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Ask the Attorney: Resolving Contract Disputes without Going to Court

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October 26, 2006
Legal Corner
John Hunt - jhunt@sheastokes.com

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© 2006 Hospitality Upgrade. No reproduction without written permission.

The past several years have witnessed a significant increase in the installation of new point-of-sale systems and property management software by hotels.  Occasionally, these systems malfunction and a dispute can arise between any number of parties, including the hotel, the software provider and the installer.  Unless resolved at an early stage, these controversies possess the potential for escalating into protracted and expensive litigation that consume resources and management time. 

Nevertheless, alternatives do exist to traditional litigation: negotiation, mediation and arbitration.

The best way to resolve the problem may be through traditional negotiation.  This generally presents the least expensive and contentious way to end a dispute, particularly where an ongoing business relationship is involved.  Of course, any settlement of a significant problem should be documented, whether by letter, agreement or e-mail.

The next informal resolution method is voluntary mediation.  In this process, each side appears before an impartial third party who assists them in negotiating a voluntary solution.  The mediator does not decide the dispute, but helps each side work toward an agreement.   Independent services such as the American Arbitration Association and JAMS, as well as various court systems, maintain lists of mediators and supervise the mediation process.  The fee for these services often is geared to the amount of money at issue.
One advantage of mediation and arbitration over traditional litigation, is that the parties are involved in the selection of the mediator.  When a lawsuit is filed in a large city, the court randomly assigns a judge to the case.  In mediation, however, the parties select the mediator themselves.  The parties are free to review the mediator’s background and decide whether he or she would be a good match for the particular facts and controversy involved.  Although the parties may disagree about the suitability of certain persons to serve as mediators, the selection process generally is not long or drawn out.  The parties also choose the date on which the mediation will be held–another important difference from the court system where the scheduling of trials and hearings is exclusively within the court’s discretion.  Although a party can choose to prepare as much as it would like for the session, there are no pre-mediation filing requirements other than the submission of a confidential statement of the party’s position.  The mediation session can last as long as the parties believe is necessary to reach a resolution.  Each side generally must be prepared to compromise its position to some extent in order to arrive at a settlement.

In contrast, arbitration involves the actual adjudication of a dispute by an impartial third party arbitrator.  In this sense, it resembles traditional court-based litigation more than mediation.  Each side presents its side of the controversy at a hearing and the arbitrator then decides the case.

Arbitration, however, differs from litigation in certain important respects.  First, arbitration is entirely voluntary.  The parties must agree to submit their dispute to arbitration.  As discussed below, the parties can provide for arbitration long before any dispute arises by including an arbitration provision in their underlying contract. The dispute also can be submitted after it arises but prior to the start of any lawsuit. 

As with mediation, a number of private companies provide arbitration services.  Perhaps the most well-known is the American Arbitration Association(AAA) which not only provides lists of potential arbitrators, but has created a well-established procedure for conducting the proceedings through its Commercial Arbitration Rules.  In a commercial case, the fee charged by the AAA depends upon the amount of money in controversy.  The fee charged by the arbitrator is additional.

After the parties agree to arbitrate their dispute, the matter is submitted to the AAA, or other service.  In the case of an AAA arbitration, the AAA will provide each side with a list of potential arbitrators.  Depending upon how many arbitrators are to be used, the parties select an arbitrator or arbitrators through the use of “strikes.”  This allows each side to eliminate any potential arbitrators they believe would be particularly unsuitable.  Following selection, the arbitrator conducts a pre-hearing conference at which the parties select the date for the hearing, decide on the amount of pre-hearing discovery that will be conducted, and address other procedural issues.  At a minimum, the parties will agree to exchange relevant documents and lists of potential witnesses.

After preparing their cases, the parties appear at a hearing before the arbitrator.  Each side has the opportunity to present its own witnesses and cross examine those presented by the other side.  Each side may also submit documentary and physical evidence.  The arbitrator then issues an award or decision within 30 days.  Either party can enforce the award in court.  While there are ways to challenge an arbitration award in court, the grounds for doing so are very limited.

As noted above, the parties can provide for arbitration in their underlying contract.  Indeed, a point-of-sale or property management system contract drafted by a vendor may automatically contain an arbitration provision.  If you are considering entering into such a contract in the future, you may want to consider including an arbitration clause.  Although the parties are free to select their own contractual language requiring arbitration, the AAA recommends the following for many contracts:  “any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment may be entered in any court having jurisdiction thereof.”

Arbitration can be a helpful device that leads to the prompt resolution of commercial disputes without lengthy litigation.  Nevertheless, adoption of any alternative dispute resolution system presents any business with a number of pros and cons.

In view of the above, many businesses find it useful to adopt contractual provisions that require both mediation and arbitration.  This provides the benefits of both systems, particularly mediation’s potential for an early and informal resolution.  Both systems should be considered when entering into any significant purchase of software.

Information provided is general and educational and not legal advice.  Article provided by Stephen Barth, attorney and founder of HospitalityLawyer.com. Stephen can be reached at sbarth@HospitalityLawyer.com or (713) 963-8800.  John Hunt is a partner and attorney at Shea Stokes ALC.   He can be reached at jhunt@sheastokes.com or (404) 766-0076.

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