We Can Work It Out

Got a business dispute? Arbitration and mediation can help you resolve the situation without going to court.

By Robert L. Reid

Robert L. Reid is managing editor of Scrap.

Let’s say you’re shipping scrap overseas through a broker. You invite the broker to watch you load the material into shipping containers, but he doesn’t show up. So you take photographs of the material to protect yourself.

The material is shipped. Time passes. Then you get the bad news: The overseas buyer has rejected the shipment, claiming it wasn’t the right material. The broker wants you to pay him damages. He even has videos of the material to prove his case.

Sounds like you’re headed for a lawsuit, doesn’t it?

Ordinarily, yes. But there are alternatives—specifically, alternative dispute resolution (ADR) methods such as arbitration and mediation.

Arbitration is a “private, informal process” in which parties agree, in writing, to submit a dispute to one or more impartial persons—called arbitrators—who then examine the evidence provided and render a “final and binding” decision, explains the American Arbitration Association (New York City), a nonprofit group that provides dispute resolution services. The arbitrated decision, which can find one party entirely at fault or apportion the responsibility among parties, is often enforceable through the courts should someone refuse to accept the results.

Mediation is similar to arbitration, except that the ultimate decision is reached by the disputing parties themselves, with a neutral mediator working mainly to help each side understand the other’s position and reach an agreement. The agreement, however, might not be binding and could be difficult or impossible to enforce.

Both methods have become increasingly popular because they offer a faster, cheaper, and far less public setting for resolving business disputes than the courts, experts say.

What’s more, ADR can sometimes be the only practical alternative for businesses. The combination of an increasingly litigious society with get-tough approaches to crime means that many courts are swamped with criminal trials, which take priority over civil disputes. As a result, these courts face backlogs of two or more years in scheduling civil trials. In one New York jurisdiction, the courts have even mandated some form of ADR for all newly filed tort and contract cases. 

And since about 95 percent of civil cases settle out of court anyway, arbitration and mediation often just help disputing businesses reach a settlement sooner, notes Scott Carfello, regional vice president for the American Arbitration Association’s Chicago office. In fact, he says, since arbitration clauses in contracts often preclude either party from going straight to court, “it forces you to talk.”

Saving Time and Money

Though individual companies can pursue ADR on their own—there are many lawyers and consultants available to help—sometimes an entire industry will adopt the approach. The American Arbitration Association, for example, provides ADR services throughout the construction industry. A few years ago, it also established an arbitration program at the Chicago   Board of Trade when the exchange started trading recyclable glass, plastics, and paper, Carfello notes.

Likewise, ReMA has a long-standing arbitration program that evolved out of an earlier mediation-based approach and still heavily involves the disputing parties in the process. Tom Tyler, ISRI’s associate counsel/director of state and local programs, coordinates the scrap arbitration effort, which handles roughly one complete arbitration case a year.

But requests for information on the program arrive every few weeks and often lead to parties settling their differences without going through a full arbitration.

Proposing ReMA arbitration—which is available so long as one of the parties is an ReMA member and both agree to be bound by the arbitration decision—“is a way to let a party with whom you have a dispute know that you’re very serious about resolving it and you’re willing to take additional steps,” Tyler explains. (For details on ISRI’s arbitration program, see “Getting Arbitrated” above.)

Tyler says ReMA members often include language in their contracts stating that all disputes will be settled through the ReMA arbitration process. That way, even if the other party does try to sue, the courts will automatically “bounce” the dispute into the ReMA program.

Carfello offers similar advice, suggesting that companies include provisions for both mediation and arbitration in all their contracts. ADR agreements “can be crafted to entail pretty much anything the parties want,” he says. This ranges from a fairly loose mediation in which either side can walk away whenever it likes to a binding arbitration that functions “just like a full-blown federal trial, with the arbitrator handling all matters of evidence just like a federal judge would.”

Likewise, a fairly simple dispute involving a small amount of money could be handled with an exchange of letters, Tyler notes. At the other extreme, ISRI’s rules for arbitration spell out procedures involving affidavits and cross-examinations, testifying under oath, and other courtroom-style approaches—if that’s what both parties desire.

But even under a highly involved arbitration, the process is likely to move faster and be cheaper than a real trial, Carfello notes. For one reason, the parties in an arbitration or mediation don’t need to hire lawyers (though some do anyway).

Carfello, an attorney himself, explains that lawyers “have a tendency to burden the process with discovery”—such as depositions and document requests—that take time to prepare and add to the cost of a lawsuit. But in ADR situations, the parties can control—and limit—the gathering and introduction of evidence. Each side can simply agree to ground rules such as allowing only three depositions each or a set number of document requests, Carfello says. After that, any further depositions or document requests must be approved by the arbitrator.

