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Forget Arbitration - Go for Jury Waiver
By Fred MendohlsenPre-dispute resolution provisions should be carefully considered, along with much of the other seemingly “legal boiler-plate” provisions that show-up at the end of distribution and other contracts, before signing off on a contract that can affect a business relationship for years.
Most distributors are familiar with written contracts (like distribution agreements) that have provisions near the end of the document that appear quite legal in nature. Generally, one set of these legal provisions relates to where and how contract disputes are resolved. Most distributors are familiar with arbitration, where the parties give up the right to have their claim heard in court, as well as their right to a jury trial. ”Mandatory arbitration provisions,” however, are just the tip of the iceberg when it comes to pre-dispute resolution contract clauses.
Because these provisions are agreed to before a dispute arises between contracting parties, they are referred to as “pre-dispute resolution provisions.” As mentioned, one classic pre-dispute resolution provision is mandatory arbitration, where parties agree to select one or more “neutrals” (typically retired judges or practicing attorneys) to serve as arbitrators and preside over a hearing where the parties, typically through their own attorneys, present their case.
Because arbitration is a creature of contract, its contours are left in large part up to the parties. They can agree, for example, whether one or more arbitrators will hear the dispute, how they are selected, whether a written decision must be issued, the types of pre-hearing discovery available to the parties (depositions, requests for documents, etc.), and whether the arbitrator can award punitive damages and/or attorney’s fees. Parties can also agree on the scope of disputes to be heard in arbitration. For example, clauses that provide that “any claim, dispute or controversy between us… and any claim arising from or relating to this agreement or the relationships which result from this agreement…” can be resolved by arbitration.
Pre-Dispute Resolution Issues
Pre-dispute resolution provisions can be extremely important after-the-fact (i.e., once a dispute arises), and often can seriously hinder how a party resolves a contract-based dispute. Most businesses, however, give these types of provisions little consideration before hand, only to realize, after the fact, that the ability to address post-dispute issues can be substantially limited.
For example, in a recent case where a dealer wanted to pursue certain statutory anti-trust claims against a supplier, the dealer was prohibited from asserting that claim in court before a jury because the underlying contract contained a broad arbitration provision. Not only did the arbitration provision supercede the party’s right to resolve any contract dispute in court (including a right to a jury), it covered all statutory claims that party might have. While the dealer in that case did not even consider, at the time of contract formation, the impact of the pre-dispute clause in its supplier agreement, it certainly recognized the pitfalls after the fact. The lesson learned is that pre-dispute resolution provisions should be carefully considered, along with much of the other seemingly “legal boiler-plate” provisions that show-up at the end of distribution and other contracts, before signing off on a contract that can affect a business relationship for years to come and where disputes, however unlikely they seem at the time, are possible or even likely “down the road.”
Arbitration is not always the speedy and inexpensive forum that many believe. In fact, in the dealer case mentioned above, the dealer first asserted its claims in federal court, and found itself on the receiving end of a motion to order the case to be heard in arbitration, which was not only granted, but cost the dealer a good chunk of change to litigate that procedural issue.
While arbitration is sanctioned by the courts, and even federal and state statutes such as the Federal Arbitration Act (which makes “valid, irrevocable and enforceable” written provisions in contracts affecting commerce calling for arbitration of disputes), many courts refuse to enforce such provisions, depending on the facts and circumstances. That is, there is no guarantee that a pre-dispute mandatory arbitration agreement will be enforced. Because arbitration is a creature of contract, contract defenses, including those relating to contract formation and procedural and substantive unconscionability, are often successfully asserted by parties seemingly bound to an arbitration provision.
Courts also look to see if there is balance in the arbitration provision. Those that give one party the right to go to court, but restrict the other; those that do not provide for selection of a neutral arbitrator; those that unduly restrict a party’s right to recover certain types of damages, or non-monetary relief; or those that restrict the rights of a party to engage in discovery – can be invalidated. Similarly, provisions that improperly allocate the costs of arbitration (including as to attorney’s fees) or are overly biased in administration and process can be set aside by the courts.
Thus, to the extent that a party wants to preserve a pre-dispute mandatory arbitration provision (for example, to deprive a channel partner of the ability to present to a jury statutory claims with the potential for treble damages and attorney’s fees, like the anti-trust claim referred to in our example) needs to be equally sensitive to the provision in the contract formation stage to preserve its enforceability.
Alternatives to arbitration
Other pre-dispute resolution provisions, like jury waivers, forum-selection clauses, personal service waivers, choice of law provisions and/or consent to jurisdiction clauses, are equally important, both tactically and strategically, to provide for effective dispute resolution at the contract formation stage. Many, in fact, are constitutional in nature, such as the right to a jury trial (which flows from the Seventh Amendment to the United States Constitution and each state’s constitution), and the personal right to jurisdiction (which flows from the Fourteenth Amendments mandate of due process).
Jury waivers are particularly interesting. Because they are constitutional in nature, and exist in the context of criminal proceedings (where the longstanding inalienable right to life, liberty and the pursuit of happiness [as contemplated by the Declaration of Independence] can be compromised if not taken away), the courts have developed a different legal standard to assess the propriety of a jury waiver – whether or not they are “knowing and voluntary.”
Jury waivers eliminate much of the procedural and substantive challenges to arbitration provisions, and give parties more protection against runaway jury verdicts in commercial, employment and other disputes. For example, full discovery exists under applicable rules of procedure; no issues exist as to the neutrality in a bench trial (i.e., one presided over by a judge, without a jury); the judge decides how costs and fees are apportioned; and, the parties have full appellate rights (which do not exist in arbitration).
While not nearly as common in practice or in the literature, planning for disputes to be resolved by way of a bench trial is a viable alternative to pre-dispute mandatory arbitration, and should not be overlooked by distributors and contracting parties in pre-dispute resolution contract formation planning. When coupled with a favorable choice of forum, choice of law, and consent to jurisdiction provisions, a bench trial can be a meaningful alternative to arbitration if and when the relationship between contracting parties turns south and disputes (particularly difficult and/or hotly contested disputes) develop.
Frederic Mendelsohn is a partner with the law firm of Burke, Warren, MacKay & Serritella, P.C., in Chicago, www.burkelaw.com. His practice involves complex commercial litigation and dispute resolution; labor and employment law; market channel matters involving dealers, distributors and sales representatives; and the general representation of middle market business. For 12 years he was general manager of the Electronic Distribution Show, and is intimately familiar with the electronic distribution industry. He may be reached at 312-840-7004 or fmendelsohn@burkelaw.com.
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