Working it out: using arbitration and mediation to reduce litigation costs.

If you were given a week to design a process for resolving business disputes, very few business people would think up what is now the civil jury system. Business people, more than any other group, understand the pain, delay disruption, expense and angst that litigation causes.

A growing number of business disputes are being directed out of the courts and into private mediation and arbitration. Cases that might have been tied up in litigation for years are being hashed out instead through one of the many companies or individuals that now specialize in alternative dispute resolution.

Chevron, Bank of America and almost every other major corporation are saving money with arbitration and mediation. Deere & Co., for example, reported 20 of 36 potential litigation matters resolved by using ADR. The Federal Deposit Insurance Corp. reported saving $3 million in legal costs by sending cases to mediation. An environmental case in Northern California was recently mediated to a successful conclusion at a cost of 1% of the estimated $11 million it would have cost to arbitrate the matter. These are just a few examples of the cost savings that can be realized through alternative dispute resolution.

ADR embraces a wide range of dispute resolution techniques that provide an alternative to cumbersome litigation through the overburdened civil courts. With 90% to 95% success rate, the use of ADR is a very effective way to significantly reduce litigation costs in any business.

WHAT IS ALTERNATIVE DISPUTE RESOLUTION?

Although the vast majority of cases settle before a full trial, many cases do not settle until a trial is imminent. At that point, disputants have usually lost a lot of money and gained a lot of stress. Parties who are at odds with each other can use a variety of alternative dispute approaches. Some of these processes are binding and some are not, depending on the parties' agreement.

Mediation: The parties use a neutral third party to help them negotiate a voluntary settlement. A mediator does not impose his or her will or judgment on the parties. The result of successful mediation may be incorporated in a written agreement and is enforceable as any other contract, or it may be submitted to the court as an agreed order. Mediation is successful about 80% to 85% of the time.

Binding arbitration: A neutral third party renders a decision that is final and binding on the parties. Typically, the parties agree contractually to arbitrate, either prior to or after a dispute arises. Arbitration involves rules of evidence and procedures that are somewhat different from those in a conventional trial.

Pro tem trial: This process is most like a civil trial. A so-called special master or pro tem judge functions as an extension of the court itself. Special masters are used for exceptional cases that are very complex and involve technical issues. Pro tem judges are named when the disputing parties agree to waive a jury trial in favor of an expedited private trial.

These and other ADR processes can be combined, sequenced, limited or modified to fit the needs of a particular case. For example, the parties may agree first to mediate, and then, if mediation is unsuccessful, to arbitrate, to conduct a mini-trial or a summary jury trial, or to proceed to binding arbitration or trial by a special judge. The parties may also agree to limit their financial exposure or recovery by specifying a high or low dollar limit on the decision or award.

WHEN SHOULD ADR BE CONSIDERED?

Almost all civil cases involving money or property can be settled by an ADR procedure. There are, however, some cases in which ADR may not work. Litigation may be better for a class action involving many plaintiffs, where one of the parties wants to set a legal precedent or where a plaintiff expects a jury to award punitive damages. Two other factors to consider are that parties to an alternative dispute resolution have very limited rights to demand discovery in the form of depositions. And, parties generally can't appeal a judgment in a binding arbitration the way that a judgment at a trial can appealed to a higher court.

Except for the few circumstances where ADR may be inappropriate, the ADR process can be used at any point in a dispute -- even in the course of an appeal. As a general rule, ADR should be considered as soon as both sides have enough information to make a realistic evaluation of the case. Sometimes this information exists at the time the dispute arises; at other times, the parties need to conduct some discovery before making an accurate settlement evaluation.

WHAT IS AN ADR CLAUSE?

Many contracts include clauses which bind the parties to arbitrate their disputes. Because of the potential cost savings many businesses like General Mills commonly use ADR clauses in most of their contracts and purchase orders. The sophisticated use of these clauses is an increasing part of the business lawyer's practice when contracts are drafted.

IS ADR CONFIDENTIAL?

In California, all statements made and documents used in an ADR process are treated as confidential and protected against disclosure, unless the information is otherwise discoverable and admissible in a court proceeding. California law also provides that third-party neutrals who facilitate an ADR process will never disclose to anyone any information obtained during the proceeding.

DO YOU NEED A LAWYER FOR ADR?

Although you do not need to be represented by a lawyer in a mediation or arbitration, that decision will depend on many factors including the sophistication of the parties and the type and complexity of the dispute. ADR is not designed as process to remove the lawyer. It is designed to make your lawyer more effective and less burdened by unnecessary procedure.

WHAT DOES ADR COST?

The cost of an ADR process usually depends on the nature and complexity of the dispute, the number of parties involved, and the time required to complete the process. There are many different providers of ADR services, and their fees vary according to the qualifications of their personnel, the level of services provided, and the type of facilities made available. Fees will also vary based on whether the arbitrator or mediator is a retired judge or an expert in a particular area of business or law.

John J. Welsh, is general counsel of JAMS/Endispute, a private arbitration and mediation service with 12 offices that currently handle about 1,000 cases a month in California. Welsh is also a mediator specializing in business and commercial disputes.