How to Resolve System Development Disputes through Negotiation

When considering a project such as system development from a legal perspective, it is important to anticipate potential disputes between the user who orders the work and the vendor, and to take preventive measures and countermeasures against such risks. However, not all legal disputes between users and vendors necessarily take the form of litigation. Litigation should rather be positioned as a last resort. In this article, we will organize methods to resolve disputes between users and vendors based on negotiations, and explain how the law can be useful in contexts other than litigation.

Dispute Resolution is Not Limited to Litigation

Understanding “Negotiation” as a Means of Dispute Resolution

In system development projects, not all disputes end up in court. In fact, the majority of disputes are resolved through negotiations between the parties involved, without resorting to litigation. Therefore, when considering legal solutions to disputes surrounding system development, the question of how to find a mutually acceptable compromise through negotiation holds significant practical importance.

When attempting to resolve disputes through negotiation, it is crucial to maintain a legal perspective, but not to be overly bound by it. Instead, it is important to calmly consider the business gains and losses.

The Advantages and Disadvantages of Dispute Resolution through Litigation

Generally speaking, not limited to system development, the advantage of resolving disputes through litigation lies in its enforceability. That is, based on the court’s judgment, enforcement actions can be taken, leading to a final resolution of the dispute. Even if neither the plaintiff nor the defendant agrees with the court’s decision, the court, as a third party, will settle the dispute.

However, it is also true that there are many disadvantages to settling disputes through litigation compared to negotiation between the parties. For example, once a lawsuit is filed, it usually takes years, and the associated costs can be high. Especially in the context of IT, it goes without saying that judges are not IT experts, so the time and effort required to explain the basics can be considerable. Additionally, there are concerns that fighting with the other party in court could make it difficult to maintain the relationship, potentially leading to the termination of the business relationship itself.

The Advantages of Dispute Resolution through Negotiation

By reversing the merits and demerits of dispute resolution through litigation, the benefits of resolving disputes without resorting to litigation become clear. Let’s take a look at them below.

Quick resolution in a short period can be expected

When aiming for resolution through litigation, depending on the case, you usually need to be prepared for a period of years. However, with negotiation, it is possible to settle the matter in a short period of weeks to months.

Costs are often small

The benefit of “being able to resolve in a short period” through negotiation leads to a reduction in effort and alleviates financial burden. While litigation certainly does not involve large administrative fees (such as stamp fees), the time and effort spent can lead to increased attorney fees and personnel costs for your company’s legal department. The effort involved in preparing for hearings and creating documents for claims and rebuttals in court may become a backward cost that does not directly contribute to business profits. On the other hand, with negotiation, it is quite possible to settle the matter in a short period of weeks to months.

There is a high expectation of recovering the relationship without damaging both parties

Also, compared to escalating the dispute to litigation, if a compromise point that satisfies both parties can be found through negotiation, emotional residue is unlikely to remain on both sides, and it is often possible to proceed with future transactions without dragging the issue.

There are also disadvantages to resolution through negotiation

However, there are certain disadvantages when aiming for resolution through negotiation. One is that the result of the negotiation is greatly influenced by the “negotiation power” of the participants, making it difficult to ensure fairness. Another is that if both parties cannot find a compromise point no matter how much they negotiate, they will eventually have to fight in court.

Litigation and negotiation are not mutually exclusive

We have summarized the merits and demerits of litigation and negotiation as means of dispute resolution for convenience. However, the relationship between litigation and negotiation should be understood as being closely connected rather than choosing one or the other. In other words, if the disadvantages and costs that the plaintiff and defendant will each have to bear in the event of a lawsuit can be accurately understood, it can also be useful in negotiation.

Specific Methods for Dispute Resolution through Negotiation

Based on the above, we will organize the methods for resolving disputes through negotiation without resorting to litigation. The key point is to consider both legal perspectives and business interests.

What are the negotiation methods when there is a power imbalance in business?

For example, let’s assume that negotiations are taking place between the following two parties.

Company A: A large corporation that can freely choose its trading partners. Using this power, it makes unreasonable demands on its trading partner, Company B.

Company B: A small and medium-sized enterprise (or freelancer) that does not want to damage its relationship with Company A, a major client. Therefore, while not wanting to strain the relationship with Company A, it is struggling with how to respond to unreasonable demands.

In such a situation, the first thing that comes to mind from Company B’s perspective is to aim for a friendly settlement as much as possible, making significant concessions in anticipation of continuing the business. However, the biggest point in the negotiation between these two parties is the “unreasonable” demand. This is where the legal perspective comes into play.

https://monolith.law/corporate/engineer-joint-enterprise-contract[ja]

If Company B makes significant concessions in order to prioritize the continuation of the relationship, it indeed means that Company A’s negotiation strategy has succeeded. This is because Company A, with its organizational negotiation power, has managed to extract significant concessions from Company B.

However, if Company B has a valid point from a legal perspective, it is not necessarily appropriate to accept all “unreasonable demands” as a negotiation strategy, even if it is inferior in negotiation power. This is because if a lawsuit is actually filed, Company B can expect to win. If a lawsuit occurs, Company A will not only lose a lot of time and cost in the trial, but also suffer double pain due to the effect of the judgment, such as being forced to pay damages. In other words, in this case, Company A could be said to have missed the chance to resolve the dispute quickly and at low cost through negotiation, relying too much on the strength of its business position.

Taking the above into account, it becomes clear what negotiation measures should be taken from the side of Company B. For example, it could be effective to convey something like, “From our legal side, we have this view, and if it is difficult to resolve through negotiation, we are prepared to argue this view in court.” The point here is to convey that they have a valid point from a legal perspective, to elicit a flexible response from the other party, and to intend to get them to the negotiation table. In other words, it is also about correcting the difference in power relations in business through the strength and weakness of legal relations, and proceeding with real negotiations more fairly.

Legal Expertise Can Be Beneficial Even in Out-of-Court Negotiations

The above discussion leads us to the point that even if a matter has not escalated to a lawsuit, the expertise of lawyers and other legal professionals can be beneficial in negotiation settings. In practice, entrusting negotiations to a lawyer and understanding their assessment of potential outcomes, such as “If this goes to court, there is a high likelihood of this kind of judgment being handed down,” can enhance the expectation of making the subsequent negotiation process more rational. In this way, advancing negotiations while sharing the feel of what it would be like if it went to court can reduce the time, effort, and cost involved in litigation, while simultaneously bringing similar benefits to fair dispute resolution through litigation. It seems that the point that legal expertise can be useful not only in court but also in the negotiation stage should be widely recognized.