The Downside of Litigating a Business Dispute:
Few things depress me as much as when the participants in a business dispute give up trying to work through things together and throw the dispute over to the lawyers. They often do this out of frustration. Sometimes they don’t feel they have the time to work through the dispute. Other times, they think their lawyers will jump in and quickly save the day by applying the heavy hand of THE LAW!
A firm, quick resolution is rarely what transpires. When the lawyers take over, they may send some threatening letters and talk a big game, but often the dispute ends up in time-consuming and expensive litigation. While it feels good to bring in the hired legal guns, the power move quickly devolves into a messy, profit-sucking exercise. Oh, and the time the business people thought they were saving by getting the matter off their desks, well, welcome to world of depositions, court testimony and helping outside counsel understand what the heck happened in order to make a good argument in court. Those things all take time — lots of time.
Even most litigators will tell you that litigation is a lose-lose option. Most lawsuits – upwards of 90+ — are ultimately settled. They are settled after spending a lot of time and money in the pretrial litigation process without, in most cases, establishing any clear advantage for either side that was not already available at the start of the dispute. In other words, what I usually see is a large waste of time and money to come back to the negotiating table months, even years, after the issue was passed off to the legal team. BTW, don’t blame the lawyers for this outcome – this is all on the people hiring them.
Why Is Litigation So Expensive?
In the U.S., our litigation system is adversarial. Our method of finding truth is through a complex system of rules and procedures, pitting the two opposing parties against each other. The aim is for truth to be uncovered and there are certain rules that promote uncovering the relevant facts. Still, at the core, the system is about making your case to the judge or jury and not helping the other side make its case. The judge and/or jury, on the other hand, is there to simply hear the evidence, not uncover it. They are not able to consider any facts or issues other than those brought before them.
The U.S. litigation system is burdened with a tremendous amount of procedure. The process of discovery in the U.S. courts accounts for a lot of the time and cost in our current system. Estimates of the total cost of litigation that is spent on discovery range from 50% all the way up to 90%!
In an inquisitorial (also called non-adversarial) system, the trial judges actively participate in questioning the defense, prosecutors and witnesses. In Germany, one country with an inquisitorial system, civil procedure is much less formal than in the United States. Discovery is almost non-existent. Judges call witnesses who aren’t prepped in advance. The system is much more efficient from a time and cost standpoint. In his article, The German Advantage in Civil Procedure, Professor John Langbein argued that by comparison to the German litigation system, American litigation is overly complex, expensive, slow and unpredictable.
One of the main sources of inefficiency in an adversarial system is that efforts are duplicated. Both sides work through the same set of facts, talking to the same witnesses, deposing the same people, spending countless hours preparing their particular stance on each issue. Each side must consider every argument and angle, just in case the other side raises it. If the other side does not raise an issue at trial, that’s time that could have been saved or dedicated to some other issue.
In fairness, before I get back to the main point of this article, there are other benefits to an adversarial system. It is not all about time and speed. Accuracy of decision-making is important. Most of us would agree it is THE most important consideration, especially in criminal matters where lives are often at stake, not just dollars. Which system is more accurate is up for debate and way outside the scope of this article. For our purposes, realize that the adversarial system is more complex and expensive than an inquisitorial system. There is little debate on that issue.
The Business Mediation Alternative:
Mediation in business disputes is becoming an extremely popular way to approach commercial disputes. Mediation is a very simple process. It entails each party airing its side of the story in front of a neutral third party focused on forging a settlement. A mediation can often take place in one day, sometimes just a few hours. The parties usually spend some time in a room together and a lot of time apart, each individually with the mediator.
Although there can be multiple mediators, most mediations happen in front of a single mediator who is chosen to help facilitate negotiations between the disputing parties. The aim is for the mediator to shepherd the two sides through a discussion process that will ideally result in them reaching a mutually-beneficial resolution.
Mediators are trained to help parties come to resolutions. Mediators are not judges and they are not there to decide who is right and wrong. The role of a mediator is to help each side see the other’s point of view and find common ground.
