WLN Columns

10 Reasons to Consider Mediation and Arbitration as Alternatives to Litigation in Equipment Leasing and Finance Cases

Litigation can be expensive and time consuming, especially in equipment leasing and financing cases, which often are document intensive and involve complex factual and legal issues. Further, equipment lease finance arrangements often involve multiple parties, including the lessees, lessors, vendors, and lenders, among others.

The two most common forms of alternative dispute resolution (“ADR”) are mediation and arbitration. Mediation is an informal and confidential way for parties to resolve disputes through a neutral mediator. In arbitration, one or more arbitrators act as judge and jury, hearing testimony, reviewing evidence, and entering an award.

There are ten factors which may weigh in favor of including an ADR clause in a lease or finance agreement.

1.  Cost. Mediation is relatively inexpensive, especially when compared to litigation. Although effective mediators charge a premium hourly rate for their services, most mediations can be resolved in less than 50 hours including mediator preparation time. Further, mediation clauses generally provide that the parties will share the costs of mediation equally.

Although generally more expensive than mediation, arbitration also tends to be inexpensive when compared to litigation. Indeed, when efficiently conducted by the parties and the arbitrators, the cost of arbitration is often a fraction of the expense of litigation.

2.  Time. Mediation can result in a resolution in a short period of time, generally in less than 3 months; whereas litigation of an equipment leasing and financing dispute will generally take at least 18 months, if not longer.

Similarly, arbitration may also provide a faster process than litigation. Backlogged dockets, prioritization of criminal matters, and other delays are common in most court systems. In most arbitrations, the schedule will be dictated by the parties. Discovery and motion practice may be limited, and an expedited hearing may be provided at the election of the parties.

3.  Expertise. Mediators are specially trained to facilitate discussions and allow disputing parties to work out their differences; an approach designed to lead toward resolution. Further, the parties to mediation can select a mediator with specific knowledge of and experience in the equipment leasing and financing industry, a knowledge base that judges and jurors will typically lack.

Equipment leases and finance agreements are complex documents, with technical terms, covenants and customs that are foreign to many attorney, and therefore many judges. Most major arbitration centers offer a roster of arbitrators with knowledge of and experience in equipment leasing and financing. This high level of expertise tends to lead to fair and sensible results, as opposed to the unpredictable results from a judicial system that does not understand the industry.

4.  Specialization. Most ADR centers recognize that equipment leasing and financing disputes are unique and not merely a “commercial” matter. Unlike courts, ADR centers do not attempt to lump equipment leasing and financing disputes into a one-size-fits-all commercial docket.

Most ADR centers recognize that commercial finance disputes are complex, and therefore provide separate program, with separate rules for the mediation and arbitration of commercial finance disputes, including equipment leasing disputes.

5. Flexibility. Most ADR centers allow the parties to customize the procedures of litigation to fit their case, whether mediation, arbitration or a combination of both.

For arbitration this can include, among other things, limits on discovery, limits on motion practice, and expedited hearing schedules, which all help to minimize the expensive discovery disputes and abuses common in the litigation process. Further, procedures are often available for large or complex disputes when indicated.

6. Efficient administration. Unlike court systems, which are publically funded, arbitration centers are customer driven. Most ADR centers emphasize customer service and, as a result, have a friendly and responsive staff.

In arbitration, this can also lead to greater accessibility of the arbitrators. This can help avoid discovery disputes before they begin, among other things.

7. Less Adversarial. Mediation allows the parties to resolve their dispute in a less adversarial manner. This may help to preserve ongoing business relationships which might otherwise be compromised by litigation.

Likewise, arbitration proceedings tend to be less confrontational than litigation. Unlike litigation, arbitration can afford the parties with a unique opportunity to work together to shape procedural matters, leading to a more congenial setting.

8. Confidentiality. There are many aspects of an equipment leasing or finance company’s business that it would prefer to keep private, including its leases or financing agreements, business models, servicing agreements, information regarding securitization, information about its investors, and information which is proprietary to the equipment vendors.

Many aspects of mediation are entirely confidential. As such, if a dispute may involve disclosure of private or proprietary information, or have potential for reputational risk, mediation is often the preferred method to resolve such a dispute.

Likewise, arbitration centers do not maintain public dockets like courts. Thus, arbitration may also be preferred in situations involving sensitive, proprietary information or reputational concerns.

9. Finality. Mediation is a non-binding process; therefore, if the dispute is not resolved in mediation, the parties may still have to resort to a binding process for resolution, such as litigation or arbitration. Indeed, mediation and litigation are not mutually exclusive and most mediation clauses are drafted to allow a party to proceed to litigation or arbitration if the dispute does not resolve in mediation.

Arbitration, on the other hand, provides the successful party an award with finality. An arbitration award is final and, if necessary, can become an enforceable civil judgment through the process of confirmation under the Federal Arbitration Act (“FAA”). Under this process, the only defenses available to confirmation of an arbitration award are those extraordinary circumstances listed in the FAA, including fraud, corruption, and procedural misconduct; otherwise, the court is not to reconsider the merits of the dispute.

10. International Implications.

Whether the collateral is medical equipment, machine tools, trucks and trailers, computers or aircrafts, the market for equipment leasing and related finance is increasingly international. However, generally speaking, a judgment issued by a court of one country will not be enforceable in another country. Indeed, the Hague Convention on Foreign Judgments in Civil and Commercial Matters has only been ratified by Cyprus, Kuwait, the Netherlands and Portugal. As such, to have an enforceable judgment, an equipment leasing or finance company would need to pursue litigation in a country where the lessor or other defendant’s assets are located; often the lessors country of residence. This is not ideal, given the potential biases and unknowns of foreign court systems.

On the other hand, foreign arbitration awards are almost uniformly enforceable. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) has been ratified by 142 nations, including the leading industrial nations. Under the New York Convention, arbitral awards are almost universally recognized, enforced, and confirmed to judgment, absent lack of notice, public policy or other extraordinary exceptions.

Conclusion

ADR may save the parties to an equipment finance and leasing dispute time and money, while resolving the dispute in a fair and sensible manner. Based on these factors, and others both pro and con, an ADR clause should be considered in drafting or revising your lease or finance agreement.