Take two similar cases: In “Case 1,” the case moves quickly towards trial but resolves early at mediation. In “Case 2,” the case moves slowly through discovery, with all parties objecting to the other party’s discovery requests; there is a day-long mediation where the case doesn’t settle; there are complicated issues of law to be researched and argued before the Court; and then a costly trial. It is obvious that “Case 2” would cost more money; however, what is not always obvious in the beginning is whether a case is going to follow “Case 1” or “Case 2”’s path. We try our best to estimate costs for our clients and be honest (sometimes brutally) about potential cost, but a lot of the cost depends on your opposing party.
For our business clients, and in some limited circumstances, individuals, there may be a cheaper and more predictable way: Alternative Dispute Resolution (“ADR”). ADR has been around for a long time and can be contractually mandated between the parties, usually in the form of mediation and/or arbitration. Mediation is when a neutral third party goes back and forth between the parties in an attempt to negotiate a compromise. Arbitration is a middle ground between mediation and a lawsuit. The parties present their evidence to a neutral third party who will decide the case; however, arbitration is generally far less formal than a lawsuit and costs less time and money because there are no motions filed or discovery exchanged between the parties.
There are other advantages to just saving time and money. For example, disputes that a business may not want made public (which would be a matter of public record should litigation ensue) can be resolved in a confidential nature through ADR. Where ADR really shines is in the resolution of complex disputes, like a complex breach of contract dispute or complex construction defect case. Using ADR, the parties can select an expert in the field to act as the arbitrator or mediator, instead of relying on a jury of average people who likely would not have the necessary specialist knowledge to properly decide your case.
However, businesses should be careful about blindly throwing in arbitration clauses into their contracts without first consulting an attorney. If the arbitration clause in your contract is not enforceable, then you will end up in litigation anyway. For example, there have been many lawsuits filed recently regarding the Samsung “exploding” phones. People who have been injured when the Samsung phones spontaneously combust are finding that, when they file the lawsuit, Samsung is filing a motion to dismiss the case because there is an arbitration clause contained within the phone’s warranty guide. While the consumer has 30 days to opt out of that provision after buying the phone, the majority of people do not do so because they do not know about it! Further, pursuant to the contract, the proceedings between the consumer and Samsung are secret, Samsung has the right to choose the arbitrator, and, if Samsung wins, the consumer may be required to pay Samsung’s costly legal fees.
Seems like a great deal for Samsung, right? However, In January of 2017, a federal appeals court in California ruled that the arbitration clause did not comply with California law and, therefore, the consumers were not bound by the clause. There have been many other cases in recent history where Courts have refused to enforce arbitration clauses against consumers. Frequently, the Court’s reasoning is that the clauses are hidden among other terms (so the consumer is “tricked”), not negotiable, and unfair.
The takeaway from all of this should be that, while ADR is a useful tool to move cases towards a quick and often relatively cheap resolution, the arbitration clause needs to be enforceable. Litigating the issue of whether an arbitration clause is enforceable can be extremely costly. Make sure to consult an attorney who can check to ensure that your arbitration clause is enforceable in the states in which you do business.