Keeping Our
Clients and
Business Partners
Informed

Should Your Contracts Include an Alternative Dispute Resolution Provision?

Given the unfortunate reality that doing business in California necessarily includes the cost and uncertainty of litigation, it is essential for companies to regularly take steps to minimize the cost of litigation and improve their chance of success. One important component to consider is whether it may be preferable for you to choose an alternative to traditional litigation in court. Understanding the pros and cons of Alternative Dispute Resolution (“ADR”) versus traditional litigation is critical to determining if an ADR provision should be incorporated into your company’s standard forms (contracts, invoices, etc.)

There are two primary types of ADR: (1) Arbitration, and (2) Mediation. Arbitration involves an agreement to utilize a private arbitrator (typically an attorney or former judge) to decide the dispute using an agreed upon set of rules outside of a public courtroom. The arbitrator acts as the judge and jury and rules on the evidence presented. Contracts typically provide that the arbitrator’s decision is binding and enforceable in a court of law.

Mediation is very different. Mediation is an informal settlement process which is “mediated,” again typically by an attorney or former judge, who attempts to assist the parties to reach a mutually agreeable resolution. The mediator does not decide any issues, but only serves to facilitate settlement discussions.

How do you best minimize the cost and uncertainty of litigation? The answer depends on the needs of your particular business as well as your tolerance for the respective risks of conventional litigation versus ADR.

If you are concerned that a jury may not be sympathetic to your business, particularly regarding the types of disputes that may be likely to arise, or you are simply unwilling to risk the uncertainty inherent in a “jury of your peers” deciding your legal dispute, you may prefer ADR. A well-drafted ADR provision can reduce the uncertainty of a jury trial, and provide great control over the selection of your arbitrator. It can even specify the particular qualifications of the arbitrator or that the arbitrator be selected from a pre-determined list. The wide variety of options available for the selection of an arbitrator can effectively provide for endless “challenges” to unsuitable arbitrators. By comparison, should you find yourself in court on the same dispute, your ability to “challenge” (i.e. replace) the assigned judge would be very limited.

ADR provisions can also be tailored to reduce the cost of resolving a dispute by limiting certain types of discovery and by limiting or excluding any right to appeal. They can even be drafted to ensure your dispute is resolved quickly by detailing when the various stages of arbitration must be completed by; for instance, mandating that discovery be completed within 90 days and that a final award be reached within 180 days. The scope of an appeal can also be negotiated and agreed to, thus providing the right to challenge an arbitrator’s ruling that is inconsistent with applicable law.

ADR provisions can also be tailored to reduce the cost of resolving a dispute by limiting certain types of discovery and by limiting or excluding any right to appeal. They can even be drafted to ensure your dispute is resolved quickly by detailing when the various stages of arbitration must be completed by; for instance, mandating that discovery be completed within 90 days and that a final award be reached within 180 days. The scope of an appeal can also be negotiated and agreed to, thus providing the right to challenge an arbitrator’s ruling that is inconsistent with applicable law.

However, arbitration has its disadvantages. Depending on the number of arbitrators, their hourly rates, and the time required (based part on the complexity of the dispute), arbitration can be cost-prohibitive – especially for disputes involving relatively small dollar amounts. Moreover, binding arbitration through the use of retired judges carries with it an increasing concern regarding bias of judicial officers who may be motivated by hopes of repeat business from customers obtaining favorable results.

Traditional litigation also provides more certainty the Court will apply the applicable rules of evidence and procedure and will follow the law. ADR is less formal and not similarly constrained by the typical procedural and evidentiary rules. Moreover, in an arbitration, should the arbitrator’s decision be flawed or otherwise unacceptable to you, arbitration generally provides very little or no right to appeal.

Mediation is highly recommended as an alternative to litigation. Most disputes do settle before trial. An early mediation may force the parties to seriously consider a reasonable settlement prior to incurring the expense and risks of litigation or arbitration.

Of course, the best option for you will depend greatly on the particular needs of your business. No one solution or ADR provision fits all. However, an appropriately drafted ADR provision can serve to protect your business in the event a dispute arises. Vogt, Resnick & Sherak, LLP can assist you in determining if and how an ADR provision should be incorporated into your business contracts, invoices and other forms, and agreements to best protect your business.