BUSINESS DIVORCES:  Choice of Forum — Court and Arbitration

Business owners engaged in a severe dispute among themselves can resolve their problem in one or more of several forums:

      • Court
      • Arbitration
      • Mediation
      • Negotiation

In this blog post, we will look at some of the concerns with using a court or arbitration to resolve a business divorce.

Trial Court

Some business owners, or their attorneys, think that every conflict must be resolved in front of a judge or jury.   In general, however, initiating a lawsuit is not the best first route to pursue.

Filing a lawsuit before trying out an alternate method of dispute resolution usually backfires for several reasons:

    • It raises the temperature of the dispute drastically, often locking the opposing sides into mutually hostile positions and reducing their receptiveness to considering compromise.  
    • It may motivate third parties — for example, lenders, landlords, rating agencies, suppliers and customers — to become involved in the dispute or may adversely affect their relationships with the business or its owners.
    • It surrenders control over resolving the conflict to the decisionmaking and judgment of a third party.
    • It immediately increases the cost, expense, and timeline for resolution.
    • It is, by default, a public process.
    • It may lack finality, as one or both parties can appeal the trial court decision.

On the other hand, it is almost always prudent to make arrangements for engaging a litigation lawyer at an early stage of the dispute process.  First, it’s important to be prepared to defend a lawsuit if the other side elects to go to court.  Second, it can be conducive to settlement discussions to let the opposing party know that you have a litigation attorney ready if other resolution efforts break down.

Arbitration

Arbitration can eliminate or at least mitigate the access of third parties and the general public to the existence of the dispute, increasing the chance that a private argument remains private while the different sides try to resolve it.  Arbitration also brings finality to the conflict, because the grounds for a court to reverse or modify an arbitrator’s decision are few and difficult to establish.

Arbitration, however, shares several of the drawbacks of going to court, including comparable costs, expenses and time delays and ceding control of the outcome to the arbitrator.

Also, the procedural process in arbitration may vary widely from the procedural rules a court follows.  The arbitrator may give considerable weight to evidence a court would quickly rule inadmissible or allow a recalcitrant party to engage in conduct a judge would sanction.  Subjective procedures like these may benefit one party to the detriment of the other or may leave both parties scrambling to figure out how the arbitrator will referee their conflict.

Arbitrators usually possess broad discretion in fashioning their award. An arbitrator may choose not to grant the prevailing party the remedy it wants, but a remedy the arbitrator deems fair and appropriate. 

In the next blog post, we will look at the very different resolution models of mediation and negotiation.

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