Of Interest - July 2008

Resolution of Business Disputes: The Alternatives

Posted on 23 July 2008 at 10:19

Resolving a business dispute through court-based litigation can be an expensive and time-consuming exercise. What’s more, both parties’ private affairs are exposed in a public trial, with a rigid process imposed on them over which they have no control.

This article explores alternative dispute resolution systems - collectively referred to as Alternative Dispute Resolution (ADR) - which all offer the disputing parties a less costly process, a quicker result, privacy and control, including choice of the “dispute resolver”.

The main ADR methods used in general business disputes and discussed below are expert determination, arbitration and mediation. A further method is adjudication, which is commonly used in construction disputes.

Expert determination is a relatively informal process which produces a final and binding solution. It is ideally suited to disputes of a technical nature, such as a director/shareholder dispute over the value of a shareholding, the profit share in a partnership or the revenue/ cost/ profit share in a joint venture agreement. It is also commonly used in disputes arising from the sale of a business, for example, in connection with the completion accounts or deferred consideration provisions.

In an expert determination, an independent expert is tasked by the parties to decide one or more issues which are within the expert’s experience and expertise. This means that, unlike in court, disputes of a technical nature are heard by someone with the relevant technical expertise.

The expert is required to act fairly and the parties agree to be bound by the decision. The expert uses his or her own knowledge and experience to investigate the matter, usually taking written submissions from both sides. A hearing is not normally necessary. The expert reaches a decision based on the results of his/ her own investigations. The decision is given in writing and usually without reasons, limiting the opportunities for challenge.

Some contracts, Articles of Association or Shareholders’ Agreements state that expert determination must be used to resolve particular issues. If a method is not stated, the parties can choose to settle their dispute using expert determination or, of course, through litigation or other ADR methods.

The parties can jointly appoint the expert (or indeed, arbitrator or mediator) or ask an appointing authority such as the president of the relevant professional body to make the appointment from amongst its members.

Arbitration also offers the parties a final and binding solution. Whilst similar to expert determination in that a decision is made by a neutral third party, it is in fact critically different. In this article only a few of the differences are mentioned. An arbitration is a private tribunal with the parties being “free to agree how their disputes are resolved.” The scope of arbitration naturally extends to a greater range of issues than expert determination, including both liability and the quantum of damages.

In England and Wales, arbitration is supported and controlled by the Arbitration Act 1996. The Act supports the enforceability of Arbitration awards locally and internationally. There is no similar statutory involvement or support for Expert Determination which, as a result may be considered to offer a rougher form of justice.

The arbitrator, unlike the expert, acts in a judicial capacity, weighing the arguments and the evidence before reaching a decision. The arbitrator need not be an expert in the subject matter of the dispute but may be chosen for his/ her relevant expertise to assist in evaluating the technical evidence.

Unlike the expert, the arbitrator can only undertake an investigation if permitted by the parties and must share the results with them. A further difference is that, unlike the expert, the arbitrator is statutorily immune from actions for negligence.

Arbitration awards are given in writing and ordinarily with reasons unless the parties agree otherwise. “Fairness” is formalised by the Arbitration Act.

In Arbitration, unless the parties agree otherwise, the arbitrator is required to deal with their costs and is empowered to award interest. In contrast, in expert determination these matters may not be within the agreed brief.

Party autonomy over the process, subject to the terms of the Arbitration Act, allows an arbitration to be adapted to suit the needs of a case and the parties’ requirements. A hearing is not necessarily required and the process can be undertaken on a “documents only” basis. Indeed, if required, an arbitration can be designed to resemble an expert determination.

Mediation is completely different to these other methods as the mediator does not make a binding decision. In mediation the parties are brought together in private on a collaborative as opposed to an adversarial basis. The mediator is engaged by them to assist in teasing out an agreed solution to their dispute, which will form their settlement agreement.

The mediation usually takes place over one day, confidentially and without prejudice to the parties’ position in any other dispute resolution process. With the parties present, the opportunity exists for more creative solutions other than simple monetary recompense. For example, a party may be prepared to agree some other business arrangement, such as the receipt of goods, to settle the matter.

Mediation amounts to a focused form of assisted negotiation. A settlement is achieved and relationships are preserved. Of course, mediation may not produce a settlement. In commercial litigation, parties may be required to undertake a mediation stage during the process. A party who fails to comply may be penalised by the court.

To conclude, businesses are increasingly looking at ways to tighten their belts in light of the current economic situation. Where disputes arise, alternatives to expensive court proceedings should be considered. This may have a big impact on the bottom line.

All three of the ADR methods mentioned above have been highly effective in resolving business disputes. The parties should decide for themselves, or take legal advice, as to which resolution process is best suited for their specific dispute.

By Daniel Djanogly
in The Telegraph Business Club 22/7/08

Of Interest - July 2008

Resolution of Business Disputes: The Alternatives

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