This blog is the second in a series of three.
Our most recent blog post discussed “tiered dispute resolution clauses” in contracts. This is the first step in providing clients with alternatives to court and litigation. It gives parties value in three ways: (1) It gives them the opportunity to work together on how they will resolve a dispute; (2) it allows lawyers to educate their clients on what their options are, how they work and what their pros and cons are while the parties are calm and agreeable; and (3) it gives the parties more control over the process as well as the outcome.
A dispute resolution (DR) clause is a provision in a contract that sets forth how the parties agree to resolve their disputes, should they arise. The most common, but not often the best one, is an arbitration clause. It states that if the parties have a dispute, they will use binding arbitration (which cannot be appealed) rather than initiate a lawsuit and go through the court system. The problem with this clause is that it usually doesn’t have enough details about the scope of the arbitration. Some questions are not addressed: Will it be a single arbitrator or a panel of three arbitrators? How much discovery or document exchange will be allowed? Will the scope of the arbitration hearing be limited and if so, how? Will pre-hearing and post-hearing briefs be required?
The other problem with arbitration clauses is that parties often sign the agreement without understanding its ramifications. What was once a simplified, short and less expensive arbitration process has become more like litigation. Arbitration today often includes discovery, depositions and motion practice, increasing the length and cost of the process.
A tiered DR clause offers a sequence of steps. The parties agree to first use their best efforts and work in good faith to reach a solution themselves. If they fail to resolve, then they will use an “interest-based” process like Mediation or Collaborative Law. Simply put, interest-based means that the parties and lawyers work by intention and design to achieve a resolution that satisfies all or most of the interests of both parties. They focus on the present and future, not the past. These processes are different from positional, adversarial, zero-sum game processes like litigation or arbitration, where there is a clear winner and loser (or both losers), and which typically take longer, cost more, are very draining and in which the parties have given up their control over both the process and the outcome.
Going further along the tiers, if the interest-based process does not reach a resolution, the parties then agree to utilize either the court system or some variation of arbitration, ranging from those that have a panel to a single arbitrator, and those that look a lot like litigation to much tighter, streamlined models like “baseball arbitration”.
Tiered DR clauses essentially invert the default process, so that litigation or arbitration become options of last resort, only used if other, less damaging and more efficient processes fail to resolve the case. When the right type of process is selected and clients are represented by lawyers who are trained in those types of processes, the chances are very good that the dispute will be resolved in a way that was developed and agreed upon by the parties, and accomplished in a much more cost and time-efficient manner.
Without any such DR clause, what usually happens in disputes is that one party hires a litigation firm, they start the litigation process, file suit in court and serve the defendant(s). The named defendant(s) file and serve their answers, and they’re off the races….
…Two or three years later, thousands of dollars lighter, and having either severely damaged or destroyed key relationships, the parties are trudging along in this public litigation, looking for a way to end it. They have completed discovery, have made whatever motions could be made, and then, after all that preparation for a trial, will most likely default to a process like mediation. At this late stage, this is primarily to avoid the added expense and risk leaving their fate to an unpredictable jury to decide, followed by the possibility of an appeal. This is a fact: Over 95% of the cases that get filed with court get settled and never go to trial, despite coming very close in time to the trial date. And at that point, they settle (implied – for less); they do not resolve (i.e. solve the problem). We often use these two terms interchangeably, but there’s a big difference.
Now that you know, we urge you to discuss with your legal counsel the value of including a tiered DR clause in any agreement you make, and start proactively resolving disputes even before they become disputes.