The civil litigation system itself represents a significant risk factor and exposure to liability. Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation.
By using mediation and arbitration as an alternative to the court system, the small business owner can mitigate, or completely avoid, many of the risk factors found in the civil litigation system, including the leverage created by the lack of a loser pays system, the exclusion of significant evidence from the trial and the emotional (and sometimes unreasonable) conclusions reached by jurors.
This strategy primarily benefits small business owners who may be defendants in a civil action. However, the strategy also may benefit small business owners who are plaintiffs, when claims are fairly small, and when the lack of a loser pays system will preclude reimbursement of attorney's fees and related costs (see our discussion of exceptions that will allow such reimbursement).
- Mediation involves the parties hiring a mediator, who makes recommendations to the parties on a resolution of their dispute. A mediator (in contrast to an arbitrator) cannot, without consent from both parties, make a decision binding on the parties. A mediator's role is limited to bringing the two parties together to discuss the issues, acting as an intermediary in these discussions and making recommendations to the parties. For this reason, parties who are unable to resolve their dispute through mediation usually agree to proceed to arbitration.
- Arbitration is a way to resolve a dispute, in which the parties waive their rights to sue in court and, instead, agree to have their dispute decided privately, outside of the court system, by an arbitrator. After a hearing (as opposed to a trial), the arbitrator will render a decision, called an award (as opposed to a judgment) if the plaintiff prevails, and it is binding on the parties.
While state laws differ, usually the grounds upon which an appeal may be taken to a court after an arbitration decision are severely limited. Thus, it usually is best to consider that arbitration will likely be the final step in the resolution of the dispute.
Usually, a single arbitrator will hear the case, at an office if he or she is an area attorney, or at a conference room at an area hotel. The hearing is much more informal and usually much less costly than a court trial. Normally, there is no stenographer, no jury and no rules of evidence. While a trial might take one or two years to schedule, arbitration hearing usually will be scheduled in two or three months.
For these reasons, attorney's fees and related costs usually are much lower in an arbitration proceeding.
Further, voir dire, or the choosing of a jury, can be used to stack a jury with sympathetic jurors who are already inclined to side with one party. Because there is no jury in an arbitration hearing, there is no significant ability to manipulate the make-up of the body that will decide the case.
The complex rules of evidence, which can prevent significant evidence from reaching a jury, and thus may distort the outcome of a trial, simply do not apply in an arbitration hearing. The arbitrator will hear and weigh all of the relevant evidence and, thus, render a much more reasonable decision than would a jury prevented from hearing important pieces of evidence.
The consensual nature of the agreement requires the execution of mediation and arbitration clause by all parties.