Minnesota, 1992, p.84. J. Nolan-Haley: Alternative Dispute Resolution (2nd Ed.): St. Paul Minn. West Publishing; 1992. (pp 8-9). Realnetwork press release 2004 on revenue and expenditure: Available at: http//investor. Realnetworks.com/release.detail.cfm?ReleaseID=186678. S. Nelson: Alternatives to litigation of international disputes. The International Lawyer.1989, 23(1), 187-206 Y. Shamir: Alternative Dispute Resolution Approaches and Their Application, Israel Center for Negotiation and Mediation (ICNM).2004 (pp 1-17). Read More