Arbitration clause or not, make an informed decision

Understanding options for dispute resolution can prepare your business for inevitable conflicts

As the cannabis industry matures, the volume of partnership break-ups, investor lawsuits, employee actions and contract disputes increases. Most written agreements now have terms for dispute resolution ranging from a simple choice of law agreement to a multi-level dispute resolution to a trial — and sometimes, everything in between.

Although dispute resolution is often considered just another unimportant boilerplate provision that makes your eyes glaze over, it is far more important than you might think.

The time to think about how your company would like to resolve the inevitable problems that arise in the course of business is at the drafting of contracts — and yes, you do need contracts for each aspect of your business. And every contract offers an opportunity for the parties to agree in advance to a dispute resolution protocol.

The major camps are alternative dispute resolution (ADR), including arbitration, or civil litigation. Arbitration is best characterized as a private trial; it offers final resolution of a case that will not be public record, is sometimes faster and less expensive, and is much less formal than a full jury trial. Civil litigation is a ritualized exercise of determining issues through a state or federal court (which court depends, in general, on the type of dispute, the amount in controversy and where the lawsuit originated).

Understanding the pros and cons of arbitration can help companies make better choices, rather than just accepting their attorney’s or the other parties’ choice, as expressed in the contract.

The common sense answer is, it depends.

 

Arbitration Pros

Promoted as a way to resolve disputes efficiently, three key advantages of arbitration include:

– Privacy: The fact that arbitration hearings are generally held in private rather than in an open courtroom, and decisions are usually not publicly available, is considered a benefit by some companies. Both of these safeguards can be advantageous if the subject matter of the dispute might cause some embarrassment or reveal private information such as embezzlement, black market dealings or poor quality products.

– Deescalating hostility: Because the parties in arbitration are usually encouraged to participate fully and sometimes even to help structure the resolution, they are often more likely to work together peaceably rather than escalate their angst and hostility toward one another, as is often the case in litigation.

– Usually cheaper and faster: Arbitration is becoming more costly as experienced lawyers adopt this alternative and arbitration service companies gather experienced, retired judges as their adjudicators. Still, resolving a case through arbitration is usually less costly than proceeding through litigation because the process is quicker and generally less complicated than a court proceeding.

 

Arbitration Cons

There are possible drawbacks of arbitration that cannabis companies need to be aware of. Some problems are:

– Limited recourse: A final decision is hard to change in the event that the arbitrator’s award is unfair or illogical; you and your company may be barred from appeal or from pursuing the underlying claim in court.

– Uneven playing field: Some are concerned that the “take-it-or-leave-it” nature of many arbitration clauses work in favor of a large employer or manufacturer when challenged by an employee or consumer who has shallower pockets and less power.

– Lack of transparency: The lack of transparency makes the process more likely to be tainted or biased, which is especially troublesome because arbitration decisions are so infrequently reviewed by the courts.

In the end, when establishing contracts, include a dispute resolution process or at minimum a choice of law based on where you prefer to handle a lawsuit. Read or reread all agreements you have entered into that may contain arbitration provisions. If you find an arbitration clause objectionable, be sure to make your feelings known; it is sometimes possible to negotiate the provision.

 

Anne van Leynseele is a cannabis and hemp regulatory and deal attorney, often working across sovereign borders. She advises multi-state and multi-national cannabis clients on governance, compliance, licensing, acquisition, asset management, and import/export matters. Prior to joining Zuber Lawler, she spent four years as a federal attorney advisor in Washington, D.C. She is a summa cum laude graduate of the University of Washington and a cum laude graduate of the University of Seattle School of Law. She can be reached at avanleynseele@zuberlawler.com.

 

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