Sometimes a lawsuit isn’t the answer

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Once upon a time, when a corporation or small business had a legal dispute that could not be resolved through negotiation, it meant one thing: litigation. And while the courthouse remains an effective venue for resolving business disputes, the general trend over the last decade has been a shift away from litigation and toward alternative methods…Many commercial contracts, and most consumer contracts, now contain clauses requiring that disputes first be brought to mediation, followed by binding arbitration.  For the average business dispute, the benefits of arbitration are numerous.

For example, when compared with litigation, arbitration can be much less expensive, as the scope of discovery is generally quite limited.

The arbitration process is also less time-consuming: In a recent dispute, CSG represented a client in arbitration related to the wrongful termination of a distribution contract, and completed the entire process — from filing the claim to satisfaction of the judgment — in just one year. Had the contract at issue not included an arbitration clause, litigation of the same claim could have taken three years or more. 

Another key benefit of arbitration over litigation is confidentiality. Compared to court proceedings, which involve the public filing of pleading and other papers describing the nature of the dispute, arbitration filings are private.  Likewise, trials are generally open to the public.  Arbitration hearings are conducted in private — an important factor when sensitive information regarding the business methods of one or both litigants are at issue.

In arbitration proceedings, parties may also have the ability to choose the decision-maker. When disputes are handled in the courts, litigants are assigned a judge who may or may not have any knowledge of the industry or the legal landscape in which it operates. In contrast, depending on the language of the arbitration clause, parties that have agreed to arbitrate generally have the ability to select an appropriate arbitrator, or panel of arbitrators, for their particular dispute.  The large alternative dispute resolution organizations have a deep roster of arbitrators with a wide variety of expertise.

One of the down-sides of arbitration is that the decision rendered by the arbitrator or panel of arbitrators is very difficult to successfully appeal.  The standard for reversal of an arbitration decision is much higher than that of a court decision.  Because of the comparatively informal nature of arbitration hearings — they are conducted in a conference room, rather than a court room — some parties have mistakenly taken to approaching them with less gravity and preparation than that required of a trial.  However, just as in court, the arbitrator makes his or her decision based on the strength of the evidence and arguments presented. Litigants that fail to adequately prepare and treat the proceedings more like a practice round than a court proceeding are sure to be disappointed in the result.

Many of these advantages and risks were manifest in a recent dispute our firm handled for DePasquale Salon Systems, Inc. When DePasquale Salon Systems, a distributor of professional salon products, was improperly terminated by a products manufacturer in January 2016, we initiated arbitration proceedings, per the terms of the distribution contract. In addition to being able to choose an arbitrator with experience with distribution agreements, DePasquale Salon Systems was also able to reach a resolution sooner and at lower cost than it would have had it been forced to file a lawsuit and go through a trial.   Following a truncated discovery schedule and six days of hearings, the arbitrator ruled in DePasquale’s favor, finding that the contract had been terminated without cause and awarding DePasquale its requested damages.  The entire proceeding took less than one year. 

Had there been no arbitration clause in the distribution contract, DePasquale would have faced the prospect of costly and lengthy litigation, and may have been less inclined to protect its rights in a court battle. Even if DePasquale had ultimately decided to litigate in court, the court case would likely still be pending, awaiting a trial date.  Instead, DePasquale has already received the payment ordered by the arbitrator. 

Between faster resolution, lower costs and greater confidentiality, there are valid reasons to include arbitration clauses in commercial contracts.  The efficient nature of arbitration and the judgement of a knowledgeable arbitrator make arbitration an ideal method for dispute resolution where the litigants invest the effort to prepare their case as they would for a court room.

A member in CSG’s Litigation Group, Marie Mathews focuses her practice on complex commercial matters in New York and New Jersey federal and state courts, as well as forums for alternative dispute resolution.