Arbitration vs. Litigation of Business Disputes?

Arbitration vs. Litigation of Business Disputes?

Many standard form business and especially employment, consumer and other contracts provide that some or all disputes between the parties can be resolved only by arbitration, as opposed to traditional litigation.

Recently, the business and legal press discussion of alternative dispute resolution options have focused on two somewhat divergent attacks against arbitration. First, state courts have attempted to expand consumer or employment-related arbitration claims to much broader class actions. A 9th Circuit Federal Court of Appeals’ decision to that effect was reversed by the U.S. Supreme Court (Lamps Plus v. Varela decided 4/24/19). Alternatively, more recently, on September 20, 2019, the Democratically controlled U.S. House of Representatives passed the Forced Arbitration Injustice Repeal Act (FAIR) which proposes to ban private pre-dispute arbitration agreements for employment, consumer, antitrust or civil rights’ claims. President Trump, however, has already indicated that, if in the unlikely event that the U.S. Senate passes the “FAIR” Act, he will veto it. September 21, 2019, Wall Street Journal editorial titled its criticism of the “FAIR” Act as the Lawyer Enrichment Act. Part of the Journal’s premise was that the plaintiff’s bar benefits much more than its class of claimants, who often actually receive little financial benefit as a result of such class action proceedings.

Even though the U.S. Supreme Court’s decision in Lamps Plus was by the narrowest 5 to 4 vote, it appears as though the alternative of arbitration remains viable.

In looking at the alternative of arbitration versus traditional litigation, a business manager or owner is often presented with what may be a standard form, or, where more dollars are at risk, a specially drafted contract, which includes a mandatory dispute resolution provision. What are the benefits and lists of agreeing to arbitration as a primary or sole means for resolving a business disagreement?

Arbitration proceedings are typically tied to a set of rules governing the entire proceeding, often in the form of those promulgated by the American Arbitration Association (the “AAA”), or those provided by what was formally known as the Judicial Arbitration and Mediation Services, Inc., and now identified by the acronym “JAMS”. The AAA has literally hundreds of qualified arbitrators, many of whom are current or former practicing attorneys or jurists. JAMS’ panel of arbitrators is heavily populated by retired state and federal judges. The AAA has a special set of rules for resolution of commercial disputes and, for example, construction disputes as well, while JAMS’ offerings include rules specifically geared to employment disputes.

Proponents of commercial (“BTB”) arbitration for business dispute resolution, including the AAA itself, promote arbitration as a more efficient, expeditious and less expensive alternative to traditional litigation. In addition, confidentiality of heavily protected intellectual property or other confidential business processes and procedures can be significantly enhanced through arbitration. Advocates of arbitration also cite arbitration’s ability to avoid the excesses of emotional jury awards as a benefit. On the other hand, business owners and managers generally view traditional litigation as a process burdened by the archaic procedural rules and long delays typically involved in traditional litigation filed in state or federal courts.

The advantages promoted by the advocates of arbitration are generally accurate but are variable depending upon the nature and complexity of the breadth of a particular business dispute and are somewhat dependent on the rules governing the proceeding.

Specially negotiated commercial agreements allow the parties to craft dispute resolution provisions to include rules detailing such things as the specific industry and technical training of the arbitrator and even the level of experience, of a single or panel of arbitrators. Such provisions can also mandate an initial step of non-binding Mediation. These preliminary proceedings provide the possibility of increasing the chances of preserving a long-standing and valuable business relationship. Negotiating provisions also can exclude certain types of disputes from the scope of the arbitration provision. For example, provisions may permit a party obtaining a temporary restraining order or preliminary injunction to maintain the status quo pending the ultimate resolution of the arbitration proceeding. Similarly, specially negotiated and drafted dispute resolution provisions can limit the scope and breadth of the arbitration proceeding, choose the governing rules for the matter, limit the scope and/or time of the discovery process, which often belabors traditional litigation, and also limit the types of remedies that the arbitrator can award. In addition, the arbitrator can be empowered to award attorney fees and expenses to the prevailing party. Finally, to avoid or at least limit the likelihood of any traditional litigation, placing limitations on and/or specifically defining what is arbitrable under the provision and further reduce costs and time.

