How Smaller Businesses Can Avoid Costly Litigation
Aaron Cohn, Partner, Weinberg Wheeler Hudgins Gunn & Dial writes about how businesses can use arbitration for speedier resolution of all types of disputes.
It has become standard for businesses with many customers to adopt mandatory arbitration as the preferred dispute resolution procedure. It allows companies to avoid class action litigation and often results in speedier resolution for all types of disputes. Arbitration is not a panacea, however. It can be costly to pay for private dispute resolution, and there are fewer checks and balances on the ultimate fact-finder in any given case. Also, some firms have been able to use the internet to aggregate large numbers of claimants and weaponize arbitration, which has historically been advantageous to large businesses because it suppresses aggregate small-value claims.
In this ongoing dialogue about the best form of dispute resolution, a lot is happening at the moment. On April 14, 2022, a New York State appellate court ruled that Uber could not avoid paying $91 million in arbitration fees to the American Arbitration Association for the approximately 30,000 claims pending before it. That amount is just the fee for the arbitration services and arbitrator; it does not include any potential liability. In another matter, a federal judge in the Northern District of California recently ruled that Coinbase’s arbitration clause, which governs the relationship with millions of customers, is unconscionable because it includes one-sided provisions intended to benefit just Coinbase. Meanwhile, the United States Supreme Court recently heard or decided several cases on the enforcement of arbitration clauses and awards, and the courts continue to see a massive number of cases that involve arbitration disputes under various scenarios.
With the law on the enforceability of arbitration continuing to evolve, large corporations must (and do) invest significant time and resources designating contractual remedies for disputes. That effort often includes keeping abreast of developments in alternative dispute resolution options, including newly devised subscription agreements with arbitration service providers that allow companies to avoid costly mass-arbitration bills.
By contrast, many small businesses often do not have the time or resources to consider how to address dispute resolution. Moreover, negotiating a dispute resolution clause is often prohibitive for smaller transactions, and many small claims disputes are often dropped if they cannot be resolved. Quite simply, there is often no efficient enforcement mechanism to secure contractual obligations, and paying an attorney is not economically feasible in many instances. This problem can be remedied, in some circumstances, by creating efficient contractual dispute procedures that reduce costs and the time to resolution. If the dollar value of a transaction is low, the dispute is simple, or if there is a desire to avoid expensive litigation in court and resolve disputes quickly, smaller and mid-sized businesses should consider the following suggested terms for inclusion in their contracts or invoices:
Mediate early. Add an agreement to mediate any dispute – whether by formal or informal means – early. Doing this can often result in a resolution. Do not make mediation a condition precedent to other resolution procedures, as it may delay resolution rather than encourage it. If the counterparty is a party with whom you do business often, try to select a mediator that both parties know and trust. Make the mediation as simple as possible by, among other things, allowing parties to attend by video conference.
Add an arbitration clause. Adopt a mandatory arbitration clause in your contracts except when a class action may be a more economical method of resolving a potential dispute. The clause should establish the arbitration service that will be used, the applicable rules for arbitration, the venue, and the choice of law. In some circumstances, the arbitration clause can identify the individual arbitrator that the parties agree to use. Arbitration is not always the least expensive method for resolving disputes, but it allows for more latitude in setting the rules, including reducing the burden of discovery otherwise available in court proceedings and reducing the time available before a final hearing. The arbitration clause should reference and incorporate the Federal Arbitration Act if the subject matter relates to interstate commerce in order to avoid state-specific restrictions that can prevent the enforceability of an arbitration clause.
Set limits on pre-hearing procedures. For uncomplicated matters, discovery should be limited to voluntary production or document requests. This type of limitation greatly reduces the cost of litigating a dispute and time to resolution.
Establish a hearing deadline. Setting a deadline for a final arbitration hearing helps ensure that the matter resolves quickly. For uncomplicated matters that can be determined via voluntary document production and an informal final hearing, a 90-day deadline is manageable.
Create consequences for bad faith disputes. A good arbitration clause should include entitlement to an award of attorneys’ fees, direct costs, and the costs and expenses of arbitration for the prevailing party. Including such a provision reduces the incentive for parties to violate their contractual obligations and encourages early resolution by the liable party.
Prioritize enforcement. Find a lawyer that can bring an enforcement action under terms that are economically feasible to the business and make enforcement a priority so counterparties know they cannot avoid their obligations. Enforcement becomes easier once a system is established for new disputes that is known to the party or parties.
The foregoing suggestions should make enforcement of business contracts more economical by avoiding burdensome discovery procedures available in court and by providing incentives and procedures to resolve disputes early. One of the benefits of arbitration is that there is no right to appeal absent exceptional circumstances, and the decision of the arbitrator is generally final.
About the author
Aaron Cohn is a partner in the Miami office of Weinberg Wheeler Hudgins Gunn & Dial. His practice focuses on advising businesses on corporate issues and resolving commercial and investment disputes. He can be reached at firstname.lastname@example.org or 305-455-9133.