Dispute Resolution Clause: Drop the Boilerplates
One of the biggest misnomers in a creating dispute resolution clause for an employment contract is that the language needs to be a “one-size-fits-all” boilerplate so it can be transferred from contract to contract regardless of type or need.
On the contrary, dispute resolution clauses can be completely customized based on the type of contract, the strategy of the organization and the needs of the employee, consumer or vendor.
Customization of any contract, or any provision of a contract, requires additional time and bandwidth. Fortunately, there are logical places for talent acquisition and HR professionals to start when reviewing the dispute resolution clause.
Include a “Choice of Law” Clause
The choice of law dictates which state or federal law will be applied by the decision-maker. In many instances, the choice of law may not make a difference in the ultimate outcome of the case, but that is not uniformly true. Accordingly, when drafting a contract, your company or client should consider what impact the laws of a particular state, or the applicable federal law, may have on a dispute arising out of the agreement.
For example, many organizations are incorporated in Delaware because the state has laws that are perceived as favorable to corporations, which makes it very easy to research Delaware law on corporate disputes and determine what the result of a particular dispute might be. Because of this, many organizations choose Delaware law in their corporate and commercial agreements so they have this level of certainty.
Court Versus ADR?
Does your company or client want to use the courts or an alternative dispute resolution (ADR) provider as the forum for any litigation? In some states, court dockets may be light, or the company may have a particularly strong relationship with the municipality that makes the court option an advantageous forum for litigation.
Those issues must be balanced, however, against such considerations as class action litigation. Plus, court litigation records are public. Some companies may never want to have the status and results of litigation made available to the public. Other organizations, however, may have no issue with the specter of class actions and may even want their litigation in the public sphere because of its deterrent value.
Still, others may be extraordinarily concerned about class action liability. As talent acquisition and HR professionals, you have the opportunity to bring attention to these critical issues and their importance when choosing between court and an ADR provider.
Do You Have To Pick Just One?
Companies can actually categorize different types of disputes and allocate them to different forums. In other words, you don’t have to choose court or an ADR provider for all types of litigation. You can draft the clause to allocate litigation to different forums based on the best fit.
For example, you may want all product liability disputes to be arbitrated, but any allegations of fraud or misrepresentation to be litigated in court. In the employment context, maybe you feel harassment charges are better litigated in arbitration, but wrongful termination cases are a better fit for the courts.
Of course, these decisions are all predicated on internal strategy, so there is no right or wrong answer. Taking the time and effort to customize the clause based on the situation may make the most sense in the long run.
Class Action Waiver or Not?
There’s no simple answer. Class actions can result in exponential liability to your employer or client, and they’re also a bear to defend. Mass arbitrations can also result in outsized monetary exposure.
It’s extremely important to encourage and help your company’s or client’s teams to think carefully about how to deal with litigation that involves more than one plaintiff. Consult with your attorney around your company’s strategy and goals.
Finally, be thoughtful and always consider the equity and fairness of your counterparty. Quick and efficient resolutions are always better for everyone involved.
Do You Need a Backup Forum?
There are scenarios where the dockets of a court or even an ADR provider may be so clogged that you can’t get the litigation to actually move through the process. This is of particular concern in light of the COVID pandemic, which has significantly backlogged courts. Of course, there could also be other concerns about a particular forum.
It is absolutely acceptable and sensible to designate a backup forum in case there are issues in your primary forum that limit the possibility of quick and efficient litigation.
What About Appellate Rights?
In court, there are always appellate rights or ways to argue against the decision. One of the knocks on ADR forums is that there often are no options for appeals. By customizing your dispute resolution provision, you can allow for an appeal process, providing greater comfort to any party who may demand a potential second bite at the apple.
There may be other issues or considerations not described in this article that need to be addressed in a dispute resolution provision. They may be unique to your company or client, or they may be more generalized issues that are not accounted for in boilerplate provisions.
In short, this is your dispute resolution provision, and as talent acquisition and HR professionals, you have a unique opportunity to work hand-in-hand with your legal counsel to make sure these clauses are carefully examined, considered and drafted in a manner that accounts for your particular business issues and concerns.
You, of course, want to help ensure these important clauses provide the best results for your client or company and its constituents. Don’t take old boilerplate provisions and assume they will work well for all of your contracts.
An ounce of prevention and customization may make you a hero.
Collin Williams and Rich Lee