Alternative Dispute Resolution for Startups: Mediation and Arbitration

Litigation has long been the de facto solution for companies that find themselves mired in legal conflict. However, court-sanctioned squabbling comes with spiraling costs, tremendous time investments, and a healthy dose of acrimony that can destroy business and personal relationships. For new and emerging businesses with little funds to spend on the legal battlefield, alternative dispute resolution can play an important role. Alternative dispute resolution can offer cheaper, faster, and healthier alternatives to traditional litigation. This article provides a brief overview of popular alternative dispute resolution mechanisms, and explains how to select a course of action that’s right for you and your new venture. 

Aside from negotiations between parties, the most prominent forms of alternative dispute resolution are mediation and arbitration. The following section breaks down each mechanism and lists a handful of pros and cons for each:

Mediation

The most popular method of alternative dispute resolution by a wide margin, mediation involves a neutral third-party facilitator who walks the parties through the ugly details of their conflict in search of common ground. Parties set the agenda and tell their respective stories, participating extensively in the entire process. Solutions are proposed and thoroughly discussed, and the mediator attempts to resolve outstanding issues in as equitable a manner as possible. It is important to note that mediators do not have the authority to issue binding decision, however, agreements reached through the mediation process are legally binding in the same manner as any other contract. It is the intent of mediators to facilitate such an agreement between the parties.

Pros:

1. Cheaper.
2. Informal structure allows participants much more leeway over discussions and outcome.
3. Mediators are trained to achieve and sustain consensus.
4. Mediating parties are by default more willing to reach a detente.
5. The voluntary nature of mediation and confidentiality obligations means that companies can remove themselves at will and their information will be kept private.

Cons:

1. Many disputes are irreconcilable via extra-legal means, so mediation may not be the right fit for every spat a company finds itself in.
2. Failed mediatory attempts can raise the price tag on disputes that just end up in court anyway.
3. Privacy constrictions can leave vital information under wraps.
4. Companies are free to walk at any time and are under no obligation to fulfill their end of the bargain.

Conclusion:

Mediation offers a vital, viable route for companies seeking to quell rumbling tension in a rapid, cheap, and expedient manner with a minimum amount of public attention. If deep divisions persist, however, mediation may not be the best mode of resolution. Businesses should be ready and willing to handle most disputes via a well-established mediation process, but should not automatically shy from the specter of formal proceedings.

Arbitration

Arbitration blends characteristics of mediation and litigation to create a hybrid process that combines the strengths of both. During arbitral proceedings, parties conduct miniature trials in front of a neutral third-party arbitrator. Opening and closing statements are given, evidence is presented, and the arbitrator issues a binding decision enforceable in courts of law. Arbitration can be voluntary (undertaken on the initiative of both parties) or mandatory (compelled by statute or contractual agreement).

Pros:

1. Despite recent rising costs due to its burgeoning popularity, arbitration still generally manages to save time and money for most parties.
2. Proceedings retain an aura of legal decorum, but evidentiary rules are streamlined and resolutions are rapid.
3. Arbitrations capture much of the consensus-seeking, conciliatory tone of mediation while offering in-depth analysis and enforceable decisions to companies looking for firmer legal footing.
4. Arbitrations are private, so sensitive matters may be adjudicated with relative ease.

Cons:

1. Rising costs do dampen the appeal of arbitration, especially for young companies with little to spend on dispute settlement.
2. Parties generally select the arbitrator, so complete objectivity may be an illusion.
3. Decisions are binding and unappealable, so a negative decision can have far-reaching implications.
4. Privacy constraints militate against transparency.

Conclusion:

Arbitration remains a faster, more cost-effective alternative to litigation while offering similar levels of legal analysis, representation, and enforceable decisions. For companies looking to establish formal alternative dispute resolutions mechanisms as a habitual recourse, arbitration is an excellent choice. However, the required investments of time, money, and legal expertise may still be substantial.

Drafting Alternative Dispute Resolution Clauses

When constructing contracts with investors, suppliers, customers, employees, and others, companies should make sure to include clear and comprehensive provisions governing alternative dispute resolution. Such clauses should include statements on each of the following issues (though this is not a comprehensive list):

• Types of Disputes Covered: Not all transactions need alternative dispute resolution clauses to bolster them. Companies should choose which types of transactions must be subject to dispute resolution and make sure those transactions are covered in their contracts.

• Venue: Consider the most convenient locale in which to resolve dispute. Generally, this will be the city or county in which your company is headquartered. However, if you do a substantial amount of business in a different city and the bulk of needed evidence and witnesses are there, it may be wise to consider alternative locations.

• Choice Of Law: It is always important to be aware of the applicable legal standards governing your business transactions. Bear in mind that governing law for arbitration agreements does not need to be the same as the governing law for the original contract.

• Costs: For mediation, costs are generally split between both parties. For arbitration, costs can be allocated in a variety of different ways. The losing party could shoulder the burden in some circumstances, while independent decisions on the part of the arbitrator could assign costs differently in others. Make sure you understand the prospective cost framework for the alternative dispute resolution mechanisms you are entering.

For more information on constructing alternative dispute resolution clauses, consult the American Arbitration Association’s drafting Guide.

DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.