CONTRACT DISPUTES: ALTERNATIVE DISPUTE RESOLUTION
Kenneth Glasner, Q.C.
The function of law may be described as twofold: firstly, to regulate the affairs of persons (persons includes corporations, societies, individuals and government); secondly, to establish within the community a level of moral conduct. The success may to a greater degree be based on the acceptance by the community of these regulations and level of conduct in order to resolve disputes.
To some degree, there has been a shift in the community expectations with respect to the method by which conflicts are resolved. There appears to be a desire by parties to have disputes resolved as opposed to having their day in court. This method of resolution is not new. One form of dispute resolution, namely arbitration has been around for centuries. In fact, recourse to the arbitration process has been common practice in England since the middle ages and was codified in 1698, 9 Will. 3, c. 15. Arbitration has been defined in Halsbury as:
... the reference of dispute or difference between not less than two parties for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction.
2 Halsbury's Laws of England, 225 (4th ed.)
In fact, the ADR process forms part of the Jewish Religious Court called, "The Beth Din."
The present language of the commercial community uses the phrase ADR, standing for "Alternative Dispute Resolution," as meaning an alternative to the public court system. I prefer my colleague John Sanderson Q.C.'s interpretation namely "Appropriate Dispute Resolution", thereby leaving within the arsenal of dispute resolutions systems the use of courts for those cases which may require a principle to be established, public vindication, or the infringement of a legal right.
Some years ago a Canadian publication (The Lawyers Weekly) set out the pros and cons of various dispute resolutions methods. I reproduce this reference with certain modifications.
"Disputes, unlike wine, do not improve by aging."
Willard Z. Estey, Q.C.
(as he now is).
Chief Justice Warren E. Burger said:
"A common thread pervades all courtroom contests: Lawyers are natural competitors, and once litigation begins they strive mightily to win using every tactic available. Business executives are also competitors, and when they are in litigation, they often transfer their normal productive and constructive drives into the adversary contest. Commercial litigation takes business executives and their staffs away from the creative paths of development and production and often inflicts more wear and tear on them than the most difficult business problems...The plaintive cry of many frustrated litigants echoes what Learned Hand implied: "There must be a better way".
Appropriate Dispute Resolution may take many forms. Basically the intervention of a third party making the decision is at the extreme end of appropriate dispute resolution. It is commonly called arbitration.
There are other forms of dispute resolution including:
- Early Neutral Evaluation
- Mini Trials
- Fact Finding
- Rights Based Mediation
- Interest Based Mediation
- Neutral Based Mediation
The latter two forms have recently been introduced as methods for resolving disputes for self regulating bodies.
ADR may be generally classified into 3 major areas:
I propose to deal with the latter 2 areas.
The major difference between arbitration and the other forms of ADR is that arbitration imposes a binding decision upon the parties - the other forms require the parties themselves to come to a resolution of the dispute with the assistance of the third party.
A simple comparison between Adjudication (Arbitration) and Interest Based Mediation illustrates the flexibility of one process vs. the rigidity of the other.
- Adjudication (Arbitration)
- Looks to the past.
- Focuses on facts.
- Seeks to establish fault/liability.
- Winners and losers.
- Dominated by lawyers.
- Interest Based Mediation (as opposed to Rights Based Mediation)
- Looks to the Future.
- Focuses on relationships.
- Seeks to restructure relationships.
- Results in custom made resolutions.
- Role for clients.
In 1810, Jeremy Bentham, in his book, The Rationale of Evidence, described arbitration as a process by which the parties consent to judgment. That is, the parties come to an agreement that a third party will impose a binding decision between the parties without the aid or recourse to the public dispute resolution system - namely the courts. I suspect this thought process forms the genesis of the reason why the courts are loathed to overturn an arbitrator's decision and are more susceptible to a reversal of a judge made decision within the public court system.
Arbitration is also subject to criticism. It is not cheap. It is however, cheaper than the court system. The major advantages to arbitration are:
- The matter can be heard promptly.
- The evidence is private.
- The award is private.
- The parties can determine who the decision maker will be (a great advantage over the court system).
- The rules for arbitration can be determined by consent of the parties as opposed to being governed by or being required to adopt a specific set of rules.
The lawyer's role in arbitration is similar to the lawyer's role in litigation; that is to say the lawyer is an identifier, selector, and marshaller of the evidence. In fact, one text describes the role of litigators as that of historians and litigation as largely a process of recreating historical facts. One only needs to look at the division of time spent on a case. The majority of time is spent in gathering and presenting the evidence as opposed to gathering and arguing the law.
During the process of dispute resolution, the client and their counsel deal with the evaluation of risk taking. By risk taking I mean assessing a risk - namely, the cost if things go wrong and the probability of the occurrence. If the cost is high, the probability must be minimized. If the cost is low, the probability may be allowed to increase accordingly to the party's personal assessment of "acceptable risk".
Risks are controlled by:
- The elimination of the risk.
- Eliminating activities that produce undue risk.
- Insuring for uncontrolled risk.
- The informed consent of the client
- The establishment of standards controls and regulations.
