Prelitigation in Alternative Dispute Resolution

Prelitigation in Alternative Dispute Resolution

Well, you’re fed up with waiting. You’re finally ready to file that breach of contract suit against what used to be your best customer. They have been stringing you along, but you have had it.

Or maybe you just got a nasty letter in the mail telling you the people who bought your house weren’t told that fourteen cats used to live in the basement. Now they want to undo the deal because someone is allergic to cats.

Or it’s an auto accident. Or something else. But litigation is in your future soon. Most people are angry when litigation looms, and angry people are aggressive and overconfident.  Before you go rushing off to sue anyone or defend your position to the bitter end, consider whether that action suits your needs (or those of your clients). Ask yourself if this is a case that would benefit from pre-litigation ADR. Can you resolve your case without going to court? (By pre-litigation ADR, the author means negotiation, mediation, and possibly early neutral evaluation, though evaluation itself will not resolve a dispute).  Arbitration and its hybrids are substitutes for litigation, not precursors to it.

There are many reasons to engage in pre-litigation ADR. It is faster, cheaper, less emotionally draining and physically stressful, far more confidential, less disruptive to business, and less destructive to relationships than litigation. It eases the workload of the courts. 

Some statutes even require it. The Davis-Stirling Act, governing California homeowners’ associations and their residents, provides at CA Civil Code section 5930:

“ §5930.  (a) An association or an owner or a member of a common interest development may not file an enforcement action in the superior court unless the parties have endeavored to submit their dispute to alternative dispute resolution pursuant to this article.

(b) This section applies only to an enforcement action that is solely for declaratory, injunctive, or writ relief, or for that relief in conjunction with a claim for monetary damages not in excess of five thousand dollars ($5,000).

(c) This section does not apply to a small claims action.

(d) Except as otherwise provided by law, this section does not apply to an assessment dispute.”

Some contracts for the purchase and sale of real estate also require pre-litigation ADR. Such clauses may be put into any contract, and will generally be enforced.

Regardless of whether ADR is driven by statute, contract, or common sense, certain things will have to be true before pre-litigation ADR will work well for you. Those pre-conditions are discussed below.

Necessary conditions for successful pre-litigation ADR

Condition one: Willing parties 

Mediation is a voluntary process.  Although there are court-connected programs, at the pre-litigation stage, both parties must be willing to work things out.  It is certainly a worthwhile effort. Statistics show that voluntary mediation results in the resolution of the conflict in over eighty percent of cases.  It is a good idea to suggest pre-litigation mediation when preliminary negotiations are unsuccessful.

Condition two: Sufficient information

It’s estimated that about 80% of the cost and time spent in litigation goes to discovery. In order to settle a case without litigation, you must have sufficient information to discuss it in-depth with the other party and any participating neutral.   No matter what type of case you are faced with, you need the strongest available evidence to support each element of your claim. If that evidence shows that there is a significant risk to the other party, ADR is likely to succeed.

Not only do you need evidence to support your claims, but also any element of an affirmative defense, and evidence concerning an opposing party’s contentions, counter or cross-claims, and defenses.

Of course, you cannot force revelations from the other party as you can informal discovery.  You must make every effort to gather reliable information from other sources.  You should do so as early as possible so that by the time you contact the other party (individually or through counsel) you have the strongest possible statement of your claim. (If the matter goes to litigation or ADR after a significant negotiation period, you will need to ensure you have the most up-to-date information available).

It is possible that you will be able to engage in informal discovery, exchanging information with the other side to help evaluate the value of any claim or counterclaim during negotiations.  You would have to reveal the information eventually anyway to you make your case.  Often, insurance adjusters will insist on receiving certain information before even discussing liability.

If one or more of the parties has too little information, ADR will not work.  The neutral may even delay ADR until more information has been exchanged.

Condition three: Competent legal advice 

If you do engage in informal negotiation and discovery, remember that the other party’s representative is not on your side, and may ask for information you are not bound to give or withhold information you would be entitled to in litigation.  Evidentiary objections and requirements exist partly to protect the parties and reviewing the matter with an attorney are prudent if you have any concerns or questions.

Additionally, counsel may identify additional claims, defenses, or potential consequences that would affect the value of a case.  Attorneys are not required in ADR (or in litigation, for that matter), but should be consulted at an early stage to evaluate the facts and develop the case in the best possible way.  Attorneys also may be aware of other sources of useful information.  They also use ADR frequently and will be able to alert you to what to expect and assist in the selection of a neutral and development of a negotiation strategy.

