Just as you are unlikely to find a married couple who doesn’t argue from time to time, you’d be hard-pressed to find a business where the co-owners or partners never disagree on matters relating to their company’s direction. While all business owners share the same goal of charting a course for success, they often have different visions of how to get there. And when a consequential dispute between business owners devolves into an intractable and heated conflict, the fate of their interests in the business and the company’s continued viability hang in the balance. That is why it is so important for business owners at loggerheads to find the most effective, efficient way to resolve their stalemate.
In a previous post, we discussed a variety of dispute resolution mechanisms that business owners can include in their operating agreements and bylaws to help address and resolve deadlocks. One of those options is arbitration.
Many businesses include arbitration provisions in their organizing documents because they believe arbitration is preferable to litigation. Most business owners recognize that taking matters to court, while sometimes necessary to advance or protect a party’s or the business’ interests, is usually something to avoid. While both processes involve a neutral third party who decides the outcome of the dispute, arbitration is generally perceived as a more efficient, cheaper, and less destructive way to resolve a deadlock.
While arbitration offers many benefits in business ownership disputes, it is not without its faults or potential downsides. If you are considering including an arbitration provision in your governing documents or want to submit a pending dispute to an arbitrator, here are some things to consider.
What Is Arbitration?
Arbitration is an agreed-upon process in which a third-party neutral selected by the parties considers evidence and testimony submitted by the parties and makes a decision regarding the resolution of the dispute. In this sense, arbitration is similar to traditional litigation before a judge. But there are significant distinctions in both procedure and outcome. While court proceedings are governed by rules of procedure and evidence established by the law and the judge, parties to an arbitration have much more leeway when setting the ground rules for the proceedings.
And while a judge’s ruling is definitive and conclusive, an arbitrator’s decision can be binding or non-binding. If the parties agree to the former, the arbitrator’s decision is final and can usually be enforced by a court, if necessary. In non-binding arbitration, the parties can abide by the arbitrator’s decision if they so choose but are free to ignore it as well.
Why Arbitration Is Preferable to Litigation – And Why It Isn’t
As noted above, arbitration and litigation share many characteristics but also have important distinctions. So what makes arbitration a supposedly attractive alternative to fighting things out in litigation, and what potential risks hide behind these presumed benefits?
More Control Over the Process
Civil lawsuits are governed by strict rules of evidence and procedure, as well as the judge’s rulings, which the litigants must abide by whether or not they like them. In arbitration, the parties have much more power to set their own rules. For example, litigation could involve scores of depositions, expansive document requests, and other intrusive, costly, and lengthy discovery that drain bank accounts and draw out the process for months or years longer than either party would want. In arbitration, however, the parties can agree to limit the extent of discovery, such as setting a maximum number of depositions or placing a tight deadline on when discovery must be completed.
While this ability to govern the process can benefit both sides, it may ultimately put one party at a significant disadvantage. A party may be unable to obtain the evidence and information that could be crucial to their claim or defense due to agreed-upon discovery limits. And if the parties agree to binding arbitration, the losing side forfeits the ability to challenge or change the outcome as they could in an appeal of a trial judge’s ruling.
Protracted discovery, ongoing motion practice, and overcrowded court dockets all contribute to why lawsuits may take years before they get to trial or a judge’s dispositive ruling. None of these impediments to a speedy resolution are present in arbitration. The parties can agree that a final hearing must be held by a set deadline, such as 60 or 90 days from the date of the first meeting with the arbitrator. A limit can also be set for the length of the hearing itself.
The parties’ ability to exert greater control over and place limits on the arbitration process can result in far lower costs than litigation. By restricting discovery and other aspects of the process, the parties can keep legal fees and expenses from spiraling out of control, as often happens in the endless trench warfare that litigation can devolve into. Of course, if the parties give each other as wide a berth in the agreed-upon ground rules of their arbitration as they would have in a lawsuit, any potential savings can go out the window.
For a party with greater resources or bargaining power, arbitration may cause them to inadvertently squander that advantage by leveling the playing field. With expenses limited in arbitration because of a more streamlined and restrictive process, the party with fewer resources can better afford to stay in the fight.
Keeping the Dispute Out of the Public Eye
Feuding owners are a bad look for any business, especially in the eyes of investors, other shareholders, customers, and suppliers. Since court proceedings are almost always a matter of public record, all of those critical constituencies – as well as the media – will be privy to the dispute’s ugly details. Owners can prevent their dirty laundry from being aired publicly by agreeing to keep the process and outcome of the arbitration confidential.
Sometimes, however, the threat of negative publicity for an owner or the business can give the other side leverage they would lose if they agree to confidential arbitration. This is another way arbitration can be more appealing in theory than practice.
If you have questions about arbitration or how to address disputes between business owners, please contact one of the litigation attorneys at Ansell, Grimm & Aaron.