Weighing Strategies to Limit Litigation Risk
[ILLUSTRATION OMITTED] Imagine this. It's the middle of busy season. You have clients to see, work to do, and deadlines to meet. Someone in the reception area wants to speak with you. You figure it's just another client bringing in paperwork. The man greets you with a handshake and hands you a document. It's a lawsuit. You've been served. A thousand thoughts rush into your mind: A lawsuit is public record. Can anyone go online and see I've been sued? How is this going to affect my practice? What about the time away from the office sitting for a deposition or a trial, or talking with an attorney? How much is this going to cost? You recall a colleague telling you about minimizing risk through the use of alternative dispute resolution (ADR) and limitation-of-liability clauses in engagement letters. You wonder if you could have avoided all this trouble by including such clauses in your engagement letter. More and more professionals are opting for alternatives to civil litigation for dispute resolution. Many also limit their damage exposure through limitation-of-liability clauses in engagement letters. But is ADR more streamlined than civil litigation? Is a clause limiting the CPA firm's liability even enforceable? This column explores the benefits and drawbacks of ADR and the circumstances under which courts are likely to uphold a limitation-of-liability clause. ALTERNATIVE DISPUTE RESOLUTION There are two primary ADR methods--mediation and arbitration. Parties may agree to settle disputes through mediation or arbitration by including a clause in an engagement letter or agree to ADR after a dispute arises. Mediation In mediation, the parties to a dispute agree to meet with an independent, impartial, mutually selected facilitator who works with them to reach a resolution. The process is nonbinding and confidential. Mediation offers several benefits. The exchange of information between the parties is simple, typically consisting of an exchange of position papers. The mediator's role is to help each side understand the other side's point of view and provide a neutral "voice of reason." It can cost significantly less than litigation or even arbitration, and an agreement can be reached relatively quickly. Some professional liability insurance carriers offer an incentive for settling disputes via mediation. Mediation, however, has its drawbacks. If the parties begin mediation too soon or are unprepared, or the case is not yet developed, resolution is unlikely. In addition, because mediation is informal, the parties and their attorneys confront one another directly regarding the strengths and weaknesses of their respective positions. Sometimes, this interaction can cause the parties to become further entrenched, making resolution more difficult. Finally, less effective or less experienced mediators may not fully evaluate the merits of the dispute or may create a rift between a defendant and its insurance carrier to leverage a larger settlement offer. Arbitration In arbitration, the dispute is referred to arbitrators who hear evidence from the parties and render an award. The award is binding and typically cannot be appealed. Arbitration is more formal than mediation. The parties have more input in the selection of arbitrators than they would in judicial and/or jury selection in a civil court system. Arbitration permits focused discovery and more efficient methods of exchanging information. If used properly, this streamlined discovery approach can significantly contain defense costs. However, arbitrators are authorized to control the amount of discovery to be conducted and may allow significant discovery to proceed in complex cases. Accordingly, the process does not always lead to early resolution or reduced defense costs. If the arbitrators are busy, it can take months to conclude a case. Moreover, inexperienced arbitrators may be reluctant to make decisions, leading to delay and confusion. …