For founders, the furthest thing from your mind is a legal dispute, and the goal of a good founder is to avoid litigation. However, conflict is sometimes unavoidable. When facing someone who has an issue with you or your company, whether a contract dispute or an employment issue, understanding the methods you can use to settle the dispute is critical to securing a desirable outcome.

What about settlement?

Settling a dispute is often an outcome that occurs prior to any formal methods of dispute resolution and usually consists of non-mediated negotiations between the parties. This results in a binding settlement agreement. Settling a dispute is often the ideal outcome for founders and startups because it reduces legal fees and can be far more expedient. However, it requires two parties willing to communicate and negotiate in good faith over difficult subjects. There are times where a formal adjudicative process is required. 

What methods exist for resolving legal disputes?

Generally, there are three formal methods for resolving legal conflicts. Each carry their own advantages and disadvantages: 

• Arbitration – a private, adjudication process in which the parties submit the dispute to a neutral decision maker.
• Mediation – a non-adjudicative process, in which a neutral third-party facilitates negotiation.
• Trial – a formal public adjudication process governed by procedural and evidentiary rules with the binding judgement decided either by judge or jury.

Each of these formal processes requires extensive time and cost and are understandably considered a last resort by most founders. 

Arbitration

Arbitration is best thought of as a “private” trial. Both parties submit the dispute to a third-party decision maker (or a panel of decision makers) who will function similarly to how a judge acts in a trial. The decision maker will accept evidence along with legal arguments. Those arguments will be governed either by rules agreed to by the parties or the rules of the organization the decision maker belongs to. After arguments the decision maker will render a binding decision that can be enforced as a judgement subject to any potential contractual limitations.

Pros of Arbitration

• Typically, arbitration is faster and more flexible than traditional litigation and trial.
• Often lower cost than going to trial due to limited procedural rules, discovery and motion practice.
• Arbitration can be private and confidential.
• Decision is final.

Cons of Arbitration

• Very limited ability to appeal rulings.
• Procedural tools are limited, including limited discovery and fact-finding.
• Requires both parties to agree to arbitrate, usually in the form of an earlier agreement.

Mediation 

Mediation is technically a non-adjudicative process, meaning that the third-party does not issue a decision on the dispute. It is however a process that facilitates parties to reach mutually acceptable outcomes. The mediator serves in a role that manages communication, reality-tests the positions of both sides, and identifies interests. The goal of the mediator is to explore settlement options. The outcome of a mediation only becomes enforceable if later reduced to a binding contract or stipulated order. 

Pros of Mediation

• Generally, mediation is the least expensive and quickest formal process.
• Parties retain control over outcomes, and the process can often preserve or repair ongoing relationships between the parties.

Cons of Mediation

• Outcomes are not binding without a separate agreement – this can mean that after mediation resolves positively if the dispute resumes the conflict can still end up in arbitration or court.
• A weak mediator can render the process significantly less effective.
• Mediation is voluntary, as both sides must agree to participate.

Trial

Trial is a public, formal adjudicative proceeding run by the courts. Trial can take place in state or federal court depending on the case. The outcome is determined either by a judge (a bench trial) or a jury (a jury trial). The facts, application of law, and binding judgement are all determined here but are subject to an extensive appeals process and procedural process including discovery which gives you opportunities to gain more information. The outcome of trial is binding, and the range of outcomes is broad, from injunctions restricting behavior to financial damages. The enforcement powers of the courts are vast and enforceable through judicial and law enforcement systems. 

Pros of Trial

• A full procedural toolkit. This includes robust discovery, motions, evidentiary rules, and remedies that the other formal systems don’t allow for.
• Public adjudication with potential for creating legal precedent and protecting reputations.
• The formal right to appeal the outcome.
• Trial is not voluntary. You do not need the cooperation of the opposing party to proceed with obtaining relief from the courts.
• Negotiating power. Sometimes even the threat of a trial or taking the early procedural steps to go to trial will bring the opposing party to the table for negotiating a settlement.

Cons of Trial

• Time-consuming, disruptive, and expensive. Trials can and do take years to complete.
• The outcome can be uncertain and dependent upon the judge or jury.

How to Decide Which Method is Right for You

While there is no “right” answer for which dispute resolution meets your needs, there are a few factors you may want to consider beyond the general considerations of time, costs, and effectiveness. 

• Is the relationship with the other party important to preserve and is there enough good will to properly settle or mediate?
• What resources am I willing to allocate to this dispute? 
• What am I trying to accomplish? For example: do I need the other party to stop certain actions thus potentially requiring an injunction? 
• Do I have an agreement with the other party requiring that we arbitrate?

Conclusion

Any dispute requiring a formal process to resolve is definitionally not the ideal scenario for a founder. It distracts from the goals of the company and can eat up resources. However, picking the right method to resolve the dispute can save time, money, and determine if you reach the proper outcome.

At Founders Law, we help founders navigate disputes of all kinds while keeping in line with their business goals to ensure that a legal dispute, be it arbitration, mediation, or trial, is handled with skill and professionalism to help ensure that your startup is in good hands.

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