Use alternative dispute resolutions to keep lawyers at bay: Page 2

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Navigating the ADR maze

Alternative dispute resolution is the umbrella term for an increasingly popular method of resolving conflicts where disputants talk and compromise, instead of going to court. Proponents say using ADR resolves disputes faster and saves companies tens of thousands of dollars over traditional legal methods of dispute resolution. Companies realize significant cost and time
Elpidio Villarreal says ADR clauses actually foster a better working relationship between IT managers and outside staff by building trust and removing obstacles.
savings by avoiding months-long litigation, which eliminates the need for expensive attorneys. The ADR process also avoids the cost of the trials themselves, which can equal the cost of pretrial expenses.

Companies can choose from three types of alternative dispute resolution:

1. Internal dispute resolution
Typically, in this type of resolution, one senior executive from each side--neither of whom is involved in the day-to-day operations of the project--negotiates a compromise. If those executives fail to work out a mutually agreeable solution, a second set of executives--more senior and more removed than the first pair--take over the negotiations. Since this is the simplest form of ADR, many companies choose this option first.

2. Mediation
This second type of ADR takes place with a professional dispute resolver--sort of a marriage counselor for companies--who listens to both sides of the argument and tries to facilitate a meeting of the minds. Since mediation is quick and relatively inexpensive, this is a popular choice. The cost of hiring a mediator runs from $2,500 to $10,000 per day and generally is split between the two parties. The cost of ADR is less than what it would cost to prepare a case and take it through the trial phase. According to Villarreal, preparing for litigation and court costs in an average case can exceed several hundred thousand dollars.

Sample dispute-resolution provisions for outsourcing agreement
This standard agreement was furnished by the Washington, D.C., law firm of Shaw Pittman.

"The beauty of mediation is that there are few rules, so it is much easier for the fact-finders to develop facts and get the information they need to resolve the situation," says Bruce Bower, general counsel for ZapMe!, a San Ramon, Calif., company that installs computer laboratories, broadband Internet access, and appropriate content in schools. Bower routinely inserts dispute-resolution clauses into contracts requiring work from IT contractors. "When you go the litigation route, you're essentially taking money away from a potential settlement and putting it into both sets of lawyers' pockets." Bower says that some disputes between the company and its contractors have been resolved to mutual satisfaction in a one-day mediation session.

3. Arbitration
The third type of ADR is arbitration. Unlike mediation, arbitration concludes with a judgment of guilt or innocence. A trained arbitrator--usually a judge, attorney, or expert in the field--presides over the proceedings, which can take as little as a few days. The arbitrator's ruling usually is considered final, and no appeal is allowed.

Inserting some type of ADR clause into contracts for IT work is becoming more and more popular, and doing so can make a lot of sense, says Daniel Bergeson, an attorney in San Jose, Calif., who specializes in high-tech litigation and serves as a mediator in the Alternative Dispute program for the U.S. District Court in Northern California.

The cost of ADR is less than what it would cost to prepare a case and take it through the trial phase.
"If you resort to litigation action, it can take at least a year, which is just too long when you're dealing with technology that can change every few months," he says. "By inserting an ADR clause, both parties are assured a faster resolution--a necessity in the fast-paced world of technology." If companies involved in an IT-related dispute end up in court, the judge hearing the case often has no experience handling technology-related lawsuits.

"It's very difficult to imagine entrusting the resolution of an important IT-related contract to a judge who doesn't even use e-mail," says GE's Villarreal. "This way, we can be assured that we are dealing with someone who understands the technology and the technological needs of businesses."

And with IT projects, each situation is unique. "The more understanding the mediator or arbitrator possesses going into the process, the more likely a mutually agreeable resolution will be found," notes Judge Peter Stone, a retired San Jose, Calif., judge who mediates and arbitrates IT-related disputes on behalf of JAMS/Endispute Inc., an organization specializing in dispute resolution. Stone is well known in Northern California for persuading parties to agree on a settlement outside of the confines of the court system. His specialties include high-tech and intellectual property.

Lessons learned about using ADR
  • Unlike general dispute resolution, mediators or arbitrators with specialized technical knowledge should handle IT-related disputes. "They need to talk the language," says Elpidio Villarreal, counsel for litigation and legal policy at General Electric Co., of Fairfield, Conn. "Some of this stuff can get very complicated."
  • Don't haphazardly develop your approach to ADR. "Try to take a big picture view of your dispute-resolution processes," Villarreal says. "Then you can put in place a program that addresses the entire flow of disputes you are likely to encounter in your business."
  • Structure your dispute resolution so that work continues while the dispute is being resolved. "Our dispute-resolution clauses make it clear that the status quo will continue during disputes," Villarreal says. "It says neither side can take any unilateral action and that everything has to remain in place while the dispute-resolution mechanism works itself out."
  • The IT industry is well-suited to mediation and arbitration for other reasons as well. Because it's a relatively young industry, "it hasn't yet gotten into a heavy litigation mentality," notes Sandra Sellars, president of Technology Mediation Services LLC of McLean, Va. Sellars started her business last year after seeing a need for specialized technology mediation services. The IT industry is very young, and most players generally need to put all of their cash into product development and marketing, Sellars says. "They can't afford to divert big bucks to pay for expensive litigation. Consequently, most young IT companies probably will choose to settle and save the litigation fees."

    Understanding the clause

    As more and more companies consider inserting dispute-resolution clauses into their contracts with IT contractors, they're running into a confusing array of options for structuring those clauses. A standard dispute-resolution clause doesn't exist, Shaw Pittman's Wilkins says. Instead, companies can choose between clauses that stress mediation, arbitration, informal dispute resolution, or a hybrid of the three.

    Wilkins recommends starting with informal dispute resolution first. He suggests that companies insert a carefully crafted, two-tiered informal dispute-resolution clause into the contract. Such a mechanism "removes individual egos from the problem. It also allows both sides to be open about each side's concerns and needs and to use their best efforts to solve the problem," he says.

    Not everyone agrees with Wilkins. Some recommend skipping the informal dispute-resolution step and moving ahead with a clause stipulating mediation or arbitration. Both mediation and arbitration clauses generally name a mutually acceptable arbitrator or mediator. Other contracts direct each side to name its choice, and the two choices mutually name a third and final mediator or arbitrator.

    Mediation often has a better chance of yielding an amicable outcome, so it makes sense to start with mediation instead of arbitration, Sellars says. "Mediation is much more time- and cost-efficient and doesn't create an adversary," she notes. "Everyone can come out with something from the deal. And it's a lot easier to get business from an existing customer than a new one."

    Others opt to use an arbitration clause from the start. ZapMe!'s Bower almost always inserts an arbitration clause into contracts when hiring IT contractors. Although the clause stipulates arbitration instead of mediation, California law requires that all companies advocating arbitration must try mediation first. In essence, ZapMe! has created a system of checks and balances that involves both mediation and arbitration.

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