Alternative Dispute Resolution … When to Use Mediation and Arbitration

Alternative dispute resolution (ADR) can be an effective way to reduce the time, expense and stress of resolving professional liability disputes when used thoughtfully and in appropriate circumstances. When used appropriately, mediation and arbitration are forms of ADR that can significantly reduce the cost and the emotional roller-coaster ride of disputes. The major distinction between these two ADR solutions is the degree of control the disputing parties have over the outcome. Mediation uses a neutral evaluator to assist the parties voluntarily resolve their dispute, whereas in arbitration, the neutral evaluator assesses both sides’ positions and makes a determination that is binding on each party.

Consider the following step-by-step approach when incorporating mediation and arbitration as part of your risk management:
  • When to use mediation and arbitration:

    • Mediation for all disputes: Claims experience has shown that mediation is often an effective tool in many professional liability disputes and engagements. It can lead to quicker resolutions of small matters and is often a productive tool in furthering settlement efforts in large claims. CAMICO therefore recommends mediation for all disputes and engagements.

    • Binding Arbitration for fee disputes only: Claims experience indicates that binding arbitration is advantageous to CPAs in successfully resolving disputes over fees, but it is NOT advantageous (and often disadvantageous) to CPAs in high-dollar, complex accounting professional liability disputes, especially attest engagements involving banks and other third parties. Why? Because the best defenses (lack of reliance, lack of causation) available to CPAs often require extensive discovery, which is usually curtailed in arbitration.

    • Consequently, CAMICO has found that binding arbitration for all disputes often exposes firms to substantially greater risk. Best practice is to NOT give up your ability to litigate disputes that could be significant in nature and to limit the use of binding arbitration to fee disputes only.

  • Establish an understanding with the client regarding how disputes will be handled. Don’t assume that conflicts will never happen to you. Addressing this topic on a pre-dispute basis is a proactive step toward open dialogue. Document the terms of a pre-dispute agreement in your engagement letter. In some states, ADR is only effective if stipulated as part of an engagement letter or a separate contract signed by the client.

The goal of this step-by-step approach is to encourage a collaborative resolution to disputes. You should confirm with your legal counsel, as appropriate, the applicability of ADR in your state.

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