AFM231 Chapter Notes - Chapter 4: Alternative Dispute Resolution, Arbitration Clause, Counterclaim
18 May 2018
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Chapter 4
• Legal problems cannot always be avoided even when sound management practices are in place.
• This chapter focuses on the reactive aspect of risk management
• Businesses like Northland should seek ways to mange disputes with the express goals of
• Avoiding time-consuming and expensive litigation
• Preserving desirable long-term commercial relationships
Business Activities and Legal Disputes
The Delinquent Customer
• The ustoer’s refusal to pa its aout a idiate that Northlad has failed i its procedures for
extending credit
• Northland must decide if it should give the customer an opportunity to recover financially before
demanding payment; offer to accept less than the full amount; write off the debt altogether; selling
the debt off to a collection agency
• If the debt is not large, negotiating or writing it off may be more practical than spending money to
try and collect it
The Hacking Attempt
• Northland has engaged the services of an IT security firm to install firewalls, so its all good
• If future hackers are able to breach the firewalls, Northland could incur extra expense associated
with the recovery of data, etc.
• “ie isurae o’t oer all the possile osts, Northlad ill aalze the osts of otaiig
additional insurance coverage or revise its risk management plan accordingly.
The Pollution Incident
• Northlad’s operatios hae resulted i the disharge of a sall aout of pollutats ito the
environment.
• Northland must report this incident and comply with properly enacted legislation such as a fine.
• Unlikely to result in a legal dispute
• Must report to insurer otherwise the insurance coverage for the event is invalidated
• The ash released ito the air le to a farer’s lad, a result i a legal dispute.
• The insurance company indicated to offer $50,000 to compensate the farmer for the damages done,
ut the farer o’t settle for less tha $,. This atter is a legal dispute.
• Northland is likely to suffer the loss of good will and damage to its reputation
The Equipment Breakdown
• A machine breakdown revealed that a bearing in the machine failed, causing the ore conveyor belt
to catch on fire.
• The insurer is denying coverage because the losses were not from a sudden and accidental event,
ut due to Northlad’s failure to maintain the equipment
• Although machine breakdown and resulting loss of profit was anticipated and managed by the
purchase of insurance, this incident will result in a legal dispute. The amount of money is too large
for a write off.
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• Many of these incidents at Northland was predicted by the risk management plan and a legal
dispute is unlikely to arise from them.
• Northland got to live with some damage such as the delinquent customer, and the hacker because
the do’t ko the idetit of the haker.
• Northland will engage in legal conflict with the farmer and the intransigent insurance company
• Maagig disputes does’t ea sipl go to ourt, there are a as to resole
• See page 89 figure 4.2 for alternative dispute resolution (ADR)
• The most common are negotiation, mediation, and arbitration
Alternative Dispute Resolution
Negotiation
• Negotiation is a problem-solving process in which parties discuss their differences and attempt to
reach a mutually agreeable resolution.
• Most common method, cost effective, quick
• Allow parties to craft a solution instead of having a judge to impose a resolution
• Helps to preserve the relationship between the parties
When to negotiate
• It’s oo for parties to ilude i their otrat a lause here the agree that durig ad
after the conclusion of the contract, they will make efforts to resolve any disputes by negotiation
• It can be employed at any stage of a dispute
• There are situations where negotiation is not the proper way to proceed
• When insurance covers the risks that is the subject of the dispute. We need to let the
insurer to conduct settlement negotiations. Any attempt of private business negotiation
may jeopardize the coverage.
How to Negotiate
• Sometimes nice to hire a lawyer, advocate, or counselor who has the expertise to help in
negotiation
• First step is to investigate and situation to determine the nature and extent of the dispute
• Then notify the parties involved to clarify the situation
• I Northlad’s ase ith the farer, its est to otat hi iediatel ad assure hi that the
will put their best effort to remedy his loss. May apologize for the damage
• “eeral proies hae passed apolog legislatio to perit an individual to show remorse
without triggering adverse legal consequences
• Admitting or implying wrongdoing as well as expressions of regret of sympathy- provides
that an apology
• It’s not an admission of liability
• It’s not relevant when a judge makes a determination of liability
• Cannot be used as evidence establishing liability
• Cannot be used to void an insurance policy
• Whether negotiation will succeed depend on:
• The willingness of the parties to compromise
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• The nature and significant of the dispute
• The priority the parties give to tis resolution
• The effectiveness of those involved in the negotiation
• If negotiation is successful, parties will enter into a settlement agreement of release (an agreement
where a party agrees to relinquish past, present, and future claims arising from a certain event) so
that dispute is unlikely to be resurrected or litigated in the future.
• Also, should have confidentiality clause to ensure that the terms of the settlement are not revealed
or used to advance claims against the parties
• The farmer settled for $75,000
When Negotiations End
• Northland also negotiated with its insurance company but the insurance company was not willing to
compensate Northland for any losses.
• When an impasse such as this occurs, the business is faced with a difficult choice: concede and cut
losses or risk the expenditure of more time and money. See figure 4-1
Mediation
• Mediation is whereby a neutral person, called a mediator, assists the parties in reaching a
settlement of their dispute
• It’s less expensive and quicker than more formal dispute resolution methods
• It’s priate ad ofidetial if the parties hoose
• It helps to preserve the relationship between the parties
• It can result in a resolution tailored to the needs of the parties
When Mediation is Used
• Used be use for family matters, now good for commercial disputes
• Successfully used to resolve a wide range of business conflicts involving contract matters, personal
injuries, employment matters, environmental protection, and the like.
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Document Summary
If the debt is not large, negotiating or writing it off may be more practical than spending money to try and collect it. The hacking attempt: northland has engaged the services of an it security firm to install firewalls, so its all good. This (cid:373)atter is a legal dispute: northland is likely to suffer the loss of good will and damage to its reputation. It"s (cid:272)o(cid:373)(cid:373)o(cid:374) for parties to i(cid:374)(cid:272)lude i(cid:374) their (cid:272)o(cid:374)tra(cid:272)t a (cid:272)lause (cid:449)here(cid:271)(cid:455) the(cid:455) agree that duri(cid:374)g a(cid:374)d after the conclusion of the contract, they will make efforts to resolve any disputes by negotiation. It can be employed at any stage of a dispute: there are situations where negotiation is not the proper way to proceed, when insurance covers the risks that is the subject of the dispute. We need to let the insurer to conduct settlement negotiations. Any attempt of private business negotiation may jeopardize the coverage.