Participants in mediation may be represented by legal counsel or they may not. If you have a lawyer, they will want to be present and that is, IMO, a good thing. But, that’s up to you. There usually isn’t a lot of time or money spend preparing for mediation, certainly not anything like in litigation or arbitration (we’ll talk about arbitration below).
Because mediation is quick, it may cost just a couple thousand dollars for the facilities, mediator and the cost of the mediation system itself (the organization that facilitates the process). Parties to the mediation generally split these costs and pay for their own travel expenses and attorneys’ fees. For cost reasons alone, including a mandatory non-binding mediation clause in a business contract can be a simple and smart tactic for keeping your costs down and your relationships intact (for my #1 reason to create a business contract in the first place, read “The Most Important Reason to Create a Business Contract“.
Is Arbitration Instead of Litigation a Good Option for Resolving a Business Dispute?
I am often asked if arbitration is a good option for solving a business argument. Arbitration is similar to litigation in that it is adversarial and takes place in front of a person or group that will determine an outcome – a winner and a loser, or at least some sort of decision, which is often be to “split the baby,” an ugly term for basically giving each side half of what they want.
Arbitration takes place according to certain rules, which are put in place by the organization administering the arbitration. The American Arbitration Association (AAA) and National Arbitration and Mediation (NAM) are two well-known organizations. There are typically simple rules for arbitration and then there are complex rules. Complex rules allow for more discovery and procedure. Also, arbitrations can take place in front of a sole arbitrator or a panel of arbitrators.
If you end up in an arbitration governed by complex rules in front of a panel of arbitrators, you are likely to spend the same time and money you’d spend in litigation. I was counsel to a company that combined with the other side to spend $6 million on legal fees in a very complex arbitration. We lost that one and had to pay the other side’s fees. Talk about pain!
Some arbitrations are non-binding, although most are binding, which means that the decision of the arbitrator(s) can be enforced like any judicial decision. If you go the arbitration route, I encourage you to make sure it’s binding. Otherwise, you may spend a lot of money en route to winning the arbitration, only to find out the other side is prepared to spend more money by ignoring the decision and litigating the case.
In a simple-rule, sole arbitrator process, you may save some time and money compared to litigation. Still, it’s nothing like the speed of mediation.
Why is Business Mediation Such a Great Option?
Mediation takes place early on in the dispute process. The parties don’t have a chance to spend tons of money on pretrial litigation, which, as I’ve explained earlier, is often a huge waste of money given the parties will ultimately settle the case without having gained much, if any, advantage along the way.
Some of the biggest benefits to employing mandatory non-binding mediation rather than leaping straight to business lawsuits are:
- Reduced cost
- Much less time-consuming than litigation and arbitration
- Maintaining your business relationships
- Not dependent on unpredictable juries, and
- Reaching a mutually-beneficial agreement.
Mediation is quick and informal. It forces the parties to get back in a room together and talk about what went wrong. When it works, it saves a lot of time and money. It also preserves relationships because it is not adversarial. Litigation, while not intended to harm relationships, often does. It places the parties opposite and against each other, trying to win at the other’s expense. Lawyers are paid to trap witnesses and to make them look bad on the witness stand. That’s part of the process. It may be the American mantra that everyone deserves their day in court. Yet, in this context, do we really want what we deserve?
As I mentioned, mandatory non-binding mediation can definitely help keep monetary costs down for both sides of a business dispute. It may cost as little as a couple thousand dollars total, not counting any travel or attorney fees. Mediation provides an avenue for the parties to try to talk things out before moving to much more expensive options. It’s stop the fighting and starts the talking, at least for a period of time.
Mediation can also salvage the business relationship between the parties before taking things to a more antagonistic level. In fact, I believe that most business relationships can be repaired even in the middle of a dispute if the parties are willing to sit down together with open minds. Frankly, if you can talk your “opponent” into having a drink and talking about what went wrong, you can often avoid mediation, too. Trial lawyers will warn you to be careful not to show your hand and give up an advantage by reaching out in this manner. They intend well and sometimes they are right. More often, IMO, they are prolonging the dispute. If your gut ever tells you to talk to the opposing side alone and directly (without the lawyers), listen carefully to your gut.
