Wednesday, September 30, 2009

Quicktip: Arbitrate Disputes and Save Time and Money

BIG CONFESSION: I’m involved in litigation with former business partners.

As much preaching as I do about business partners having a good quality written agreement, we didn’t have one. You know the story about the cobbler who lets his kids run around with holes in their shoes. My bad.

It’s a long, sad story about how we got here. Mostly it’s the result of strong personalities and differing opinions about how a piece of commercial real estate should be managed.

Hindsight being 20/20, as we now progress into the second year of litigation, a side battle with my first set of lawyers, and generally a lot of aggravation, the dispute has greatly changed my opinion about the use of arbitration clauses in commercial contacts.

In any contract, the parties can agree to arbitrate any dispute that may come up.

Arbitration is a form of alternative dispute resolution (ADR), that allows parties to resolve disputes outside the courts. One or more “arbitrators” are selected who hear each party’s side of the story. The arbitrator makes a decision about the outcome of a case, and their decision is legally binding on the parties.

Once you enter into an agreement to arbitrate, absent a new written agreement from both parties to change the terms of the arbitration clause, courts will not let either party "opt out" of arbitration. By the way, our over-burdened court system LOVES arbitration clauses.

Arbitration can be a lot like achieving a settlement in litigation. Unlike the final verdict in litigation, where there is usually a "winner" and a "loser", arbitration panels take into consideration each party's interests when rendering a decision. Rarely are there ever pure winners or losers.

The downside, of course, is when you are 100% "in the right" and would likely win a claim in litigation (eventually), you could end up with a decision in arbitration for an award that is something less than 100% of what you feel you are entitled to. Also, if you don't agree with the award, you are stuck with it--appeals are not an option in Arbitration.

In my opinion, this is a small price to pay for getting yourself into the dispute in the first place. Most disputes are avoidable by drafting good agreements at the outset of a relationship and picking partners, customers and vendors selectively.

In the end, parties who resolve disputes in arbitration wind up with a final outcome that is fairer and rendered more expediently than in litigation. The result is less time wasted and a fraction of the expense spent as compared fighting battles in court.

When you factor in the benefit of reduced time and legal expense, prudent business people--especially the owners of small businesses whose customers may have deeper pockets that their own--should seriously consider adding mandatory arbitration clauses to all their contracts.

If arbitrating potential disputes is right for your business, I have set up a way for you to get a copy of an Arbitration Clause that you can easily add to your agreements. Go to

Labels: , ,

Monday, September 29, 2008

Arbitration Clauses: An Insurance Policy Against Emotional Adversaries

We regularly advise our corporate clients to avoid litigation at all costs. A trial requires an immense amount of management’s time, it is a big distraction from operations, and business frequently suffers. Add in the additional cost for litigation attorneys, it’s no secret that the lawyers are often the prevailing parties.

Sometimes legal disputes are unavoidable and in these situations we advise our clients to reach a settlement as quickly as possible, even if it means walking away from some money or taking a hit to their ego. It enables management to move on to positive endeavors and, in the long run, is better for business.

Occasionally, however, you’ll have an adversary who refuses to negotiate a reasonable settlement despite the financial burden on them to continue with a lawsuit. These litigants are often very emotional about a claim, or are foolishly clinging to “principal” to make a point. Litigation attorneys love clients like this, especially if they have deep pockets to continue paying the firm’s bills. We frequently see this situation in partnership disputes where there’s been an emotional falling out between partners.

By adding arbitration clauses in all your contracts, you have an insurance policy against the emotional adversary. In an arbitration clause, both parties agree to submit any claim that cannot be settled to an arbitration panel in lieu of going to court. Courts strictly enforce contracting parties’ agreement to arbitrate claims and will hardly ever permit a claim to proceed in court where both parties have agreed to arbitrate in a contract. An arbitration panel’s decision after a hearing is then final and binding on both parties.

Unlike litigation that can drag on for years, arbitration is much less formal than a trial and takes significantly less time to reach a final resolution. In the end, litigation costs are significantly less burdensome. Some critics of arbitration claim that panels’ decisions can be unpredictable, which can be true. Further, often in contract disputes there are no clear winners or losers—the panel seeks a remedy that is most fair to both parties. Notwithstanding, for most businesses, arbitrating disputes that can’t be settled makes the most sense.

For a free copy of our Business Partners Questionnaire, a useful tool that saves business partners money by helping them begin a dialogue about their relationship, email