Experience Wanted

Equally important is the fact that the arbitrators or mediators can be industry experts. At the American Arbitration Association, for instance, the group maintains a list of potential arbitrators and mediators that includes retired judges and trial attorneys, plus other “neutrals” who are leaders in their industry or profession. For the Chicago Board of Trade’s arbitration program, candidates for the recycling arbitration panel needed at least five years of experience in one of the following areas: buying or selling recovered materials; operating materials processing facilities or recycling-based manufacturing facilities; or providing marketing, business development, or other relevant technical assistance to recycling industries and/or municipal recycling programs.

Using industry leaders boosts the credibility of arbitrated decisions, Carfello says, since “people in an industry are going to respect people whose names they recognize as experts.”

Under ISRI’s program, the parties must choose between having their dispute heard by either a single arbitrator or a three-person panel—and both sides help select the arbitrator or panel.

“Both sides get to review a list of all available ReMA arbitrators,” Tyler says, and they can disqualify anyone with whom they have some conflict or whom they feel won’t consider the case objectively. The arbitrators—all volunteers—must be ReMA members and must disclose whether they’ve had any prior business dealings with either of the disputing parties (such business doesn’t automatically disqualify them unless one of the parties objects).

Industry experience is what makes the arbitrators preferable to judges, Tyler stresses. Going to court often means having to “educate the court about the scrap recycling industry,” he says. “Whereas with arbitration, if you have a dispute in scrap plastics, chances are you’ll seek arbitrators who deal in plastics” who will already be familiar with things like differences in specifications, common inspection problems, and overall general industry practices.

Irv Ehrenhaus, president of Glenrich Metals International Inc. (Forest Hills, N.Y.) and twice an ReMA arbitrator, agrees. “Common practice in our industry might not win you the case in a court of law,” he says. “But in arbitration we understand the situation—for instance, what we consider ‘reasonable time’ for making a claim might be different in a court of law.” difficult case arises, Tyler says. ReMA gives arbitrators an eight-page list of arbitration rules, a four-page guide for carrying out their duties, and assistance with logistics and interpreting the rules.

At the American Arbitration Association, Chicago Board of Trade arbitrators were trained in dispute management and resolution techniques, as well as the association’s code of ethics.

Arbitration Lessons

One of the cases Irv Ehrenhaus helped arbitrate for ReMA was the photographed and videotaped shipment mentioned earlier. As he recalls, the photos taken by the seller clearly showed that he had packed up the correct material. The videotape of the shipment after it arrived, however, didn’t even seem to be the same material. Moreover, the videotape only showed the shipment after it had already been opened—there was no footage of the sealed container arriving intact and being opened by any kind of inspector.

And while it’s possible that something happened to the shipment after it arrived overseas, the panel of three arbitrators said it was the broker’s responsibility—not the seller’s—to make sure the material arrived sealed and was opened under the proper conditions, Tyler notes. Thus, the arbitrators decided 100 percent in favor of the seller. “They shipped what they said they were going to ship,” Ehrenhaus says.

In his other arbitration, also an export case, the dispute involved a shipment that supposedly didn’t match the sample the buyer had been shown. But when the arbitrators asked the buyer to produce the sample, he was unable to do so. As a result, the arbitrators found in favor of the seller, but this time only for 70 percent of the disputed amount. The buyer was also considered to be partially correct, Ehrenhaus notes.

Such apportionments are part of arbitration’s appeal, Tyler says. “The award by a court might be all or nothing—that might be its only option—whereas arbitrators can divide up responsibility and rule as they see fit,” he notes.

Michael Schiavone, vice president of Metal Management Inc.’s facility in North Haven, Conn., served on the photograph/ videotape case with Ehrenhaus and one other involving a buyer who, months after the fact, tried to knock off a “substantial portion” of the payment because he claimed the disputed material hadn’t been what he’d ordered. But when the seller asked for the shipment back, the buyer said he’d already processed it. Moreover, “he didn’t have pictures or anything,” Schiavone says. “It was all based on his saying he saw [the material] and it was no good.”

Not surprisingly, the arbitrators ruled for the seller.

Both Schiavone and Ehrenhaus say their experiences as arbitrators have made them much more careful in their own business dealings.

“In both arbitrations I was in, that situation could have happened to me,” Ehrenhaus notes, adding that both cases involved material that didn’t have an ReMA specification. “So I learned for the future how to protect myself, not to make the same mistakes these people made.”

