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A good settlement is better than a good law suit

Abraham Lincoln

Introduction

Disputes – whether they be with employees, clients or contractors, can not only consume a significant amount of time and resource (and a great deal of nervous energy) but are expensive ! With lawyers fees often running into thousands and thousands of pounds (and sometimes exceeding the value of the claim!) and an increase in contractual claims expected as a consequence of Covid 19, what are the alternatives to going to court ?

Litigation

The process of going to court is called litigation. Employment disputes, for example, have to be heard before a specialist court (known as an Employment Tribunal), whilst others will either go to the County or to the High Court, depending on the value and complexity of the claim.

As a lawyer, it may come as a surprise that I have always taken the view that going to court is a last resort. The litigation process takes time (sometimes years!), will inevitably drain resources (both financial and human) and, particularly with SMEs, will frequently result in a significant distraction from running the business.

So what are the alternatives to going to court?

Whilst there are many forms of Alternative Dispute Resolution (or ADR), the most common are arbitration and mediation.

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ADR is far quicker and cheaper than going to court and what’s more, it’s confidential

Arbitration

Arbitration commonly arises due to a clause in a contract. Typically, the clause will provide that, if a dispute arises, then the matter will have to be referred to an arbitrator for a decision – such decision being final and legally binding on the parties. Arbitration clauses are already common place in many contracts – for example, in building contracts, medical (GP) and business partnership agreements and in insurance policies.

If an arbitration clause is contained in a contract, then the parties are contractually required to follow it. They cannot go to court instead and any attempt to do so will be rejected by the courts (who are pro-arbitration).

The arbitration clause will either allow the parties to jointly agree upon and appoint an arbitrator (with a mechanism for resolving a dispute if they cannot do so !) or will authorise a third party (for example, a relevant trade or professional association) to make an appointment on their behalf.

Many trade associations provide arbitration services for a party that has contracted on one of their standard form contracts. In the agri-commodities sector, for example, over 80% of world trade in grains is contracted under standard form contracts produced by The Grain and Feed Trade Association Ltd (Gafta). These contracts incorporate the relevant Gafta arbitration Rules which, by entering into the contract, the parties are deemed to have read and agreed to.

If a contract does not contain an arbitration clause, then the parties are still free to arbitrate if they both wish to do so.

In terms of the format of an arbitration, the arbitrator will usually determine the procedure which the parties will follow or, where relevant, follow the relevant arbitration rules of the trade association in question.

Either way, the arbitration will be subject to the Arbitration Act 1996, which provides that the overriding objective of an arbitration is the fair resolution of a dispute by an impartial arbitrator without unnecessary delay or expense.

The arbitration procedure is beyond the scope of this note. However, generally, it will involve both parties having the right to put forward their respective arguments, in writing. The Claimant will provide a Submission, the Defendant, a Defence. Sometimes, the Claimant will be given a right of reply to any new issues raised in the Defence. All documents will be carefully considered by the arbitrator.

Sometimes, an arbitration will be on paper only (with the arbitrator basing his decision on the documentation provided). Sometimes, the parties will appear before the arbitrator and put forward their arguments (rather like a court hearing).

A key advantage of arbitration, when compared to going to court, is that arbitration is entirely confidential and any hearing will be in private. In addition, the procedure is more flexible (court rules can be very strict) and, overall, arbitration is far quicker and much cheaper than court litigation.

The decision of an arbitrator is usually final. That is to say, there can be no appeal to the courts, save for very exceptional circumstances (for example, proven bias on the part of the arbitrator or an error of law). Even then, based on court statistics, the chances of actually overturning an arbitration Award are very rare indeed. Arbitration should, therefore, be regarded as final and binding and an end to the dispute.

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80% of mediations result in a settlement – a very high success rate and far quicker and cheaper than court or even arbitration

Mediation

Mediation, however, is very different and, unlike arbitration (which is a contractual obligation), is entirely voluntary.

The role of a mediator is to try and encourage the parties to reach a settlement solution which they are both comfortable with. A mediator is, thus, a facilitator of a settlement. This is very different from the role of an arbitrator who, in effect, acts as a judge and whose decision is final and contractually binding on the parties.

In court litigation, mediation is actively encouraged by judges and a party who unreasonably refuses to mediate can be penalised in terms of legal costs in the event of the case proceeding to a court trial.

Sometimes, a commercial contract will contain a dispute resolution clause. This may require the parties to escalate a complaint to a named individual, failing which there may be a requirement to appoint an independent mediator to assist in the resolution of the dispute. If Resolution is not possible, then, depending on the wording of the contract, the dispute may either be referred to arbitration or to the courts.

Mediation is a confidential process. The mediator is neutral and his role is to encourage a constructive dialogue between the parties. Anything said in mediation is ‘without prejudice’ and, as such, if the mediation breaks down, cannot be later used in court proceedings.

As mediation is voluntary a party may walk away at any time (although, in practice, this is rare).

In a typical mediation, the mediator will invite the parties to submit a short document, setting out their position, in advance of the mediation hearing. On the day of the hearing itself, the parties will, initially, all meet in one room for a general introduction, after which, they will adjourn to separate rooms. The mediator will then spend time talking to the parties, shuttling between the rooms and, if needs be, bringing the parties together. If the parties agree on a settlement, then the mediator will, in conjunction with the parties, draw up a settlement agreement which the parties will then sign. The agreement is contractually binding.

It has been estimated that, approximately, 80% of mediations result in a settlement – a very high success rate and far quicker, and cheaper, than going to court or, indeed, to arbitration ! The settlement itself can not only refer to the resolution of the dispute in question, but may also contain additional provisions – such as the conduct of future business, a protocol for dealing with any disputes which may arise or even the promise of further business.

Mediation can be used in a variety of ways – for example, to independently resolve issues between members of staff and, more commonly, the resolution of commercial contract disputes.

Jonathan Waters My Inhouse Lawyer

Written by Jonathan Waters
Principal & Employment and Dispute Resolution Specialist at My Inhouse Lawyer

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