The default method of resolving legal disputes in Texas by going to court is based on your constitutional right, as either initiating party (plaintiff or claimant) or answering party (defendant or respondent), to have any civil dispute heard by an impartial judge or jury that will determine who is right and wrong. That is a time-honored and tested tradition long used in common law countries. However, over the years it has become a more expensive and time-consuming process not only for individuals but small businesses as well; in large part due to the huge amount of electronic information and communications that may be subject to the generally broad “discovery” process available in court.
One way to resolve disputes faster and by less formal means is through alternative dispute resolution (ADR). There are many different types of ADR, with the most common of those being arbitration and mediation.
Arbitration is by far the most prevalent form of ADR known to virtually everyone, as it is a matter of contract. Any two or more parties can agree to arbitrate as part of a business deal, license, purchase agreement, or anything else, either before or after a dispute arises. Large companies can effectively impose arbitration as well by including such a requirement in their terms and conditions for the purchase of a good or service, whether that is found in a form adhesion contract, tucked into the packaging terms (i.e., “shrinkwrap”), or mandated in the form of having to check a “terms of service” button before online purchase (i.e., “clickwrap”).
Courts in Texas and throughout the nation strongly favor a policy of encouraging arbitration and thus have for years found ways to make virtually every type of arbitration agreement enforceable. If you have purchased a good or service offered in a standard format without much or any ability to negotiate the terms, chances are high that any dispute you later have with that merchant is subject to arbitration.
Mediation is the next most common form of ADR. It typically comes into play only after a dispute has arisen and either the parties agree or a court orders them to mediate before a third-party neutral. The idea is that an experienced neutral can help convince parties where there may be weaknesses in their case that help push the persons together towards settlement. Some types of agreements include a mandatory mediation in the same way as arbitration though, with the standard Texas Residential Real Estate Contract (TREC) being an example that includes a pre-suit mediation clause.
Other types of ADR are less commonly used in Texas but are explicitly available by statute for parties to agree to include a “mini-trial,” a “moderated settlement conference,” a “summary jury trial,” or a trial by “special judge” (or “private judge”). Those are all detailed in Chapters 151 and 154 of the Texas Civil Practice and Remedies Code.
ADR does not work in every situation though. There are both benefits and disadvantages to keep in mind in deciding whether to agree to any such process.
The Benefits of Alternative Dispute Resolution
There are, broadly speaking, three main benefits to the ADR process in Texas: control that is dictated by the parties’ agreement, speed of resolutions being much faster typically than in court, and often less cost overall.
Once you decide to take a suit to court, the parties generally have less control over how and when the dispute gets decided. Most courts these days in larger urban areas have thousands of cases on their docket at any one time. It is not unusual for it to take two years or more before the case gets to a point of final resolution. In addition, the parties are subject to following many formalized rules that only attorneys know well.
When the parties opt for ADR, however, they can negotiate and agree on virtually anything related to the dispute. That includes how many third-party neutrals will be involved (e.g., one arbitrator or a panel), how they get selected (by agreement, by each side selecting one and those two selecting the other), their qualifications (industry experts or attorneys), the rules that will be followed (formal to informal), and virtually anything else that still constitutes a fair and unbiased proceeding to both sides.
Allowing the parties to tailor the proceeding to their needs, as opposed to putting it before a randomly selected judge or jury, is one of the greatest benefits of ADR.
Another major benefit of ADR is getting to a final resolution faster than possible in court. That is because the parties are essentially engaging a third-party neutral to be dedicated to deciding their dispute, but also because they typically forgo the formality of courts that require filing a written motion, response, and reply, then waiting for a hearing date before a court, and possibly not getting a court that can focus much on the issues even then due to other matters.
Mediators, arbitrators, and private judges are much more familiar with the issues and can often make a decision quickly based on a short submission or even just a phone call between all sides. The process of a final resolution also is less formal. Rather than everyone appearing in a courtroom with the formalities of evidence presentation over several days or weeks, it gets condensed into a much shorter period of time (often a single day) with the parties having much more leeway with how to make their arguments and trying to sway the neutral in their favor.