Schiavone now photographs all material being shipped out and any incoming shipments that might be disputed. And if a problems crops up, “We drop everything and call the customer immediately,” he says. Being an arbitrator also helps him write better contracts, he adds, noting that he no longer uses “imprecise terms like ‘usual’ or ‘shipment as usual.’”

A Private Matter

A key benefit of arbitration or mediation is that the proceedings are kept private, whereas a court case automatically creates a public record. There won’t even be minutes taken during an arbitration unless one party requests it. Such privacy is one of the reasons why arbitration can help preserve the business relationship between two companies while “going to court tends to break down relationships,” Tyler says.

Carfello makes a similar point, especially stressing the benefits of mediation—since the two parties work out their own agreement—when the dispute is between companies with a long-standing history of doing business together. “If you have a supplier and a vendor who’ve worked together for years and now they have a dispute, most times it’s best for them to mediate that, to talk it out,” he notes. “If they end up in court, that relationship’s going to die, they’re going to spend a lot of money, and there will be a lot of hard feelings over a course of years—and then they’ll probably end up settling anyway.”

In the end of every arbitration or mediation, there’s usually someone who has to pay out money or who doesn’t get money they were expecting, but a key goal of the process is to avoid the bitter recriminations that can follow a court edict.

“A party in an arbitration might be unhappy [with the ultimate decision], but they’re likely to be satisfied that the arbitrators looked at the evidence carefully and made a reasonable decision,” Tyler says.

Ehrenhaus echoes that thought, noting that he’s still on friendly terms with the parties involved in the cases he arbitrated. “They felt, I guess, that we made a fair decision,” he concludes.

Getting Arbitrated

The first steps in ISRI’s arbitration program involve filling out a form and writing a check. In addition to asking for information on the controversy and the desired remedy, the arbitration request form emphasizes that all parties will observe ISRI’s rules of arbitration and abide by the arbitrators’ decision. The check, which must be submitted with the form, covers a one-time fee of $500, plus a $500 deposit per arbitrator requested to help cover each arbitrator’s expenses, such as travel and lodging. A portion of the deposit can be refunded if expenses remain low, says Tom Tyler, ISRI’s associate counsel/director of state and local programs.

Both parties must fill out the form and send in the money. If one side fails to follow through, ReMA won’t proceed with the arbitration, Tyler notes. If both do submit their forms and checks, then they have to agree on arbitrators, which can take several months in the most contentious cases.

A fairly straightforward case can be completely resolved in a few months, he notes, while others might take much longer if the parties are “disagreeing on every single issue.”

The parties decide with the arbitrators what types of evidence to consider—for instance, photographs and sworn statements—as well as the venue for the case. 

Arbitrations can be handled entirely through the mail, over the phone, or in face-to-face meetings such as in an office or hotel. To help minimize travel expenses, arbitrations can be timed to coincide with an ReMA event that both parties and the arbitrators were attending anyway.

One arbitrator who has handled cases in person and over the phone thinks both approaches work well, though he prefers to arbitrate in person because then you can “look at the guy and know if he’s lying.” (Though ISRI’s rules urge participants to waive an actual face-to-face hearing, Tyler says roughly half the cases he’s seen have gone to a three-person panel and a hearing.)

During a face-to-face hearing, the party bringing the complaint goes first, introducing whatever testimony, evidence, or exhibits were agreed upon. Then the other party presents his evidence, followed by a limited rebuttal. Though the arbitrators can finesse these procedures as necessary, the goal is to “afford full and equal opportunity” for all parties to make their case, according to ReMA rules.

The arbitrators’ decision must usually be issued within 20 days after the hearing closes, though many cases can be decided on the same day of the hearing. With material submitted in advance, Tyler notes, the actual hearing can go fast and smooth. “You’d rarely get a trial done in one day,” he says.

Resolving International Disputes

Export issues account for about a quarter of ReMA arbitration cases. One resource for information on international disputes is the Foreign Counsel Web site (www.foreigncounsel.com) of Seattle-based attorneys Charles Veigel and Richard Brothers.

Highlighting the advantages and disadvantages of international arbitration, they note: Arbitration is especially useful when you’re not sure what procedures and rules will apply if the dispute is heard in another country’s courts and when collecting on a foreign judgment might be difficult. Moreover, certain countries—Russia, Japan, and China, for instance—tend to prefer resolving international disputes through arbitration, and most countries will enforce arbitration awards.

But be careful, Veigel and Brothers warn: Initiating international arbitrations can require thousands of dollars in filing fees. And you might find your ability to obtain information about the dispute “sharply curtailed.” •