Several recent cases remind me that most distributors – and frankly all businesses – simply ignore the impact of alternate dispute resolution provisions in contracts until it is too late. Alternative dispute resolution (ADR) clauses can vary, substantially, from contract to contract, industry to industry, and clause-to-clause, but the essence of ADR is a procedure established by contract which contracting parties utilize to resolve a dispute other than traditional court-based litigation.
Types of ADR
Alternative dispute resolution can take many forms, the most common of which is binding arbitration — where one or more “neutrals” (typically retired judges) decide a dispute between the parties and typically through a recognized ADR service provider, like the American Arbitration Association (AAA). However, ADR mechanisms can also take the form of binding or non-binding mediation, mini trials, jury waivers or agreed to forms of “negotiations” or submissions of disputes to third parties, who can be vested with discretion to resolve the dispute and/or make recommendations for resolution to the parties to a dispute. ADR, however, is a creature of contract, leaving it up to the parties to determine and properly craft the framework for ADR provisions, even if the choice of alternative dispute resolution involves third party service providers, like the AAA, who often have rules of procedure and engagement that become incorporated into the underlying ADR provision.
When to Focus on ADR Provisions
Unfortunately, most contracting parties consider dispute resolution part of the “boilerplate” of any contract (where it is typically located) and rarely pay attention to any of its details before signing a contract. Few distributors even know or understand the scope of ADR contract provisions let alone the legal implications these provisions can have when a breakdown occurs in a contractual relationship and the need develops to resolve one or more disputes. In fact, very few contract draftsman (e.g., transactional lawyers) understand the legal implications of implementing ADR contract provisions and, if they do, the law is very challenging to draft such provisions correctly. The time to address dispute resolution, including the potential for ADR provisions, is before any contract is drafted and after considering the multiple legal and business issues that affect dispute resolution procedures.
A Few Examples Demonstrate the Import of Dispute Resolution Provisions
In a recent case, a broker claimed a multi-million-dollar commission based on a sale transaction. The claimed fee obligation was fully disputed, including because the brokerage contract was void under state law. Unfortunately, the brokerage contract contained an arbitration provision, before the AAA in a different state, applying that state’s laws. The ADR provision became a substantial obstacle to resolving the dispute, ultimately leading to the filing of a lawsuit, challenging the underlying venue and arbitration provision, only leading to more litigation as to whether the courts or an arbitrator determines the result. In another case, whether arbitration was required was ambiguous, and hinged in part on the language of the arbitration provision: whether the dispute arose under the subject contract. The law draws a distinction between cases that “arise under” compared to those “that arise under and relate to” the subject, favoring arbitration under the latter language, but limiting the scope of arbitral disputes under the former language. Similarly, in a recent distribution dispute, whether a distributor could assert in court certain federal security and anti-trust violations was a function of how well (or poorly) an arbitration clause was drafted. Because it contained the “relating to language” the court litigation led to the matter being heard before an arbitrator. Most recently, one dispute – where time was of the essence as the relief sought was emergent non-monetary relief from the courts – was subject to a condition precedent: that the contracting parties submit their dispute to a “consultant” for a non-binding recommended resolution, before the parties could even litigate if the dispute was subject to an arbitration clause. In each case, these problems could have been resolved, before contract execution, by drafting appropriate provisions, including appropriate exceptions to the dispute resolution provisions — saving the parties tens of thousands of dollars in unnecessary litigation costs.
Even Disputes that Go to Court Require Up-Front Consideration
Even distributors who elect not to provide for ADR provisions in their contracts – instead leaving dispute resolution to the courts – must carefully analyze and structure contract provisions to maximize efficiency of court-based litigation. Distributors should consider: in what court disputes should be heard, fixing venue if need be; determine if there are jurisdictional hurdles that can be contractually resolved (e.g., personal jurisdiction waivers); whether a jury-waiver is appropriate, to minimize the costs of litigation; what law should govern any disputes; and whether to shift costs, such as attorney’s fees, should one party prevail in some or all of the underlying disputes. Similarly, parties who favor litigation, or desire to reserve that right in certain circumstances (such as the need to obtain injunctive relief in the event of trade-secret theft or imminent or existing violations of restrictive covenants as to non-competition, employee raiding, or customer solicitation), can do so — provided again that each provision is carefully crafted and thought is given to the potential for disputes beforehand. Each element of these non-ADR provisions are important, not only tactically and strategically, but also to accomplish business objectives of a party whose rights are in need of redress.
ADR and Litigation in Court Are not Mutually Exclusive
Many distributors believe that arbitration and mediation provisions are beneficial, as they are perceived as saving costs and being a speedy way to resolve disputes. While there are benefits to arbitration, mediation and other ADR mechanisms, such as confidentiality, they can be fraught with peril, including, for example, limiting the discovery rights of parties (such as party depositions), especially when it comes to third-party discovery. Further, ADR neutrals and service providers are not inexpensive. In addition, state and federal laws (that parties typically do not consider) impact on how ADR mechanisms operate (especially arbitration), and depending on how drafted, such provisions could lead to parties being subject to the rules that are unknown and/or have changed since contract execution. Nonetheless, there are ways to craft a series of inter-related dispute resolution provisions, including a blend of both ADR and court-based litigation that are most beneficial to the contracting parties, but preserve their options and concerns (e.g., costs, confidentiality, and discovery rights), in the face of potential challenges, like those in the examples above.
If you have questions or concerns about alternative dispute resolution clauses, or any other issues covered by this article, please contact me at 312-840-7004 or [email protected].
The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.
