Anticipating Litigation: 4 Key Dispute Resolution Tips in Business Contracts

Facebook has been in hot water over the years because of several data breaches, and has had a litany of lawsuits as a result. Facebook is currently facing as many as 16 lawsuits related to data privacy issues alone, and several of those are class action lawsuits. Lawsuits are often an inevitable cost of doing business. But whether you are a large company like Facebook or a small business or individual, alternative dispute resolution (ADR) provision in all your contracts can, and often should, be included in contracts to mitigate and reduce the risk and cost of litigation.

Expense and Uncertainty of Litigation

There are no guarantees in litigation except that most lawsuits for damages above $25,000 can be costly and time consuming. According to data from the National Center for State Courts, the median cost of civil cases is $43,000 – $122,000. Multiplied by potentially tens of thousands of disgruntled customers, it makes sense companies like Facebook would want methods to avoid litigation and encourage settlements. A settlement also removes the risk of appeal, which can take years and add even more expenses to an already sizable bill. Arbitration awards are extremely resistant to appeal as well.

Besides the tangible costs of going to trial, there are other costs of litigation beneath the surface. Trial and the discovery leading up to it require time and energy from the parties, taking away from time and energy that could be better spent improving one’s business, or simply living more worry free. In California, trial courts are slammed with numerous cases and are generally understaffed. Even for simple cases one would be lucky to see the end of trial within a year from the date a complaint is filed. Compared to litigation, alternative dispute resolution methods take a fraction of the time, leaving you to get on with your life as soon as possible.

Here are four common issues to consider for dealing with potential disputes when negotiating business contracts. 

Whether to Require Mandatory Notice.

Before even engaging in an alternative dispute resolution, the contract can contain a notice provision that requires a complaining party to give notice of any alleged breach of the contract and give the offending party a chance to explain or cure the defect. These provisions can save time, money, and confusion by requiring the would-be plaintiff to air their grievances in enough detail so you can properly evaluate your options. 

Such provisions are almost always beneficial and should be strongly considered. Though, you should only have such a provision if you will engage the complaining party’s issues in good faith. Otherwise, you can open yourself up to bad faith claims on top of the other issues. This could be a problem for Facebook, for example, who might have trouble fielding the countless data privacy complaints in good faith.

Whether to Require Mandatory Mediation prior to Litigation

If simple negotiations between the parties goes nowhere, a neutral third party can still help to resolve the matter. A sample ADR clause in a contract can be as simple as the following:

If a dispute arises from or relates to this contract or the alleged breach thereof, and if the dispute cannot be settled through negotiations within 30 days, the parties agree to endeavor first to settle the dispute by mediation administered by the (name administrative provider) under its Commercial Mediation Procedures before resorting to arbitration.

Mediation can be more productive than simple negotiations between the parties. Having a neutral third party who is knowledgeable about the industry and law involved in the claims can set expectations and bring the parties to a solution they would not have come to on their own. Mediation can also be extremely cost effective when compared to trial. While not every user would settle, it would beneficial for a company like Facebook to shave off thousands of claims at an early stage. Further, Facebook could require the mediation and ultimate settlement be confidential, meaning that it would not have to worry a certain payout would become the norm. A hefty award at trial, on the other hand, would embolden plaintiffs, lead to even more lawsuits, and raise the stakes during settlement negotiations.

Mediation is only cost effective if it resolves the matter, though. Mediation does not bind the party and requires no discovery. If mediation is contractually obligated before discovery can be conducted, this means each side is playing in the dark with very little to lose for holding out at this initial stage, which can leave the parties entrenched in their position and unable to settle. There is no guarantee a solution will be reached at mediation and all the effort could still leave you at square one, minus the fees and costs spent to get you there.  

Whether to Require Binding & Confidential Arbitration

Binding arbitration is also a viable solution over going to court. Arbitration uses a neutral third party, just as mediation does, but can be binding on both the parties, meaning the decision of the arbitrator is as good as a decision handed down from the court. Further, it allows some limited discovery. Arbitration also generally takes half the time of regular court proceedings. It likewise often costs less. You can also require that arbitration be confidential, but you must require it, as arbitration is not automatically confidential. An arbitration provision can also prevent class action lawsuits.

