EXECUTI VE BRIEFING
Stephen L. Hayford
S ince the beginning of the Repub-
lic, business decision-makers
have railed against the legal sys-
t e m - i t s complexities, its costs, the
diversion of resources, and the general
sense of helplessness they feel w h e n
confronted with the lawsuits that inevi-
tably arise w h e n relationships go sour
or untoward events occur. At the core
of this response is the frustration execu-
tives feel at losing control over their
fate and the Dte of the firms they man-
age w h e n thrust into the bowels of the
civil justice system.
Until very recently, w h e n legal
disputes arose in the business commu-
nity, executives had little real choice but
to retain counsel and passively submit
to a bewildering system, where out-
comes are determined by rules they
often do not understand. That is no
longer true. The courts' recent enthusi-
astic embrace of alternative dispute
resolution (ADR) methods presents a
unique opportunity to seize the initia-
tive and reassert control over controver-
sies that until the last decade could only
be left to the alien and arcane world of
lawyers, judges, and juries.
A new, proactive strategy can take
full advantage of this changed legal
landscape of civil litigation. Of course,
this does not mean that lawyers, judges,
and the courts are no longer necessary.
The point is that today's business deci-
sion-makers no longer need to abrogate
responsibility for the outcomes of legal
controversies and passively await the
"roll of dice" inherent in the civil litiga-
tion process.
2 Business Horizons / January.-February 2000
ALTERNATIVEDISPUTERESOLUTION
Arbitrator and Associate Professor
of Business Law,
Kelley School of Business,
Indiana University
The Changed Playing Field
o f Civil Litigation
Until the early 1980s, attempts by busi-
ness firms to avoid litigation with part-
ners, customers, suppliers, employees,
and the like were frustrated by a long-
standing hostility on the part of the
courts toward any devices that infringed
on their jurisdiction. The idea that every
Ombuds, m and
person had an inalienable right to his
"day in court" held sway, and there was
no real choice but to submit to the
vagaries of traditional litigation. All of
that began to change w h e n the courts,
especially the U.S. Supreme Court,
came to the realization that the civil
justice system was incapable of han-
dling the burgeoning numbers of law-
suits resulting from the growing w e b of
government regulation and the increas-
ingly litigious nature of American soci-
ety.
The most significant development
in this regard was a series of opinions
from the U.S. Supreme Court beginning
in 1983. The Court has broadly sanc-
tioned contractual agreements to arbi-
trate commercial disputes to a final and
binding outcome. The end result of that
new b o d y of case law, interpreting and
giving broad effect to the Federal Arbi-
tration Act, is to place great incentive
on designing and implementing binding
arbitration provisions in commercial
contracts between business firms, em-
ployers and employees, franchisers and
franchisees, and the like. At the same
time, clogged civil dockets have pro-
pelled the federal and state courts to
e n c o u r a g e - - a n d in m a n y jurisdictions,
to m a n d a t e - - t h a t civil controversies be
mediated before being submitted to the
courts.
These developments have caused a
revolution in the practice of commercial
law. Savvy business lawyers have b e e n
obliged to refocus on the development
of an ADR practice, and have b e c o m e
acclimated to a new world in which the
lawyers w h o "lawyer least," "lawyer
best." This radical change in the mind-
set of the courts and the practicing bar
c o m m a n d s that the business clients they
serve also reorient themselves. The key
to that reorientation is a shift in matters
involving potential litigation from a
passive to an active mindset on the part
of the firms and the executives whose
interests are at play in such matters.
A New Way o f Thinking About
Resolving Legal Disputes
This new, active m o d e of confronting
the threat of litigation must occur on
three levels. First comes an appreciation
of the importance of effective, compe-
tent efforts at negotiation as the means
of avoiding the b r e a k d o w n s that lead to
litigation. Second is the realization that
the business client should play a central
role in designing and implementing its
ADR mechanisms. This is not a matter
to be left to the sole discretion of legal
counsel. Finally comes the realization
that the n e w attitude of the judiciary
toward the use of ADR devices presents
manifold opportunities for the execu-
tive w h o is prepared to play an active
role in those processes.
The first dynamic is reflected in the
recent emphasis in the curricula of pro-
gressive business schools and executive
education programs on negotiation and
conflict m a n a g e m e n t skills. Today, well-
trained business executives must have a
full understanding of their negotiating
styles, an ability to diagnose w h e n ne-
gotiations are called for, a grasp of the
basic elements of the negotiating pro-
cess and its several constituent subpro-
cesses, and an appreciation of h o w to
exercise p o w e r wisely and thoughtfully.
