A. Consider Using Customized Arbitration Clauses.

A contractual arbitration clause is one of the most powerful ways that a business has to try to control its exposure to costly and dangerous lawsuits. Arbitration, mediation, and other methods of resolving conflicts outside of court are sometimes collectively referred to as alternative dispute resolution, or "ADR."

By the careful use of an arbitration or other ADR clause in its contracts, a business can dramatically affect how disputes with its employees, customers, vendors, and others with whom it does business are resolved, discourage claims from being brought, and limit its exposure to large damage awards. On the other hand, an arbitration clause that is carelessly drafted or slanted in favor of the other party to an agreement can be a serious disadvantage in the event of a dispute.

When parties agree to arbitration, they make a binding determination that some or all of their disputes will be resolved outside of court by one or more persons called arbitrators, rather than in court by a judge or jury. In recent years, courts have allowed the contracting parties broad discretion to make up any rules they wish concerning who will hear the dispute and what rules will govern the outcome.

Arbitration clauses can specify simplified procedures both before and trial. For example, they can limit or eliminate the depositions, interrogatories, document requests, and pretrial motions that are responsible for much of the sometimes crushing expense of litigation. The procedures at the arbitration hearing, which takes the place of a trial in court, can be simpler and less time consuming than those for a jury trial. Arbitration clauses can also set short mandatory schedules for resolution of a problem before both the problem and the business involved in it become ancient history.

In addition to reducing litigation expenses and speeding the resolution of disputes, arbitration clauses can discourage or prevent claims from being made in the first place. For example, a contract can provide that claims that are not brought by certain deadlines are barred altogether. Such provisions, which create shortened statutes of limitations for the parties, will be enforced by the courts if they are found to be reasonable. Other provisions can require that, before making a demand for arbitration, the claimant must first try in good faith to negotiate a resolution either with or without the help of a trained mediator.

Provisions that require the party demanding the arbitration to advance the arbitrator's fees, which can be substantial, can deter groundless claims. So can provisions requiring the loser to pay the winner's attorneys' fees.

Arbitration clauses, and other contract clauses, can limit the type of damages or other relief that may be sought by a claimant. For example, the courts often uphold agreements that prevent the parties from seeking punitive damages, specific performance, or injunctive relief. A contract can also attempt to limit any award to actual economic out of pocket damages, thereby reducing or preventing exposure to claims for lost profits, pain and suffering, mental distress, and consequential or special damages. These kinds of limitations on damages not only reduce the amount of potential awards, they discourage potential claimants, and their lawyers, from making claims in the first place.

There are limits to what you can put in an arbitration clause and have it enforced, and those limits may depend on the type of contract.  For example, in California and some other jurisdictions, predispute provisions for arbitration of disputes with employees have some limitations in scope and are more strictly scrutinized than other agreements to arbitrate.

There are a wide variety of organizations and individuals that, for a fee, administer arbitrations. Some of them, like the American Arbitration Association, have procedural rules for dealing with issues that may not be covered in the contract.

Arbitration provisions can incorporate these rules into a contract, and vary any of them that the parties wish. If no rules are specified in the contract, California law supplies rules that will apply by default.

Because of the power and flexibility of arbitration clauses, failing to include one in a contract or choosing one poorly can actually determine whether a business will survive a major dispute. As a result, no business should ever sign a contract or enter into a significant transaction or relationship without first considering what kind of arbitration clause or agreement could reduce its exposure in the event of a later lawsuit.

B. The Three Most Common Litigation Boondoggles and How to Avoid Them.

If you are trying to control the cost of litigation, it is helpful to distinguish between strategies for reduction of costs and boondoggles. Strategies involve choices requiring thought and the weighing of risks against savings. Therefore, after considering them, you may decide that the a particular economy is not worth the increased risk. Boondoggles are work that usually has insignificant value compared to the expense. You always want to avoid them.

The three most common litigation boondoggles are wasteful staffing practices, the digesting of deposition transcripts, and the failure to attempt to settle.

1. Wasteful Staffing.

Wasteful staffing practices consist of excessive staffing, changes in staffing, and excessive delegation to junior lawyers. If you have more than one lawyer and one paralegal regularly working on your case, and the litigation is unlikely to result in a judgment of more than a half a million dollars, you should ask your lawyer about staffing.

2. Digesting Transcripts of Depositions.

The routine digesting transcripts of depositions is one of those fine old traditions that law firms have been practicing for ages and that, as far as I can tell, produce only useless paper and increased billings for paralegals and junior lawyers. I have never, I repeat, never, found a deposition digest to be at all helpful in a case. Now that you can get your depositions on a computer disk and do instant text searches on them, I believe that any law firm that is charging you for routine digesting of deposition transcripts is, at best, clueless.

3. Failure to Attempt Settlement.

The most effective way to control litigation costs is to settle early. Sometimes this is not possible. However, it should be attempted in every case.

Your lawyer may be reluctant to get the ball rolling on settlement because he thinks it make him look like a wimp, so unless you have an unusually secure lawyer, it may be up to you to raise the subject. This does not mean that you should appear weak to your opponents. The idea is to talk softly, but keep whacking the bad guys with a big stick until they come to the table.

