Effective Jan. 1, 2015, Alabama amended its Limited Liability Act, which provided a number of new options for owners of LLCs and gave them more freedom in terms of how they run their businesses. The new act requires certain changes of all LLCs, regardless of when they were created. By Jan. 21, 2017, the act will require business owners to re-evaluate and re-examine their company documents.
While business owners need to review and revise their LLC documents, it may be a good time for all businesses, whether limited liability companies, general partnerships, corporations or even sole proprietorships, to examine their contracts with customers and vendors in terms of dispute resolution provisions.
For quite a while, business owners have added arbitration provisions to their customer and vendor contracts. The reason for this is because arbitration can be a way to add certainty to business disputes by having issues resolved by an arbitrator, as opposed to having uncertainty arise from having disputes decided by a jury. In addition, the prevailing thought is that arbitration can also provide a quicker and more cost effective means of resolving disputes since discovery and its associated costs can be curbed (theoretically) through the arbitration proceeding.
However, some of the believed benefits in resolving disputes through arbitration ring hollow. From a cost perspective, arbitrations can be substantially more expensive than resolving issues through the court system. There are administrative costs with arbitration organizations, and there are other separate costs for the arbitrator that parties would otherwise not have to incur if the case was filed and proceeded in court.
Christian & Small has dealt with arbitrations involving numerous parties and complex issues. We have found that the perceived costs of limited discovery do not always take place in arbitrations. It has been our firm’s experience that in complicated business disputes, arbitrators are often very lenient (as they probably should be) in allowing parties to engage in discovery, including extensive document production, and allowing numerous depositions at the party’s request. In many instances, there really is no litigation cost savings through arbitration.
Furthermore, arbitration panels are not always as business-friendly as some may initially think. Courts, in interpreting the Federal Arbitration Act, have made it exceedingly difficult for parties to have any meaningful review of an arbitrator’s final decision. The ability to appeal an arbitration award can only happen in very certain limited circumstances, and courts generally give an incredible amount of deference to an arbitrator’s findings and conclusions. This lack of meaningful review can certainly lead to situations where it will be difficult to predict how an arbitrator will rule, thus detracting from the goal of standardizing, or limiting, risk.
In 2012, the Alabama legislature adopted a Private Judging Act where former state court judges can serve as a private judge to resolve parties’ disputes or disagreements. Under this act, a former judge can serve as if they were a sitting judge to resolve cases in a non-jury format. There are numerous benefits to using a private judge, including the fact that the administrative cost is just a $100 filing fee. However, the cost of a private judge is separate, and they are allowed to be compensated for their time, much like arbitrators.
The primary benefit to the Private Judging Act in comparison to proceeding with arbitration is that the Private Judging Act provides a higher level of predictability and the right to an appeal. The Private Judging Act specifically provides that the Alabama Rules of Civil Procedure will apply, thus providing a degree of certainty to the parties as to how their issues will be resolved. In comparison, traditional arbitrators have more discretion in how they decide procedural and evidentiary issues, which again detracts from the predictability of the dispute’s outcome.
Perhaps most importantly, the Alabama Private Judging Act allows for a direct appeal just as if the case was originally filed in court. This enables the parties to have their cases resolved on a non-jury basis by a former judge but also gives the right to appeal those decisions when a party deems that there has been a misapplication of law or fact. The right to appeal allows for a meaningful review of the decision, and the ability to appeal a Private Judging Act matter is substantially more expansive than the opportunities under arbitration.
The biggest limitations to the use of the Alabama Private Judging Act is that a former judge can only serve as a private judge for the jurisdictional type of case they would have heard while they were a sitting judge. For instance, a former district court judge who could only hear matters up to $10,000 while on the bench could not hear a matter that exceeds that jurisdictional limit. What is unresolved is whether issues of personal jurisdiction and/or venue can serve as a basis to limit certain disputes from being resolved by private judge even though the parties provide that in the contract. In addition, under Alabama law, the private judge dispute resolution provision will likely need to implicate interstate commerce in order to be enforceable.
In closing, parties should give strong consideration to amending their contracts with vendors and customers to provide specific language about requiring matters to be resolved through the use of a private judge. Many of the same provisions in an arbitration provision can also be used in provisions requiring an Alabama private judge. For instance, the contract can provide that if the parties cannot agree on a private judge, then they can each select their own private judge who will converse with each other to select a third former judge – the one who will actually serve as the person deciding that matter.
Having a private judge provides a great opportunity to help potentially reduce costs and the risks involved in dispute resolution while allowing opportunities for meaningful appellate review.