The attitude must be: Negotiate first;
litigate only as a last resort.
T h e T h r e e Main ADR D e v i c e s
Of course, even the most competent
negotiators cannot expect to settle ev-
er} legal dispute in which they find
themselves entangled. Consequently,
the effective conflict manager must give
serious t h o u g h t - - b e f o r e controversies
arise--as to how' those matters can be
resolved other than by litigation in a
court of law.
Despite the m a n y hybrid forms of
ADR methods, only three are really
useful enough to warrant consideration.
In declining order of the extent to which
they facilitate the retention of party
control over the outcomes achieved,
those devices are (1) the ombuds, (2)
mediation, and (3) arbitration. It is im-
perative for corporate executives to
b e c o m e familiar with the workings of
each of these techniques and take a
primary, "hands-on" role in ensuring
that they are fashioned to achieve a
go~d fit for the firm, its industry, and
the particular relationship (with an em-
ployer, a customer, a supplier, a credi-
tor. a debtor, and so on) at play.
T h e O m b u d s Device. The char-
ter of a firm's o m b u d s is typically lim-
ited to the disputes that arise between
employees and the firm (as employer),
Exc'cutive Briefing
although it can be extended to embrace
customer- and supplier-related matters.
Typically a m e m b e r of u p p e r manage-
ment with strong communication skills
w h o is respected by both the rank and
file and the m a n a g e m e n t corps, the
o m b u d s is granted broad license to
hear and facilitate the resolution of all
intraorganizational disputes within the
range of his or her authority. His or her
role is to facilitate negotiations between
the complaining party and the respon-
sible m a n a g e m e n t official whose ac-
tions, or w h o s e subordinates' actions,
generated the complaint.
The o m b u d s must be fully trained
in negotiations and dispute resolution
techniques and be willing to take bold
action w h e n called for in the course of
carrying out his duties. The attributes of
this device are several. First, it provides
a confidential, typically low-key ap-
proach to dispute resolution that keeps
conflicts "in the family." Second, it en-
sures early intervention by a respected
m e m b e r of the organization w h o is
charged with looking out for the inter-
ests of all involved parties. Properly
effected, the o m b u d s mechanism can
do much to enhance the perception
that the c o m p a n y is concerned and
eager to address the problems of its
employees by providing them with an
accessible, nonthreatening avenue for
seeking redress when they believe they
have been wronged.
On the downside, it is often difficult
to identify an individual from the higher
echelons w h o is both capable of and
willing to assume the ombuds mantle. It
takes an exceptional person to adroitly
handle the type of delicate, often high-
stakes controversies that are the om-
buds's raison dFtre. Selecting s o m e o n e
w h o is not up to the demanding tasks
inherent in the position is a recipe for
disaster.
M e d i a t i o n . Unlike the o m b u d s
device, mediation is amenable to use in
the full range of a firm's contract-based
relationships. It involves the use of a
neutral third person, not a party (di-
rectly or indirectly) to the underlying
contract, w h o is selected by the parties
and given the role of facilitating negotia-
tions in circumstances where the parties
have been unable to achieve settlement
on their own. The mediator's iob is to
ensure that the parties communicate
clearly with one another, ameliorating
the problems caused by emotion, mis-
trust, perceptual errors, and the myriad
other factors that can distort the mes-
sages adversaries send in negotiations.
Moreover, a savvy mediator can
k e e p the parties on mission, focused on
the interests that p r o m p t e d the dispute
rather than the positions on the issues
that divide them. He or she can ease
the often difficult task of information-
sharing and tacitly encourage the par-
ties to take the risks invariably needed
to achieve settlement in tough disputes.
In doing so, the effective mediator gives
the parties the opportunity to shift the
exchanges between them from the dis-
tributive bargaining Cwin-lose") focus
that typically characterizes pretrial ne-
gotiations to an integrative Cwin-win")
problem-solving mode.
The keys to the effective use of
mediation are several. First, the con-
tracting parties must be firmly commit-
ted to the process. Mediation only
works when the parties employing it
are willing to go all out in the attempt
to achieve settlement. Second, the me-
diator must be selected carefully, with
an eye toward the critical attributes of
neutrality, subject matter and process
expertise, and previous track record.
Not just anyone will make a good me-
d i a t o r - n o t even a good lawyer or re-
tired judge. Like most other important
dimensions of the wise use of ADR
methods, the parties themselves must
play an active role in selecting the me-
diator. It is not a decision that should
be delegated entirely to legal counsel.
