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There is no doubt that litigating a dispute through the courts is expensive and, for most parties, a last resort. This is well understood by the courts, and Lord Justice Jackson’s recent review of civil litigation costs called for a package of reforms to rein in the costs of civil justice.

Pending such reforms, the good news is that a variety of alternative dispute resolution (ADR) procedures exist that offer alternatives to court proceedings that can help preserve business relationships and save costs. The contract may contain dispute resolution provisions that specify the alternative methods that parties must try before they can be referred to litigation or arbitration. Either way, prior to embarking on litigation, the parties are obliged to consider using ADR and may face costs orders if they do not do so.

Negotiation

Resolving a dispute through direct negotiation is the cheapest method of dispute resolution. Of course, this is easier said than done. Direct negotiations can fail because parties’ positions have become unnecessarily entrenched either owing to personality issues or the history between the key players. If this is the case, consider arranging for senior personnel within each party’s organisation, who have no direct involvement in the dispute, to meet on a without prejudice basis, at a neutral venue, with the sole purpose of discussing and resolving the dispute. Even if unsuccessful, it should open up a channel of communication between senior management, increasing the chances that the dispute will be resolved in the future.

Pre-action protocol

In England and Wales, before parties start court proceedings, they are required to follow a pre-action protocol procedure. The protocol for construction and engineering disputes involves the parties exchanging letters of claim and response and helps to define and narrow the issues in dispute. The parties must then meet on a without prejudice basis to try to resolve the issues. The parties must consider whether some form of ADR would be more suitable than litigation. The pre-action protocol can also be used in tandem with ADR procedures, such as mediation. The fact that litigation may follow if no settlement is reached during the pre-action protocol stage helps incentivise both parties to settle.

If the dispute is settled at the pre-action stage, the parties usually bear their own costs subject to the terms of any settlement agreement. However, if claims are pursued in litigation, the pre-action costs incurred are, in principle, recoverable by the successful party as part of the costs of the action.

Expert determination

In disputes where there is a clear or limited number of issues between the parties it may be appropriate for a third party expert to determine the issues. For certain technical disputes this can offer a more cost-effective means of resolving the dispute than litigation or arbitration. An expert’s opinion is usually final and binding on the parties - in other words, it is not possible to refer it to the courts or arbitration if the parties disagree with the decision. It is therefore imperative that the parties appoint a suitably qualified and competent expert to determine the dispute.

An alternative is to agree for an independent third party to provide a non-binding opinion on key issues to assist the parties in their negotiations. Although there is a risk that a party will not accept the decision if it goes against them, where there is sufficient goodwill and a continuing business relationship, this approach can be a cost-effective way to avoid litigation. It is usual for the parties to agree to split the costs of an expert or independent third party.

Mediation

Mediation is probably the most popular form of ADR. A mediator is a neutral third party who meets and helps facilitate the parties’ negotiations. They cannot impose a settlement on the parties, but help to structure the negotiations, encourage the parties to discuss the key issues in dispute, help explain the parties’ needs to the other party and spell out the risks if no settlement is achieved, thereby encouraging the parties to settle.

The mediation process is without prejudice and confidential. The fact that mediation usually lasts no more than a day with limited preparation work makes this a faster and cheaper way of resolving the dispute than through formal proceedings. For a mediation to succeed there needs to be a genuine willingness to settle and the direct involvement of the key decision-makers from both parties. Again, it is usual for the parties to agree to split the costs of a mediation between them.

Paul Flook is associate director at Berwin Leighton Paisner