Alternative Dispute Resolution: How Small Businesses Can Avoid the Courts in Resolving Disputes

By McDowell, Wyatt; Sussman, Lyle | SAM Advanced Management Journal, Summer 2004 | Go to article overview

Alternative Dispute Resolution: How Small Businesses Can Avoid the Courts in Resolving Disputes


McDowell, Wyatt, Sussman, Lyle, SAM Advanced Management Journal


"There is far too much law for those who can afford it and far too little for those who cannot. No one can be satisfied with this state of affairs. The cost of hiring a lawyer and the mysteries of the legal process discourage most people of modest means from trying to enforce their rights."

--Dr. Derek Bok, former president of Harvard University, Harvard Magazine, 1993.

To jaw-jaw is always better than to war-war.

--Sir Winston Churchill

Regardless of profitability, size, ownership, or industry sector, all businesses share a common problem: conflict and conflict resolution. Internal conflicts between and among employees, as well as external conflicts with suppliers, subcontractors, and customers, deplete valuable resources of time, money, and manpower. Unfortunately the resolution of many conflicts culminates not in smiles, handshakes, and prospects for synergy, but in acrimony, legal fees, and mutual loss.

Although all businesses face conflicts, there are at least four differences between the conflict resolution options available to small business owners and those available to companies in the Fortune 500. First, managers in the latter typically have access to in-house legal counsel and are likely to seek that counsel proactively. The small business owner, however, must pay for counsel and typically seeks it as a last resort. Second, managers in large companies typically have access to extensive formal policies and procedures governing employee behavior. Small business owners tend to create policies ad hoc or apply generic policies reflecting templates downloaded from the Internet, gleaned from conversations with friends and associates, or reproduced from trade books. Third, managers in large organizations have more slack resources (time and manpower), so conflict resolution may be timely and concurrent with day-to-day operations. For the small business owner, any time spent on conflict resolution is time taken away from the essence of the business: serving customers and managing cash flow. And finally, access to financial resources tends to be greater for the Fortune 500 manager than the small business owner. Justice is indeed expensive, and that expense affects large and small businesses differently.

These four differences underscore the various constraints facing large and small businesses in resolving conflicts. The small business owner should not only consider costly legal remedies, but should also explore other options. Information gleaned from the mass media and anecdotes related by friends and neighbors has given most small business owners a far greater understanding of litigation than they have of alternative dispute resolution (ADR). This paper highlights ADR options, thereby providing the small business owner with alternatives that may turn acrimony and mutual loss into handshakes and synergy.

We structure this presentation in the following sequence: 1) a definition of ADR and its current status, 2) the value of ADR versus litigation, focusing specifically on applications to the small business owner, 3) the differences among the various ADR options, and 4) recommendations the small business owner should consider before selecting and implementing ADR.

I ADR: Definition and Current Status

Alternatives to dispute resolution (ADR) goes beyond those structured processes that occur by virtue of formal litigation in municipal, state, and federal courts. ADR broadens options for resolving conflicts in hopes of minimizing costly litigation and hostility, while emphasizing mutual problem solving.

ADR became institutionalized in the United States through the American Arbitration Association (AAA). Since the AAA's inception in 1926, out-of-court techniques have been used to resolve family controversies, employment disputes, building design and construction problems, organizational conflicts, and negligence claims. The dramatic role the AAA has played in facilitating ADR processes is perhaps best reflected by its impact. …

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