HOW TO AVOID LITIGATION | PART 3 | ALTERNATE DISPUTE RESOLUTION

HOW TO AVOID LITIGATION | PART 3 | ALTERNATE DISPUTE RESOLUTION https://wahospitality.org/wp-content/uploads/2013/11/court-600x198.png

What’s the difference between mediation and arbitration? Should my business sign a contract with a binding arbitration clause? Can I go to the local trial court if I don’t like the results of an arbitration proceeding? You should know the answers to these questions before signing on the dotted line.

This is the third part in a series on avoiding litigation, focusing on the use of strong contracts. In this installment, we examine alternate dispute resolution clauses.

You’ve heard the horror stories- “Good Business” is forced to sue “Wayward Supplier” for breach of contract. Good Business spends its nest egg on legal fees, all while incurring the “soft costs” of employee time. Wayward Supplier drags its feet, hoping that the litigation will become too expensive and time-consuming for the other side. The courts are backlogged; Good Business knows that its case may not be heard for a year or two.  Good Business eventually accepts pennies on the dollar, simply because it cannot devote the necessary resources to bring this case to trial.

Is there a different path, rather than this long-winded court battle? Yes- it’s called “alternate dispute resolution.”

Alternate dispute resolution or “ADR” is a means to resolve disagreements outside of the traditional court system. ADR typically involves mediation and/or arbitration.

Mediation occurs when the parties negotiate, using a mediator. Mediators are not judges; they do not have the power to decide which party is right and which party is wrong. Instead, mediators facilitate settlement discussions, providing a neutral, third-party perspective. If the mediation is successful, the parties walk away with a settlement. If not, the parties continue to litigate their dispute.

Arbitration is similar to a traditional trial, though with important differences. Generally speaking, the parties select an arbitrator. This person is often an attorney with experience in the relevant field. He or she serves as the decision-maker. At the arbitration, the parties call witnesses, introduce evidence, and otherwise attempt to persuade the arbitrator that they should prevail. Unlike a trial, there is no jury; the rules of evidence are relaxed; and the parties can often fast-track the hearing to occur in weeks or months, rather than years.

After the arbitration, the arbitrator renders a decision, stating which party won, and which party lost. In a binding arbitration, the arbitrator’s decision is final, meaning that neither party can appeal. In a non-binding arbitration, the losing party can appeal, often to the local trial court.

Start to finish, cases generally resolve faster and cheaper through ADR than the traditional court system. There are a few traps for the unwary, however:

• Waiver of Right to Jury Trial.  When your business signs a contract with an ADR clause, it has waived its right to file suit in the traditional court system, and has waived its right to a jury trial. (As with anything, there are exceptions to this rule, but that’s a topic for another day.)

• Use of ADR Services. Many standard ADR clauses call for use of an ADR service, like the American Arbitration Association. These companies provide services akin to a court clerk, helping parties identify possible arbitrators, handling scheduling, and otherwise administering the case. The services can be expensive, though.  Administrative fees range from several hundred to tens of thousands of dollars, based on the company selected and the sums sought by the parties. These fees are in addition to the mediator’s and arbitrator’s hourly rates.

• Lack of Subpoena Power. In a traditional court case, attorneys issue subpoenas to third-parties for documents, attendance at depositions, and the like. If the third-party refuses, a judge can force him or her to comply. Mediators and arbitrators do not have this power, meaning that the third-party could completely ignore the subpoena.

Bottom line:  ADR clauses have important consequences, as they remove the dispute from the traditional court system. Drafting a strong ADR clause helps your company plan, sets clear expectations with the opposing party, and ultimately decreases the likelihood of expensive legal battles down the line.

Emily Gant is a partner in OMW’s Hospitality Group. In addition to her litigation practice, Emily helps businesses draft, review, and negotiate contracts. Questions? Contact Emily at 206.447.7024 or egant@omwlaw.com. Check out her blog at sipandnosh.com.

(This is a brief overview of a complex topic, and does not constitute legal advice.)

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