Don’t wait for trouble to seek ADR

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Attorneys advised to add clause preempting business fallout

By Nancy Crotti
Dolan Media Newswires

Parties just going into business together may believe everything is going to work out swell, but litigators know better.

In case of a falling out, business attorneys would be wise to add an alternative dispute resolution clause to their clients’ contracts, said Timothy Pramas, an attorney with Manty & Associates, Minneapolis. If they wait until a major disagreement arises, those once-amicable business partners could be headed down the long, expensive road to court.

ADR should never be an afterthought, according to Pramas and attorney David Allgeyer, a partner at Lindquist & Vennum in Minneapolis and an arbitrator for 15 years.

Alternative dispute resolution may include arbitration (which usually is binding), mediation or other types of nonbinding resolution such as early neutral evaluation and summary jury trial. Mediators can help parties reach an agreement but cannot decide a case, which can still go to trial or settlement. Arbitrators take the place of judge or jury, deciding a case unless the parties opt to settle, but they cannot order the parties to mediation or a settlement conference.

Whether to add an ADR clause and what to include should depend on what is at stake, Allgeyer said. It may be difficult to determine how complex to make the clause because the parties do not know which issue, if any, might arise, he said.

Like any legal maneuver, arbitration has its pluses and minuses. Drawbacks include the filing fee ($10,000 in multi-million-dollar cases) and arbitrator’s fee; the possibility for delay when attorneys cannot agree whether to arbitrate or find a common hearing date; and the fact that arbitration generally leaves little room for appeal, even if the arbitrator misinterprets the law.

In order to overturn an arbitrator’s ruling, the federal arbitration statute says a district court must find the arbitrator did one of the following:

• Was corrupt;
• Was biased against one party;
• Refused to change a hearing date despite sufficient cause;
• Refused to hear pertinent evidence;
• Exceeded his or her powers or executed them so poorly that “a mutual, final and definite award upon the subject matter was not made.”

Yet even with those narrow grounds, some attorneys will launch a post-arbitration attack.

“That’s when you get your arbitration award,” Allgeyer explained. “It’s supposed to be final, but lawyers being lawyers, they just love to attack the award afterwards, trying to show they’ve met the grounds for vacating the arbitration decision.”

They rarely win, he added.

So why would anyone opt for arbitration? It may be faster and less expensive than going to court, according to Pramas and Allgeyer. For example, the parties may agree to limit the number of depositions, making the process less formal than going to court. The arbitrator also may be an expert in the disputed area, an unlikely trait among judges and juries. Unlike public court rulings, an arbitrator’s decision is private.

The most expensive part of going to court is taking depositions, exchanging documents and doing discovery, Pramas said. Keeping costs lower through arbitration also means attorneys learn less about the case before the hearing.

Problems with arbitration may stem from ambiguous ADR clauses, Allgeyer said. Unless they agree up front, the parties may later squabble over which issues the process will cover. If the clause says the arbitrator can interpret the contract but has no power to decide issues of tort or statute, the parties may end up in court, he said.

Allgeyer and Pramas recommend using the American Arbitration Association’s Web page for guidance in drafting ADRs. Other sites include JAMS and the International Institute for Conflict Prevention & Resolution.

The Clausebuilder tool at clausebuilder.org walks an attorney through the process of writing an ADR, depending upon the nature of the contract or dispute type. It includes options such as the number of arbitrators to include, their qualifications, the locale for the arbitration hearing, the amount and type(s) of discovery, how many depositions to allow (if any), remedies and more. Under AAA rules, the arbitrators must be neutral parties unless the clause allows for partial ones.

Attorneys considering arbitration would be wise to disregard the advice of colleagues who recently won or lost a case that went to arbitration, Allgeyer said, and instead keep their focus on their contract.

“You should think objectively about whether the case is right for arbitration based on its size, complexity and what the issues are likely to be,” he said. “(In) a lot of business disputes, the costs of litigation overwhelm the
problem.”