ADR can also present a large cost savings overall depending on the amount at issue. That is because the procedures are more streamlined and less time is spent on the formalities of motions and evidence presentation as opposed to on the merits of a position.
The parties do have to pay for a third-party neutral’s time unlike in court where the judge is compensated by the state or a jury can be called to serve, but the cost savings from less hearings in the courtroom (with its associated written motion practice) and streamlined discovery can be substantial overall. This is especially true when it comes to mediation as the amount spent on a half- or full-day use of a neutral’s time can be huge when they are able to get the parties to come together to an immediate resolution.
The Drawback to Alternative Dispute Resolution
There are some disadvantages to think about with all the ADR processes as well, but the biggest one involves the loss of a broad right of review for an arbitration award.
In theory, ADR is always fair to both sides – particularly when they genuinely agreed to engage in the process. However, when it comes to arbitration imposed by large companies or repeat players (like a financial institution), there is a strong debate as to whether it is truly impartial to both sides. Small individuals and companies forced into arbitration to purchase a good and service can be at a great disadvantage when the third-party neutral unconsciously or otherwise recognize it is the larger player that will decide whether to continue using the service so as to perhaps favor them in making certain decisions; especially when a close call. A jury is historically known to be more favorable to the underdog.
Another major reason that companies choose to include a mandatory arbitration class is because they can, in that way, prevent any class action type procedures. That allows them to divide and conquer in ways that would otherwise not be available.
Unlike court proceedings, all forms of ADR are presumptively confidential (unless the parties explicitly agree otherwise). The idea is that confidentiality encourages both sides to come to a resolution without fear it may be used against them in other matters. Sometimes the publicity of what a bad actor has done serves not only to result in greater compensation to the harmed party but prevents and deters them from acting in the same way towards others, as much as or more even than punitive damages. Confidentiality can be a double-edged sword.
Limited Ability to Correct Errors or Appeal
By far, however, the greatest disadvantage of ADR—and any arbitration-type resolution in particular—is that, unless the parties agree, a decision made in the proceeding is deemed final and cannot be overturned even if there was serious legal or factual error. The ways in which an arbitration award can be vacated are limited to things such as it not occurring according to the parties’ agreement in the first place, an objectively biased or conflicted arbitrator, failure to provide for basic due process (i.e., a hearing at all), and egregious violations of public policy otherwise.
The statistics vary greatly but it is often noted that less than 1% of all challenges to an arbitration award are successful in vacating that in whole or part. The courts are very serious when stating the policy is to not disturb an arbitration award otherwise based on a fundamentally fair process. In other words, if the parties contracted for a single arbitrator with limited review they are deemed to have taken on the risk that the arbitrator could simply get it all wrong. That is not a reason to overturn the agreement.
The general inability to appeal or correct an error made by a single arbitrator or arbitration panel is the greatest disadvantage of such ADR (but, if you are on the receiving end of error, an advantage in your favor as it cuts both ways – neither side is generally allowed leeway to petition to correct an error).
Is ADR right for me?
There are many considerations to take into account when deciding whether to agree to an ADR process after a dispute arises (since, again, a pre-suit arbitration or mediation clause generally is not subject to challenge). Trading in the ability to seek appellate review or correct errors by the first decider of law and facts—i.e., a trial judge and/or jury—is the biggest concern to consider before agreeing to a procedure like arbitration, which is generally binding no matter the result.
The decision of whether to engage in other types of ADR that are not necessarily dispositive—including mediation and the other more advisory-type procedures—is often a factor of cost versus how beneficial it is towards pushing the sides together to reach a resolution that otherwise saves money overall.
In all instances, it is advisable to consult with an attorney to determine which may be the best option for you. Wright Commercial Litigation has substantial knowledge and experience with arbitration and mediation and is familiar with the lesser-known forms of ADR as well. Wright Commercial Litigation provides free initial consultations and often offers to take appropriate cases on a partial contingency or reduced fee hybrid fee basis.
Contact the firm here to request a free consultation on your arbitration provision.