The principal upsides of mediation
center on the degree of control that is
retained over the outcomes. Because
the mediator has no authority to impose
a settlement on the parties, the latter are
guaranteed that the resolution achieved
will be acceptable to them both. More-
over, mediation enables them to attack
the problems separating them in a shel-
tered context, not open to public scru-
tiny. If unsuccessf\d, the process leaves
them back where they started, none the
worse for the effort. The only real
downside of mediation is the lack of
finality inherent in a volunta W, concilia-
tion-based procedure.
A r b i t r a t i o n . Arbitration is the
final w e a p o n in the ADR arsenal. It
provides a lower-cost, less complex,
and more expeditious alternative to
traditional litigation for adjudicating
3
business/business, employer/employee,
and business/consumer disputes to a
binding result. The arbitration process
minimizes pre-hearing machinations
with regard to discovery, motion prac-
tice, and the other preliminary skir-
mishes that extend the time, expense,
and consternation of court litigation. In
exchange, the parties to a contractual
binding arbitration provision agree to
accept the risk of being stuck with an
unacceptable decision. And the courts
are reticent to overturn the awards of
arbitrators that the parties have agreed,
a priori, to accept in binding resolution
of the disputes between them.
Arbitration sounds like a great idea
in the abstract. But w h e n confronted
with the prospect of delegating to a
mutually selected outsider the authority
to impose binding resolution of "bet
your business" (or career) disputes,
executives often become a little squea-
mish. Such a reaction is appropriate. It
serves to crystallize the truism that no
sane executive would submit to such a
one-shot alternative to traditional litiga-
tion--devoid of much of the due pro-
cess and virtually all of the appeal
rights inherent in a court trial without
being fully informed of the realities of
the process.
Careful formulation of the arbitra-
tion provision in the contract is essen-
tial. Again, this is not a task that should
be left solely to legal counsel. The temp-
tation to resort to boilerplate arbitration
provisions must be resisted. Instead,
working in tandem with legal counsel,
executives must strive to become famil-
4 Business Horizons /January-February 2000
iar with the various alternative forms of
arbitration tribunal (single neutral, three
neutrals, tripartite) and educate them-
selves about the hallmarks of acceptable
arbitrators. They must also make clear
decisions on the extent of pre-hearing
discovery, due process guarantees, ap-
peal rights, and the like necessary to
balance the downside of the increased
risk of "boneheaded" arbitration awards
that are virtually immune from judicial
review. Finally, like mediation, execu-
tives must be prepared to take an active
role in selecting the neutral arbitrator.
he advent of alternative dispute
T resolution presents both a tre-
mendous opportunity and a
significant challenge to corporate deci-
sion-makers. The opportunity lies in the
chance to exercise substantial control
over the outcome w h e n soured busi-
ness deals or relationships lead to the
threat of lawsuits.
The three ADR techniques de-
scribed above, w h e n used wisely by
bold, adequately trained executives, can
greatly reduce the cost, time to resolu-
tion, and consternation typically experi-
enced when litigation looms. Instead of
passively submitting to the uncertainty
inherent in permitting strangers to de-
cide your fate and the fate of your firm,
these ADR methods largely allow you
to determine your own destiny w h e n
legal controversies arise. It is difficult to
overestimate the value of that.
The business community has a
choice. It must decide whether to em-
brace this new way of thinking about
dealing with legal disputes, or ignore it.
No doubt, the former course of action
will require some retooling---overcom-
ing the fear of the "bogeyman" the civil
justice system instills in most managers,
learning the basics of ADR, redefining
the respective roles of the business
client and counsel by taking responsi-
bility for the basic fairness and work-
ability of the ADR procedures adopted,
and so forth. On balance, however, the
downsides of not fully engaging this
new p h e n o m e n o n and failing to take
full advantage of the opportunity it
presents for maximizing the degree of
control over the legal dimensions of
important matters far outweigh the
effort involved in mastering this new
skill set.
The civil justice system is changing
in momentous ways. ADR is in full
bloom, its continued ascendancy virtu-
ally assured. Thoughtful executives
cannot pretend that the old ways of
handling legal disputes still bind and
limit them. In today's fast-moving
economy, few firms can afford the dis-
traction from their core activities that
invariably arise when lawsuits are filed.
Instead of being content with the status
quo, executives must act to place them-
selves and their firms squarely in the
mainstream of the ADR movement. By
making appropriate use of one, two, or
all three of these techniques, they can
take most of the unpredictability out of
legal disputes and maximize the degree
of control they wield over their fate and
the fate of their firms. Failure to do so
is inexcusable. O