Legal Advice by Arthur L. Weiss, Attorney
You’ve heard it before: litigation is expensive. While the adage is true, litigation is not only expensive but also time-consuming and emotionally draining. In a recent study done by the National Center for State Courts, it takes a contract case an average of 367 hours to go through a trial. For an employment law matter, that number is pretty close – 374. According to the same study, it takes an average of 220 hours to settle the matter just before trial. All of that is billable time and this does not include court costs, deposition fees, expert witness fees, etc. Those other fees can add up. For instance, if your lawyer bills you at $300 an hour, you will likely be out over $100,000 for all litigation costs. This is why avoiding litigation should be a priority for your business!
Unfortunately, many businesses will run into problems requiring legal intervention at some point. When this happens, the key is to keep those legal costs as low as possible and to resolve the matter quickly. That’s where arbitration can be helpful. There are several different routes to get to arbitration (rather than litigation). In my limited space here, I will consider only one – the arbitration provision in written contracts.
During normal operations of your business, you will likely execute many contracts – a commercial lease, purchase agreement, supplier’s agreement, employee agreements, non-disclosure agreements, non-compete agreements, and more. An integral part of any written contract is what to do if someone defaults on or breaches the contract. This may include a mandatory binding arbitration agreement, which effectively keeps the matter out of court. How does this benefit you, the non-breaching party? As you saw above, the costs to enforce a contract in court can be very high – reaching $100,000 in many cases. This high cost will give anyone pause before they commence litigation in Virginia state court. If the amount in controversy is relatively low, let’s say $30,000, it is likely the non-breaching party will be forced to settle for an amount considerably less than what is entitled. However, if there is an arbitration agreement in place, the costs are significantly less and the matter can be resolved much sooner. I recently scheduled a three-day jury trial for the summer of 2023. No typo – 2023. Conversely, my arbitration cases will be heard before the end of 2021.
There are costs in arbitration that do not arise in litigation. The arbitrator will be paid roughly $350-400 per hour and there are filing fees if the parties use a nationally recognized body like the American Arbitration Association (AAA) to administer the matter. However, it is not mandatory to use the AAA. A local arbitrator (in many cases, a retired judge) can handle the matter just fine without higher-level administration. This will eliminate the admin fees and will likely get the matter resolved sooner.
It is important to understand the difference between arbitration and mediation. In mediation, the parties get together with their attorneys and a trained mediator and they try to come to an agreeable resolution. There is no trial, no hearing, and no decision other than the ones made by the parties. Mediations are generally voluntary. If arbitration is specified in the contract, it is not voluntary and neither party should waste time and money filing a lawsuit. Once the parties have agreed on an arbitrator, a hearing will be scheduled that will have several earmarks of a trial but it will be conducted in a lawyer’s conference room rather than a court. The arbitrator will hear evidence presented from both the plaintiff and the defendant and decide the case. If the contract calls for “binding arbitration” then that decision will be binding. That decision may then be filed in a local court and the usual procedures for executing the judgment will apply.
Let's say you won at the arbitration and were awarded the full amount of your contract damages. What about attorney’s fees? By now, you will likely have accrued around $10,000 in fees. Can you recover those? Maybe. Virginia adheres to the American rule of legal fees, which holds that the prevailing party in a dispute may only recover if there is a provision in the contract allowing for the recovery of attorney’s fees or if there is a statutory provision permitting recovery. Many statutes do permit recovery of attorney’s fees, far too many for this brief treatment of a complicated matter. But rather than rely on them, it might be better for you to include in your contracts the provision that in any dispute between the parties, the prevailing party would be entitled to recover reasonable attorney’s fees and costs. Now it is up to the arbitrator to decide what “reasonable” is. Good luck with that.
In summary, arbitration is an excellent tool to use to reduce legal expenses in a business dispute. The number of hours expended by the attorney will be considerably lower and the time to get before a neutral party will be measured in months, not years. When I get a call from an aggrieved party, my first three questions are (1) is there a written contract? (2) is there a provision for the recovery of attorney’s fees? (3) is there an arbitration provision? It is only after I have answers to these three questions that I can properly advise a prospective client on the path forward. Best wishes on the success of your business! Arthur Weiss, Esquire, is a graduate of the James Rogers School of Law at the University of Arizona. His other academic accomplishments include a master’s degree in accounting, a master’s of science degree in finance and an undergraduate degree in History and German. Mr. Weiss regularly lectures on tax matters, valuation issues and IRS representation. He served twenty years in the U.S. Air Force, retiring in 1989. Visit www.artweisslaw.com for more information. Have a legal question for Art? Email firstname.lastname@example.org. All legal questions remain 100% confidential.