1. Have a Strategy.

You can't control your fees if you don't have a strategy. Flailing around at a couple of hundred dollars per hour gets expensive fast.

2. Talk to Your Lawyer.

Ask your lawyer about his overall strategy for the case. What kinds of motions does he think may be cost effective? What does he think about the prospects of an early settlement? How are you going to try to win the case? Is a demurrer worth the money? Is it realistic to try to win on summary judgment?

Make sure you talk to your lawyer early about settlement. You should do this even where early settlement is not likely. Many lawyers don't like to bring this up.

Discuss each the costs and benefits associated with motion or other significant action in the case. Get estimates for specific activities that are under consideration. No lawyer can reliably estimate the cost of an entire lawsuit, but he should be able to do a reasonable estimate for a particular motion. Ask what benefit can reasonably be expected from the motion or other tactic being considered. Ask what alternatives exist for that tactic and what they would cost.

3. Determine What the Case is Worth.

Estimate both trial value and settlement value. Settlement value is much higher than trial value because of the staggering costs of litigation. At best, such an evaluation is a guess, but must be done in order to make rational decisions about strategy.

If you are a plaintiff, ask yourself
 

a. How much can you realistically expect to recover if you win?

b. What are your chances of winning?

c. How likely is it that you will be able to collect any judgment?

d. How much is the case likely to cost?
 

For example, if the most likely recovery if you win is $400,000, your chances of winning are 50%, your chances of collecting judgment are 100% (often they are far less than that), and the cost of the litigation (including any appeal and collection procedures!) is $200,000, the trial value of the case is NOTHING! On the other hand, the settlement value of the same case would be $200,000.

If you are a defendant, you should make same kind of calculation. The results will be equally sobering, I assure you.

4. Consider Strategies for Cost Reduction That Involve Significant Risk.

The following options each involve some risk, and are not appropriate in every case. But you should consider them with your lawyer in each case.
 

a. Written Statements.

Consider the use of written statements instead of depositions for healthy and friendly witnesses who you are sure will be available to testify at trial.

b. Answer Instead of Demurring.

Consider filing an answer rather than a demurrer even to a legally insufficient complaint.

c. Preliminary Relief.

Don't seek preliminary relief, like a preliminary injunction, unless you need it, you have a good chance to get it, and it will be worth the money.

d. Motions to Compel Discovery.

When considering whether to make motions to compel discovery, don't just ask whether you are entitled to the information--ask whether it is worth the cost of obtaining it.

e. Simplify Your Complaint.

Consider whether you can sometimes make a lawsuit that you file less expensive by simplifying it.
 

(1) Forego Unnecessary Parties.

You should consider not suing parties against whom you only have a slim chance of prevailing and peripheral parties who have no money.

(2) Dispense With Exotic Claims.

Anyone who has gone to law school can spin a virtually unlimited number of exotic theories involving an unlimited number of defendants. Consider dispensing with theories that do not add anything significant to the case.

(3) Avoid Factually Complicated Claims.

Sometimes you have a strong claim that can probably be decided in summary judgment and a weak claim that will require a long and expensive trial. When this happens, consider not bringing the factually complicated claim.
 

5. Your Invoice Is Your Friend.

Your invoice is one of your best tools for reducing your costs. You should always read it, and ask questions if you have them. If the invoice is not detailed enough for you to understand what you're paying for, ask for more detail.

6. Don't Let, or Make, Your Lawyer Do the Grunt Work.

You can save a lot of money if you will do as much of the necessary but routine tasks involved in litigation yourself. For example, it will cost you a lot less to pay your own clerical personnel to locate and organize your own documents than to pay your lawyer to drag them out of you and then sort through them.

Other things you can do to help keep the costs down are to prepare a written chronology summarizing the relevant facts and evidence in the case, help with the investigation by locating witnesses and obtaining necessary documents in the hands of cooperative third parties, crunch your own numbers, prepare any necessary financial schedules and exhibits.

7. Avoid the Attitude Traps.

Certain statements that are often heard in law offices are often the prelude to an sad lesson in the high cost of litigation. If you are tempted to say any of the following to your lawyer, watch out!

"Can you just take a quick look at this?" Ask yourself, is it possible to sort out the relevant facts in the time that you are allowing?

"I want a "junk-yard dog" litigator. Remember that over 90% of all disputes are settled before trial. If you hire a mad dog, you will probably get bitten. You don't want mindless aggression. You want rational aggression.

"It's the principle of the thing." Usually, after the first $30,000 or so, the principle seems to get less important than the principal.

"Money is no object." This is almost never true. The only question is usually, "How much is it worth?"

"I'd rather pay you than him." This usually indicates that you have an irrational certainty about your chances of winning.  Realize that, even in what may seem to be the strongest case, you may end up paying both.

No matter what you do, being a litigant is never going to be much more fun than root canal, much cheaper than a yacht, or much more reassuring than heavy air turbulence.  However, those who fail to follow the advice above are likely to find that it is even more expensive than it needs to be.

For more information, e-mail me at vdicarlo@dicarlolaw.com

This page last updated March 5, 2008
Copyright © 1998-2008 Vincent DiCarlo