The Downside of Mediation in Business Disputes:
The downside of mediation is that it often doesn’t work. If the parties are not willing to be open and reasonable, they won’t make any headway in resolving their dispute. Even if there is a mandatory mediation clause in a contract, no one can force a person to participate with an open mind and intent to resolve the matter.
It’s best to conduct a mediation after the parties have had a little opportunity to cool off, although since time is money, getting into a mediation more quickly is beneficial. These are two competing concepts, making it tough to decide exactly when to mediate. Most business contracts call for mediation right away if a dispute breaks out that can’t be resolved through amicable negotiation. Mediating early works. At least, it is much better than not trying mediation at all.
Having a business attorney that believe in resolving business disputes through mediation is critical. Some business litigation attorneys prefer, not surprisingly, to litigate to resolve a business dispute. That’s how they earn their living and they believe in the power of litigation to ultimately reach just outcomes. For this reason, there is value in choosing an attorney that doesn’t litigate (hint, hint) if your goal is to resolve an argument outside of litigation. There are downsides to that choice, too – rarely there is a perfect decision when you are working through a business dispute with a partner, cofounder, customer or other key business relationship.
If mediation is non-binding, you reserve the right to proceed to a lawsuit in the event that a mutual agreement can’t be reached. So, it may turn out to be time spent without much to show for it. That happens.
Preserving Business Relationships:
It can help if both parties remember that it may be more beneficial in the long run to talk things through now and save the business relationship by compromising rather than being unwilling to budge. By doing what they can do to save the relationship, the parties may be able to work together in the future. Even in the event that both parties decide to part ways as business partners, they’ve managed to keep their costs down by avoiding drawn-out commercial litigation.
Sometimes just hearing the other party’s point of view in a neutral setting, in front of an impartial mediator whose emotions aren’t involved, may be enough to help forge a mutual compromise. I have seen plenty of clients who found it satisfying just to get things off their chests, to tell their side of the story to someone willing to listen. This has helped contribute to making forward progress in the negotiation process. If both parties feel like they are able to get their side of the story out in the light of day, it can help foster more positive feelings rather than building deeper resentments. Litigation and arbitration also offer an opportunity to be heard, but at a much steeper cost.
Maintaining business relationships is no small thing, especially in today’s world where we often depend on networking and cooperation to help drive our businesses forward. The cost of mediation is minor when compared to the price of ruined relationships.
Example of a Mediation Clause for a Contract:
Many of my clients, in Texas (Austin, Houston, Dallas and San Antonio, in particular), Delaware and throughout the world, have benefited from having mandatory non-binding mediation clauses in their commercial contracts. Here is a very simple provision I use in business contracts to require the parties engage in mandatory, non-binding mediation if a business argument develops:
“If a dispute arises between the parties that is any way whatsoever related to this Agreement and the dispute cannot be resolved by negotiation, the parties to such dispute agree to submit it to non-binding mediation conducted by a sole mediator mutually selected by them. If the parties to the dispute are unable to agree upon a mediator, National Arbitration and Mediation (NAM) shall select the mediator. The mediation shall be conducted in [Town, State]. The parties to the dispute will equally share the costs of the mediator, but shall otherwise pay their own expenses, including attorneys’ fees and travel expenses.”
Here’s to Hoping You Get Your Day Out of Court:
Given the relatively nominal costs of mediation, I believe business people should require it in all their business contracts. It doesn’t always work, although it often does and your bank account and psyche deserve your day out of court.
In Texas and elsewhere, consulting with a business law attorney experienced in this type of mediation may be a smart move for anyone who is wondering whether non-binding mediation or arbitration might be the right move for them to try to save time and money and preserve relationships after a business dispute breaks out.
If you need help sorting through a business dispute, whether with a partner or founder or some other type of business argument, please get in touch.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.