Arbitration is not perfect, however. Since there is limited discovery, there can be important information that will never be learned through the proceeding. This can thwart a full understanding of the issues and an accurate evaluation of the risks. Moreover, the decision is not appealable. Courts often defer to arbitrator’s awards and will only modify or overturn them on very limited grounds. Most notably an error in law is not grounds for modification in many states. This could leave you out of options after an award against you even if it was made in derogation of the law. 

While courts have made important decisions in favor of arbitration, there has been growing social backlash against forced arbitration clauses for employees. In particular, several high-profile companies like Uber, Facebook, and Google, have recently ended their binding arbitration requirements for claims related to sexual harassment.

Whether to Award Attorney Fees to Prevailing Party

The threat of attorney’s fees is a powerful card in any negotiation. The standard contractual provision awards attorney’s fees to the winner of the dispute. In states like California, such clauses must be reciprocal, meaning if there is such a provision at all, it applies to all parties to the contract.

The obvious benefit to an attorney’s fees provision is the ability to recoup on the costs of litigation. However, for businesses like Facebook with money to spare, it may be more beneficial to go without the provision. Facebook can likely fund its own litigation and may even have insurance that pays for the defense costs. Being awarded attorney’s fees may also be an empty victory if the plaintiff cannot pay. On the other hand, a lawyer is that much more likely to take the case on contingency and fight to take the case to trial or use it as a bargaining chip in settlement talks.

Bonus tips for mediation / settlement conferences: 

You can bring a horse to water, but you can’t make it drink. You can similarly require a party to come to mediation, but you can’t make them settle. Here are some tips to help make the settlement efforts more productive.

Have a goal in mind but be prepared to move the posts.

Having a clear goal in mind for what you want out of the mediation will help focus the discussions on the pressing issues and ideally move the process towards resolution more quickly. The other side might have different concerns in mind or problems with your proposed deal. For example, the absolute minimum payment you are willing to settle for might simply be more money than the other side can liquidate or obtain right away. Being flexible can save the mediation. In this scenario you can consider a payment plan over the course of months or even years.

Always consider what your best alternative is if settlement talks fail. In the above example, a judgment at trial won’t make the money appear any faster than a payment plan if the money isn’t there. You also won’t be getting a dime until you get the judgment, and all the while you’ll be spending money on attorneys and other fees. Understanding the consequences of a failure to settle can help temper your expectations and bring you closer to a solution everyone can agree to.

It is not over until there is ink on paper.

Settling a dispute is the end goal, but until there is an agreement with signatures the goal has not been reached. All too often parties can rely on verbal representations and agreements only to have one side get cold feet and back out at the eleventh hour. Moreover, verbal agreements often miss the finer details of important and material settlement obligations that can become a new dispute, putting you back at square one threatening litigation to resolve the issue.

Make sure the other side has someone present with the authority to settle the case.

Standard advice in the world of sales is you are wasting your time unless you are making the pitch to a person with decision making power. The same concept applies in settlement. As stated above you want to be able to leave the negotiations with a signed agreement if possible, or at the very least an affirmative agreement to the basic terms. Leaving with a “we need to check with the higher ups” leaves you where you started. 

The sky’s the limit.

Don’t let money be the only factor. If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail. But with ADR you have a whole workshop at your disposal. Challenge yourself to think outside the box. Court’s have limited powers to award judgments outside the context of money. The terms of a settlement can include anything that could be enforced through contract. Going into mediation without considering the non-lumpsum payment possibilities is a waste of the process. Was the vendor’s breach unintentional? Would you still prefer to do business with them? Reaffirm a contract at a new rate instead of a lumpsum payment that might sour your otherwise good business relations.

Anticipating Litigation: 4 Key Dispute Resolution Tips in Business Contracts