Condition four: A clear, well-supported demand 

From the plaintiff’s perspective, the first step in the resolution of any claim, after evidence has been gathered, is the presentation of a demand (sometimes called a settlement package). This consists of a clear, detailed statement of the facts, the reasons for Defendants’ liability, and a demand for a specific amount of damages. Remember that your demand is highly unlikely to result in a check by return mail. It is analogous to a complaint in a litigated case, and may yet form the basis for one.  The demand may also serve as a draft mediation brief, with appropriate updates to reflect later developments.  A clear and persuasive demand letter is the opening move in your negotiation with the other party, and the basis for recovery in the absence of a complaint.  It is also likely to provoke a response that will give you an idea of the other party’s position and strategy moving forward.  In short, a well-drafted demand is central to the success of your claim.

Condition five: Careful planning for negotiation 

Preparation and planning are critical for success in any important negotiation. You need to know as much as possible about the subject of the negotiation as possible. You also need to know as much as possible about the needs, goals, and motivations of the other party or parties.  In a pre-litigation context, that means being thoroughly versed in the potentially applicable law, the facts, and the consequences for your family and your business if any.  It means having accurate assessments of potential damages recovery, potential liability if any, and your likely outcome if the matter goes to court.  

In preparation for the negotiation, decide what you want, what you can’t do without, and what you are willing to give in return.  Planning concessions is not defeatist.  Reciprocal concessions are expected.  Their absence will stall bargaining.  Their presence drives it forward.

You cannot simply show up at mediation without a plan and expect to succeed. Thorough preparation allows you to credibly justify your position and also predict what the others in the negotiation will do.  Also, use your preparation time to plan for likely demands and concessions you are willing to make.  Be flexible in your strategy. Your plan will change as you listen and learn.

Preparation and planning are critical for success in any important negotiation. You need to know as much about your potential claims and liabilities as possible. You also need to know as much as possible about the needs, goals, and motivations of the other party or parties.

In preparation for the negotiation, decide what you want, what you can’t make a deal without, and what you are willing to give in return. Do the necessary work to be sure your demands are within the realm of reason. The more credible you are, the more likely you are to achieve your goals.

Thorough preparation will allow you to credibly justify your position, and also predict what the others in the negotiation will do.  Also, use your preparation time to plan for likely demands and concessions you are willing to make.  Be flexible in your strategy. Your plan will change as you listen and learn more during negotiation.

You must also plan for the possibility that the negotiation will fail. As defeatist as it seems to plan for failure, knowing what you will do if you can’t agree despite pre-litigation ADR has a huge impact on negotiation strategy.

Know your Best Alternative to a Negotiated Agreement, or BATNA.  Knowing your fallback position tells you where to set your bottom line — that is when it is better to walk away than agree.

Experts say that negotiators should also know the Worst Alternative to a Negotiated Agreement or WATNA. What happens if everything falls apart?   Knowing the worst that could happen, and the probability that it will happen is at least as important as having a fallback position in deciding strategy. It can keep you from taking risks you can’t afford.  Even a poor settlement is preferable to your WATNA.

Condition six: Prior negotiations

Mediators can be thought of as negotiation coaches.  They will usually presume that negotiations have taken place and ask about their history.  They are looking for an indication of why negotiations have broken down. Are there emotional issues at work? Different interpretations of the law? Contested facts? Existing liability defenses? Contribution disputes between defendants? Incorrect valuation of the case by one or more parties? Any of these factors could leave the negotiations to break down. Knowing what has not worked can be tremendously helpful in crafting a solution.

Also, prior negotiations will give the parties insight into each other’s interests, goals, and needs, which will result in more effective preparations and increase the likelihood of success.

Condition seven: The right neutral 

One of the advantages of ADR is the ability to choose a neutral based on his or her expertise and background. Choosing an expert in the area of potential litigation

  • increases the impact on listeners of the advice given,
  • allows the neutral to propose practical and creative solutions,
  • allows the mediator to predict outcomes based upon prior similar experience, and
  •  increases the accuracy of the evaluations made.

Choosing the right neutral is critical to the success of pre-litigation ADR.

If the proper work is done to optimize the success of the pre-litigation ADR process, the parties to a dispute should be able to resolve their differences through negotiation or mediation, without the tremendous time, expense, disruption of business, stress, or destruction of relationships that result from litigation.

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