By default, most civil disputes are litigated in court. Unfortunately, litigation is expensive and inefficient. In fact, civil litigation can take years and cost hundreds of thousands of dollars. Litigation can take a horrifying toll not only on individuals, but also on small businesses. It is impossible to avoid all disputes. However, litigation can drain a small business of its assets and resources. Even if you “win” in court, you could be out a lot of time and money.
In order to avoid going to court, contracts can (and often do) contain alternative dispute resolution (“ADR”) clauses. ADR clauses stipulate that disputes about the contract must be addressed in arbitration and/or mediation. Here are a few things to consider when you are using ADR clauses in your small business.
ADR clauses usually require the parties to waive some important rights. First, it is important to remember that ADR clauses generally deprive one or both parties of the right to a trial. Yes, going to trial is a right. This is because the court system is highly controlled and meant to prevent unfair advantages; everyone is subject to the same rules and procedures for presenting a case, and a jury of your peers makes an impartial decision. Mediation is nothing like this, as mediation is much more like negotiation than litigation. Arbitration is often highly structured like litigation, but the rules often vary based on the arbitration service, and you never have the benefit of a jury in arbitration. Because of the perceived benefits of trial, some people prefer the court system.
ADR clauses come in a variety of forms, and one size does not fit all. You probably use a lot of contracts in your business, and an ADR clause might be useful in all of them. But, as is the case with most contract terms, there is not one magical ADR clause that fits perfectly into every agreement. Here is a sample ADR clause:
“Client and Company agree that all disputes between them arising out of or relating to this Agreement shall be submitted to binding arbitration.”
This clause is really basic. In fact, I would argue that it is insufficient for most circumstances. It requires the parties to submit to arbitration, but it could do so much more. It could require the parties to use a specific arbitrator; it could require the parties to try to mediate first, and then go to arbitration if mediation is unsuccessful; it could state that certain types of claims must go to court and others must go to ADR.
Obviously, the type of ADR clause you need will depend on your contract and your ultimate goal(s) for using ADR. For instance, if your goal is to resolve payment disputes as fast as possible, you may want an ADR clause in your sale contract that requires all payment disputes to be submitted to ADR within 30 days.
Even if there is no ADR clause, the parties to a dispute may still choose ADR. As discussed above, some people will always prefer the court system over ADR. Depending on the dispute, you may even prefer the court system. However, many small businesses today recognize that ADR can be cheaper and faster than litigation, even if they have failed to include ADR clauses in their contracts (oops!). If you find yourself involved in a dispute and there is no ADR clause, all is not lost. You or your attorney may still propose a form of ADR, such as formal negotiation sessions, mediation, or arbitration. Many courts actually require some form of ADR before a matter can go to trial, anyway, so proposing ADR is still a good option, even without the ADR clause.
The law is always changing. We cannot guarantee that the information provided herein is current and accurate. Every situation is different. Do not refrain from seeking legal advice from a lawyer because of anything contained in this blog. Consult an attorney for individual legal advice regarding your own situation.