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When General Electric Co. hires a contractor to install a computer system, run a data center, remediate legacy systems for Y2K compliance, or perform any number of other information technology tasks, it routinely inserts a small clause that can yield big returns. The provision, known in the legal community as an alternative dispute resolution (ADR) clause, stipulates that if a dispute arises between GE and the IT contractor, both parties will try to resolve the dispute without involving the court system.
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Elpidio Villarreal, counsel for litigation and legal policy at General Electric Co. |
Over the past five years, Elpidio Villarreal, counsel for litigation and legal policy at GE, in Fairfield, Conn., has convinced GE executives that inserting ADR clauses can save the company millions of dollars annually and avoid the type of unwanted publicity often associated with large, splashy, and sometimes messy courtroom battles. Villarreal says the company saved about $40 million using mediation and arbitration in 1998, and that 1999’s savings should be even higher.
The company began inserting ADR clauses into many of its contracts in earnest about two years ago. Since then, more and more company executives routinely insert some form of a dispute-resolution clause into contracts. Some IT contractors are suspicious of dispute-resolution clauses–mainly because they believe anything written into a contract favors the other party. But Villarreal says the clause actually fosters a better working relationship between IT managers and outside staff by building trust and removing obstacles.
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“The clauses reinforce the notion that this is a relationship, and if we get in a fight, we aren’t going to go to court. We have already agreed on a way to resolve the dispute because we are committed to the concept of getting the job done,” he says.
Inserting ADR clauses in IT-related contracts is especially important, since IT’s complexity makes terminating IT-related contracts difficult and expensive. And, because technology changes so rapidly, the parties often don’t negotiate how to handle a particular–often unforeseen–circumstance, notes James Wilkins, head of the technology transactions and outsourcing practice at Shaw Pittman, a Washington, DC-based law firm.
Many companies are beginning to insert such clauses–albeit slowly–as they realize the consequences of spending countless hours and dollars fighting legal battles. They now understand their time is better spent keeping current with the technology necessary to run their businesses. Because ADR clauses can help avoid Y2K-related lawsuits that may otherwise arise from inadequate systems remediation, the new millennium is an added reason for companies to consider inserting such clauses into IT contracts.
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
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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.
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“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.
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“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.
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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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Bower has seen his arbitration clause in action. ZapMe! was unhappy with the work a vendor had performed in creating an end-to-end intranet delivery system, which was supposed to encompass a search engine as well as other Web-enabled functions. ZapMe! claimed the company missed its delivery schedule and didn’t complete the work. Because of the ADR clause, both parties were required yo meet with a mutually agreeable mediator in good faith. “It allowed us to bring numerous factual issues to the table in a timely and cost-effective manner,” said Bergeson, who represented ZapMe! in the dispute. The two parties ultimately reached a mutually agreeable solution.
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“From our perspective, it worked. We were able to get closure on the issue very quickly and move forward,” Bower says. “The speed with which the issue was resolved was the key, because the legal issues were clouding the company’s judgment and making it difficult to make important strategic business decisions.”
Remain flexible
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In many cases, however, a company has to be flexible in constructing dispute-resolution clauses. Although GE prefers to insert clauses that stress mediation, Villarreal says the company will change the terms of clause to satisfy contractors. One agreement with an IT vendor, for example, provided for an unusual multistep resolution process. In the event of a dispute, the parties involved would first try to resolve the controversy through mediation. If that failed, the parties would then immediately move to a court venue specified in the contract instead of the intermediate arbitration step.
The agreement was a departure for GE, Villarreal says, but making a concession to the other party in this case made sense. “This was an example that normally would have culminated in binding arbitration, but they wouldn’t go for it,” he says. “It was a highly individualized and heavily negotiated contract, and it shows that you can’t be married to a particular clause.”
In some cases, GE executives have even wanted a contractor so much that executives have given in to the contractor’s request to eliminate the dispute-resolution clause from the contract altogether. “There are times when we get resistance to this type of clause,” Villarreal says. “Some people still operate under the notion that if the other side wants something, there must be something wrong with it. And some people simply prefer the environment of a hometown court.” When that happens, “We push as best we can, but we ultimately have to make a decision. Generally, if we want the deal, we don’t let the insertion of a mediation clause be a deal-breaker.”
Gary Kirstein also has encountered resistance to his standard dispute-resolution clause. Kirstein, president of Softcare Computer Consulting Co. in Pittsburgh, takes an unusual approach. Although his company is the IT contractor, not the hiring organization, Kirstein often presents his customers with the same type of contract–complete with dispute-resolution clause–just to ensure that neither he nor his customers end up in a protracted legal battle.
“We have had companies balk at the clause, and when that happens, we come to some mutual agreement,” he says. If the clause is rejected, Kirstein makes sure the company agrees to conduct any necessary litigation in Kirstein’s home state of Pennsylvania. “That way, we have more knowledge of the laws. I know we are going to battle on familiar ground in Pennsylvania.” //
Karen D. Schwartz is a freelance writer specializing in business and technology. Based in the Washington, D.C. area, she can be reached at [email protected].