In its recent editorial, the Wall Street Journal also cited a number of statistics from the U.S. Chamber of Commerce’s Institute for Legal Reform, including those showing that even employees are three times more likely to win in arbitration than in court, while arbitration is over 15% “quicker” than litigation, even though the average arbitrated dispute still required over 18 months to be resolved.

Business attorneys themselves should be cautious in drafting dispute resolution provisions in a specially negotiated agreement without consulting with an experienced commercial litigator, as well as an experienced mediator and/or arbitrator. Business interests can be overzealous in restricting the scope of the arbitration provision or in establishing unrealistic timelines for the proceeding.

Further, not every business dispute is best resolved by arbitration. Here, avoiding what is often referred to as “Bet the Company” issues, such as those involving critical intellectual property raising to the level of being the “lifeblood” of a business should likely be avoided.

Nevertheless, arbitration provides business owners and managers with what may often be a more expeditious, less costly, and confidential means of resolving “BTB” disputes. In negotiating alternative dispute resolution provisions, business owners and managers should have their general business legal counsel consult with his or her litigation colleagues to assure the best results.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.

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Author: Partner, Thomas J. Hall, is a business and succession planning attorney at Tuesley Hall Konopa, LLP where he has counseled Michiana business owners for over 30 years in the day-to-day operations of running a business. Tom is also a certified mediator and is licensed to practice in Indiana and Michigan.

You can contact Tom Hall by calling 574.232.3538 or email thall@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
Considerations for Buying and Selling Real Estate When Tenants are Involved

Considerations for Buying and Selling Real Estate When Tenants are Involved

Considerations for Buying and Selling Real Estate When Tenants are Involved – The Importance of the Tenant Estoppel Certificate.

Real estate transactions are strange and often lead to unforeseen complications. Real estate transactions become further complicated when they involve tenant-occupied properties, be it commercial spaces, apartment complexes, or single-family homes. The purchase of a rental property comes with questions you don’t get when buying an unoccupied building. As a seller, for example, you will need to consider what kind of notice must be provided to residents before the sale? As a buyer, you must take into account the cost of security deposits you will have to pay to tenants down the road when determining the final price to be paid at closing. And both parties will need to agree who is responsible for damages caused by tenants before the sale closes. The purchase and sale of tenant-occupied real estate can also further complicate the due diligence process. For example, it is extremely important to obtain and review all lease agreements potentially affecting the property. Another essential part of completing due diligence comes in the form of tenant estoppel certificates.

Tenant estoppel certificates are signed statements that certify facts concerning the tenant’s lease and the status of its occupancy. According to Black’s Law Dictionary, an estoppel statement is “a signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults (by the landlord or the tenant), and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.” Black’s Law Dictionary, 572 (7th Ed., 1999). In short, these certificates are used to inform potential purchasers of the rights and obligations of existing tenants.

An estoppel certificate will usually memorialize the date the lease began, the duration of the lease, monthly rental amount, security deposit, renewal options, whether any modifications to the lease have been made, etc. It will also certify whether rent is in arrears or up to date, whether any subleases are in place, whether there are any oral agreements with the landlord or promises made by the landlord, etc. Additionally, estoppel certificates give tenants the option to explain any claims they might have against the landlord. In some circumstances, a tenant estoppel certificate can also require that the tenant certify whether it has used any hazardous substances on the premises or whether it has violated any environmental laws. By signing this statement, the tenant is prohibited from taking a contrary position in the future. This allows prospective purchasers to fully assess the economic benefits they will gain by purchasing a tenant-occupied property as well as potential liabilities they may face after assuming ownership.

Tenants are not required to sign an estoppel certificate unless mandated to do so by the terms of their lease. Luckily, most commercial and residential form leases contain clauses requiring tenants to sign estoppel certificates when requested by the landlord. If a tenant fails to sign an estoppel certificate as requested, it may be considered an affirmation of the facts contained therein or it may be used as a basis for evicting the tenant for breach of the lease. It is therefore important to thoroughly review all leases affecting tenant-occupied property as part of your due diligence before closing.

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Author: Elizabeth (Libby) A. Klesmith is a civil litigation and business attorney at Tuesley Hall Konopa, LLP. Her practice areas include real estate, insurance defense, and trademark law. She is licensed to practice in Indiana and Michigan

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.