The tsunami of litigation brought on by the pandemic has crystalized the importance of “dispute-resolution” clauses.
In particular two high-profile cases – pandemic-related cases against Airbnb and Amazon — have brought this to light. These clauses can be potent tool for business owners to minimize litigation risk.
In a well-written business contract, parties will set contours that would govern any future dispute between them. In such a dispute-resolution clause, the parties often select a court location, consent to its jurisdiction, and waive the right to a jury trial.
Alternatively, in lieu of designating a court as the forum for a dispute, some contracts contain arbitration clauses (known as alternative dispute-resolution or ADR clauses) that require that the parties handle any future dispute in arbitration rather than litigation.
An arbitrator is a neutral adjudicator who is empowered by the ADR clause to make a binding decision. An arbitration proceeds like a court case: both parties have the opportunity to seek discovery, call witnesses, make motions, and ultimately try their case. However, unlike a court case, an arbitration is a private proceeding done fully at the expense of the parties.
Many business owners utilize ADR clauses in their contracts. Doing so could give them predictability as to the path and duration of a contract dispute.
COVID litigation has reinforced the well-established utility of an ADR clause.
In a suit brought against Amazon relating to the purchase of coronavirus protective face masks, Amazon moved to dismiss the case in favor of arbitration based on the ADR clause in Amazon’s conditions of use of its site. Those conditions say a customer will resolve any dispute regarding the company or a product purchased through Amazon through arbitration on an individual basis, not through a class action.
Likewise, when an Airbnb host sued, alleging that Airbnb had to reimburse him for losses incurred when the pandemic hit, Airbnb argued that the case must be dismissed because the former host signed terms of service documents and assented to the documents’ arbitration provision.
Even as arbitration clauses come into focus in pandemic related litigation, entrepreneurs would do well to pause before jumping to use ADR clauses rather than litigation dispute-resolution provisions. Depending on the type of dispute and specifics of the ADR clause, arbitration could cost more than traditional litigation since the cost of the arbitration is borne by the parties.
Business owners should consult with counsel to crafting contract dispute-resolution clauses. Regardless of which dispute resolution mechanism an entrepreneur selects, though, pandemic related litigation serves as a reminder to address this important contract term.
By Judith Bachman