These factors come into play in any dispute either as a proactive or reactive procedure. I shall later deal with the involvement of the solicitor in commercial disputes and their duty to reduce or eliminate the costly downtime to the client and to the litigator when a dispute arises.
THE PROACTIVE ARBITRATOR - APPLYING MANAGEMENT PRINCIPLES TO ARBITRATION
By proactive I mean active conduct by the arbitrator rather than a passive conduct.
The management skills required of an arbitrator are numerous. He or she is in fact not a judge, while still having judgelike powers, with the ability to bind the parties in a manner I suggest in many cases no different than a judge. They are in fact decision makers. At the end of the day when they act as decision maker in the arbitration process one party will be happy and one party will be unhappy. It is important for the arbitrator to ensure that he or she writes a decision that clearly explains to the unsuccessful party the reasons for the decision. If not, the arbitrator will be performing economic suicide.
There has been criticism by lawyers and their clients that the arbitrator fails to take a leading role in controlling the proceedings from the commencement to the completion of the arbitration. Such control, without arrogance is I suggest required in many arbitrations. Generally counsel prefer an arbitrator who manages the whole hearing process so that decisions are made on promptly, clearly and concisely. People like to win but when they don't win they need to know that the process was fair.
Arbitrators need confidence in their expertise and experience coupled with the working knowledge of business and management. One must remember that the arbitrator relies on the parties to perform his or her directions and orders so that the process works smoothly.
This process requires initial planning on the part of the arbitrator with substantial input from the parties or their counsel, including deciding whether or not they are going to conform to a specific set of rules or adapt their own rules. Other forms of appropriate dispute resolution may be used. For example, it is not uncommon in certain situations to use Med/Arb.
The structure and process should evolve and everyone should know what has to be done and who will be doing it and within what time frame. Throughout this process the arbitrator must have a clear idea of the necessary personal duties and responsibilities while retaining command of the proceedings. This form of discipline and control must be evident together with hopefully, a trace of gentle humor.
The process may very well commence with correspondence sent out by the arbitrator setting out a prehearing agenda, inviting counsel for input to the agenda. This letter is generally followed by a prehearing meeting (preferably at the arbitrator's office) to decide a number of issues. The alternative is to have a conference call. By taking this approach no one is caught off guard or is subjected to "trial by ambush".
It is important for an arbitrator to anticipate, to think ahead of possible developments, and make the parties aware of events to come in a timely fashion. The proceedings should be controlled with flexibility and humanity. The arbitrator must be prepared to make clear decisions and offer directions at critical stages.
What is more, the parties must be aware of the arbitrator's objective at all times, which is to ensure that natural justice based on the law and common sense based on good commercial practice are very much evident.
I suspect that no arbitrator comes close to being a Solomon, however, certain leadership qualities are essential.
Derek Sharp in his article, Applying Management Principles to Arbitration, published in Arbitration, February 1996, listed those leadership qualities:
- Knowing and understanding what is wanted by the parties and communicating it to all involved.
- Creating a personal atmosphere, having the right appearance, body language, voice quality and formulating the appropriate package with flair.
- Demonstrating integrity, fairness, truthfulness and the confidence to act alone.
- Having the confidence to dominate encounters, meetings and hearings, being able to set the scene, begin to set the pace, keep control, manage change and stop proceedings when appropriate.
- Remaining calm in crises, absorbing stress, standing off to see the whole problem, creating order from chaos, giving simple, clear directions and knowing how to get relief from the tension after each crisis is resolved.
- Making the parties aware of where their authority, responsibility and accountability lie and ensuring that each party performs their role and focuses on the desired results.
- Maintaining discipline by establishing ground rules of behavior, being punctual and reliable and by offering a good example.
- Gauging the place and timing of action, knowing the right moment to intervene, being consistent in directions and stimulating action by the parties at the right time.
- Ensuring balanced, harmonious progress, tying up loose ends, giving clear directions on time and maintaining continuity and enthusiasm.
- Maintaining good morale - we are all human and the best results are based on trust, recognition, rewards, satisfaction and fulfilment, allowing people maximum freedom of action.
THE STANDARD CLAUSE
In order to invoke either mediation or arbitration, it is my opinion that it is in the best interest of all parties that a mediation or arbitration clause, or a clause dealing with both processes be inserted in commercial contracts where the parties wish to invoke alternative dispute resolution procedures - instead of taking their dispute to court. This involves the parties considering how they wish to resolve their disputes when a particular dispute occurs. Do they wish all disputes to go to arbitration or mediation, or do they wish some disputes to go to arbitration and mediation leaving the remainder of disputes to the court process?
I include here a copy of a standard clause which I generally use for many contracts which I draft.
