Last updated on May 9th, 2020 at 08:56 am
Contracts are designed to make your business run smoother and to protect you from unnecessary risks. However, business disputes between contract partners are still commonplace.
What is the best way to handle contract disputes? You have three main tools to resolve a business dispute. You can use mediation, arbitration, or litigation. Each tool has its pros and cons. The right one for your business will depend on your goals and the nature of the dispute.
Hidden Costs of Contract Disputes
Every contract dispute has obvious costs and hidden costs. The obvious costs include loss of revenue, cost for securing new supplies, and other easily measurable costs.
But, often the hidden costs end up being even more than the obvious costs. Hidden costs include using resources to resolve the dispute, loss of agility to take advantage of new opportunities, loss of reputation with your customers, and distracting key members of your organization from their primary responsibilities.
The best way to limit these hidden costs is to avoid disputes where possible and to resolve them as quickly as possible.
What is Mediation?
Mediation is often thought of as the softest form of contract dispute resolution. Mediation is nothing more than a negotiation overseen by a professional mediator.
The mediator helps keep the conversation flowing, helps facilitate compromise, and can point out to both sides the risks of proceeding to litigation instead of coming to an agreement in mediation.
Benefits of Using Mediation for Contract Disputes
The key benefits of using mediation to resolve contract disputes are:
- Lower costs than arbitration or litigation
- Faster than arbitration or litigation
- Confidential settlements
- Creative solutions
- Protects the relationship between the parties
- No outside solution is imposed on the two sides
When you enter into mediation, there is no set outcome. Neither side has to lose the mediation. You can craft creative solutions that preserve the relationship, and the resolution can be completely confidential.
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Mediation allows you to use common sense business principles to resolve the issue. It is also faster and much cheaper than other forms of dispute resolution.
Drawbacks of Mediation
Mediation isn’t perfect. Some of the drawbacks to mediation include:
- The open-ended process can be abused by one side
- May still require litigation to enforce the agreement
- Doesn’t work if trust has completely broken down between the two sides.
Mediation is a poor choice if one side refuses to engage in the process. If there is a significant disparity in the bargaining position of the two sides, one side can easily bully the other side in mediation.
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What is Arbitration?
Arbitration is a private court system. Instead of using the state or federal court system, the two sides argue their case to a private arbitrator.
Arbitrators are often lawyers or retired judges. Many arbitrators have industry-specific expertise beyond what you would find in the court system.
Pros and Cons of arbitration for Contract Disputes
Let’s start with the benefits of Using Arbitration
The most notable benefits of arbitration for resolving contract disputes include:
- Streamlined process
- Faster resolution
- Binding outcomes
- Less expensive than litigation
- Results often private
- Greater chance of having someone with deep knowledge of the industry making decisions about the contract dispute.
Even though you have to pay an arbitrator, arbitration is almost always less expensive than litigation. This is because the procedures for presenting your case in arbitration are streamlined. Often hearings happen only through written submissions or over the phone.
Arbitration is much faster than litigation.
Unlike mediation, the arbitrator has the authority to issue binding rulings on the two sides, even if one side doesn’t want to cooperate.
Drawbacks of Arbitration
Arbitration does have some problems:
- Litigation may still be required if one side refuses to follow the order
- Limited appeal rights
- Harms relationship between the two sides
- Arbitrators more likely to have a specific industry bias (buyers vs. vendors) than a judge
- The arbitration may move too fast for complex disputes
If one side is refusing to participate in any form of dispute resolution, you may still have to use litigation to enforce your rights, even if you won in arbitration.
Arbitration tends to favor bigger companies over smaller companies because of the way the system is designed.
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What is Litigation?
Litigation means using the state or federal court system to resolve a dispute. Litigation officially starts when one side files a lawsuit.
Depending on where the lawsuit is brought, a judge or a jury is the ultimate fact finder. The judge or jury determines which side prevails and what damages, if any, should be awarded.
Almost every court system is overburdened with lawsuits. It can take years for even a simple case to get through the system. Most lawsuits never go all the way to trial. Instead, most are settled during the discovery process.
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Benefits of Using Litigation for Contract Disputes
Litigation is often the last resort of companies looking to resolve a contract dispute. But, it does have several advantages:
- The force of law behind all decisions
- Access to a wide range of tools to gather information about the dispute
- Deadlines than increase chances of settling a lawsuit
One side cannot just ignore a judge like they can a mediator or an arbitrator. If you obtain a judgment, you can enforce that judgment through garnishments, liens, or even having the sheriff or U.S. Marshals seize assets.
Litigation may be slow, but it eventually produces a final judgment.
The reason there is so much information about alternative dispute resolution is that litigation has many serious drawbacks. Some of the major problems with litigation include:
- Unpredictable results
- Often destroys relationship between two sides
- Public results
- May cause reputational harm
- Lengthy appeals process
- Favors side with deeper pockets
- Legal resolution may lack any business rationale
If you take your case all the way to trial, you may end up with a decision that makes no business sense. You could get a legal win and still be facing significant business losses.
Having your day in court is expensive. Many companies find litigation isn’t worth the expense unless there are millions of dollars at stake.
The lengthy appeals process means that your case may stretch on for years even after you’ve already gone to trial.
Many businesses find litigation to be too unpredictable, too slow, and too expensive. Litigation is the last resort for many businesses dealing with a contract dispute.