Simple additions to contracts or invoices can help relieve potential headaches.
Large corporations invest significant time and resources designating contractual remedies for disputes that may arise. These remedies are often buried in agreements generally ignored by the consumer, who has little choice but to agree.
For instance, many publicly traded companies require binding arbitration on an individualized basis to resolve disputes and often select a forum convenient for their purposes. The cruise industry, for example, requires most consumer claims be brought in federal court in the Southern District of Florida.
By contrast, many small businesses do not have the time or resources to consider how to address dispute resolution at a large scale, focused instead on business operations and without an on-hand attorney to advise. Moreover, negotiating a dispute resolution clause is often prohibitive for smaller transactions, and many small claims disputes are often dropped if they cannot be resolved.
Quite simply, there is no efficient enforcement mechanism to secure contractual obligations. In addition, paying an attorney is not economically feasible in many instances.
This problem can be remedied, in some circumstances, by creating efficient contractual dispute procedures that reduce costs and the time to resolution. If the dollar value of a transaction is low, the dispute is simple, or if there is a desire to avoid expensive litigation in court and resolve disputes quickly, small businesses should consider the following suggested terms for inclusion in their contracts or invoices:
Agree to mediate early: Add an agreement to mediate any dispute – whether by formal or informal means – early. Doing this can often result in a resolution. Do not make mediation a condition precedent to other resolution procedures, as it may delay resolution rather than encourage it. If the counterparty is a party with whom you do business often, try to select a mediator both parties know and trust. Make the mediation as simple as possible by, among other factors, allowing parties to attend by videoconference.
Adopt mandatory arbitration: A mandatory arbitration clause in your contracts should establish the arbitration service that will be used, the applicable rules for arbitration, the venue and choice of law. In some circumstances, the arbitration clause can identify the individual arbitrator that the parties agree to use. Arbitration is not always the least expensive method for resolving disputes, but it allows more latitude in setting the rules, including reducing the burden of discovery otherwise available in court proceedings and reducing the time available before a final hearing.
Limit discovery: For uncomplicated matters, discovery should be limited to document requests and production — unless the business knows in advance the claim cannot be proven without testimony or other information that would justify subpoenas or depositions, among other discovery tools. By limiting discovery in arbitration, all parties’ actual costs and opportunity costs are reduced.
Establish a deadline for a final hearing: For uncomplicated matters that can be determined via documentation or with direct testimony, a 160-day deadline for the final arbitration hearing is appropriate.
Give teeth to arbitration proceedings: A good arbitration clause should include entitlement to an award of attorneys’ fees, direct costs and the costs and expenses of arbitration for the prevailing party. Including such a provision reduces incentive for parties to violate their contractual obligations and encourages early resolution by the liable party.
Make enforcement a priority: Find a lawyer who can bring an enforcement action under terms that are economically feasible and make enforcement a priority, so counterparties know they cannot avoid their obligations. Enforcement becomes easier once a system is established for new disputes that are known to the party or parties.
These suggestions should make enforcement of small business contracts more economical by avoiding burdensome discovery procedures available in court and by providing incentive and procedures to resolve disputes early. One of the benefits of arbitration is there is no right to appeal absent exceptional circumstances, and the decision of the arbitrator is generally final.
Aaron Cohn is a partner with the law firm Weinberg Wheeler Hudgins Gunn & Dial. His practice focuses on advising businesses on corporate issues and resolving disputes over contracts, investments and employment matters. Based in Miami, Cohn has clients in Naples and other parts of Florida.