If a dispute arises between the parties relating to this Agreement, or arising out of this Agreement the parties agree to use the following procedure as a condition precedent to any party pursuing other available remedies;
|(a)||A meeting shall be held promptly between the parties, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute.|
|(b)||If, within 7 days after such meeting, or such further period as is agreeable to the parties, the parties have not succeeded in negotiating a resolution of the dispute, they agree to submit the dispute to mediation and to bear equally the costs of mediation.|
|(c)||The parties will jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the British Columbia International Commercial Arbitration Centre if they have been unable to agree upon such appointment within 20 days from the conclusion of the negotiation period.|
|(d)||The parties agree to participate in good faith in the mediation and negotiations related thereto for a period of 30 days. If the parties are not successful in resolving the dispute through the mediation, then the parties agree that the dispute shall be settled by arbitration in accordance with the Commercial Arbitration Act, S.B.C. 1986 as amended. The decision of the arbitrator shall be final and binding and shall not be subject to appeal on a question of fact, law or mixed fact and law.|
The costs of mediation or arbitration shall be shared equally between the parties. Costs shall not include costs incurred by a party for representation by counsel.
Unless the parties otherwise agree, the rules of the British Columbia International Commercial Arbitration Centre shall apply.
My concise definition of mediation is the process of adjusting each party's level of expectation without suffering a loss of face. In many cases, the process deals strictly with money. On many other occasions, the process deals with the interests of the parties - not their position. There are many books available to the practitioner and to their client on mediation. They include:
- Getting to Yes, by Roger Fisher and William Ury;
- Getting Past No, by William Ury;
- Getting Ready to Negotiate, by Roger Fisher and Daniel Ertel.
Mediation is different from the adversarial litigation process. It does not involve the search for truth about the legal and factual issues in the case but rather is involved in a search for a final solution to a dispute. In order for mediation to be successful it requires not only trust in the mediator but also a commitment by the parties to resolve the dispute. Failure in either one of those factors will result in the dispute continuing.
In assessing factors to consider when selecting a mediator the following questions should be considered:
- Do you want a rights - based mediator or interest based mediator?
- What kind of mediator do you need - evaluative or neutral?
- Do you want the mediator to tell you what the outcome at trial might be?
- Is the mediator style suited to the case?
- Do you want a mediator with practical or technical experience in the area of the dispute?
- Has a mediator been involved in other disputes in the same industry?
- Will the mediator by sympathetic to your particular client?
- Does the mediator have an institutional bias - that is to say in favor of the "little guy" or the "big guy", the insured or the insurer?
The preparation for the mediation session is very important. Mediation is client, not lawyer driven and therefore the client plays a major role. Both the client and their lawyer must be fully prepared for mediation.
- Who should attend? There must be a decision maker from each party with the authority to settle at the mediation session or standing by a telephone or fax machine.
- The decision to bring in key technical people or experts.
- The formulation of strategies to deal with hot issues.
- The ability to identify the other side's important issues.
- The ability to brainstorm about settlement proposals.
- Your opening.
- Your bottom line.
- The ability to assess the best alternative to a negotiated agreement or, namely the next best process or step which a disputant would take if an agreement could not be concluded through negotiations vs. the ability to assess the worst alternative to a negotiated agreement, namely the worst process or step which a disputant would or might be forced to take if an agreement could not be concluded through negotiations.
The lawyer's role in mediation is quite different from that at trial. The lawyer is not there to be confrontational. This is not the time to object to evidence or call the other side a liar or a cheat. He or she is there to assist in resolving the dispute and to prepare the Memorandum of Agreement once that dispute has been resolved.
In any case, it is important to prepare a Mediation Brief for delivery to the mediator in sufficient time for the mediator to be able to absorb the nature of the dispute prior to entering the mediation session. I don't propose to set out all of the material necessary for the preparation of a mediation. There is sufficient material out there for your attention.
One of the important functions of the party and their lawyer is to listen. Remember, when one is talking and one is listening, only the one who is listening is learning.
HELP - NON PROFIT SERVICE PROVIDERS
We are fortunate in British Columbia to have a number of service providers to assist the parties or their counsel who are unfamiliar with the process (including those who are familiar with the process) in setting up a mediation or arbitration. I shall speak of only three such organizations, each of which are not in the profit making business.
Each of these organizations has a considerable amount of literature, together with websites, which will assist the parties and their counsel in deciding the appropriate process. I suggest that you become acquainted the three organizations - read their literature, visit their website, contact them and ask questions.
1. BCICAC. BCICAC stands for the British Columbia International Commercial Arbitration Centre located at:
P.O. Box 27, Suite 1140 - 1090 West Georgia Street,2. British Columbia Mediator Roster Society located at:
Vancouver, B.C., V6E 3V7
Peter Grove, Executive Director
British Columbia Mediator Roster Society3. British Columbia Arbitration and Mediation Institute
c/o Dispute Resolution Office
Ministry of Attorney General
P.O. Box 9280 Stn. Prov. Govt.
Victoria, B.C., V8W 9J7
Jerry McHale or Susanna Jani
1628 West 7th Avenue
Vancouver, B.C., V6J 1S5
Someone once said:
"Most of the time we don't communicate, we just take turns talking"
I invite your questions.
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Kenneth J. Glasner, Q.C.
Tel: (604) 683-4181 / Fax: (604) 683-0226
Suite 1414, Nelson Square, Box 12156, 808 Nelson Street
Vancouver, British Columbia, V6Z 2H2 Canada