Disputes in the commercial real estate context take many forms. Disagreements between real estate investors over partnership agreement terms; lenders seeking to enforce remedies following an event of default; landlords and tenants fighting over the terms of a commercial lease; and buyers suing over breached representations in a purchase and sale agreement, are but a few examples.
While both judges and arbitrators can adjudicate most contract disputes, only courts can implement certain remedies, such as granting lenders the right to foreclosure. Courts provide litigants access to a neutral forum with impartial judges. Requiring parties to adhere to codified, well-established procedural and evidentiary rules instills confidence in the fairness of the judicial process. The obligation of judges to decide issues based upon established case law allows parties to assume that litigation will lead to a legally correct result. The right to appeal reinforces this.
While courts offer these advantages, litigation takes a long time to complete, the discovery process can drag on, costing parties time and money, and, absent special arrangements that some courts will not approve, confidential information becomes public. In addition, the judge may not have, and a jury certainly will not have, expertise in the subject matter of the case. The right to appeal can result in further delays, increased costs, and lack of finality.
In order to evade downsides of the judicial system, parties often include mandatory arbitration provisions in commercial real estate contracts. Potential litigants generally perceive arbitration as a more stream-lined and thus quicker and less expensive way to resolve disputes. In theory, the process can be less formal. The standard rules of arbitration organizations such as the American Arbitration Association and JAMS provide for much more limited discovery than judicial rules of evidence. Commonly cited advantages of arbitration include its more flexible and less formal rules of evidence, confidentiality (since, among other things, it creates no public record), and the freedom of parties to select arbitrators with expertise in the subject matter. Complex or more heavily negotiated arbitration provisions, however, can diminish some of these advantages by, for example, specifically entitling the parties to extensive discovery and/or requiring the arbitrator to apply the rules of evidence strictly. One growing criticism of commercial arbitration is that it is becoming more time consuming and less cost effective as parties increasingly include provisions for broad discovery and courtroom-like procedures, which can be cumbersome and time-consuming. Further, most federal and state arbitration statutes make the grounds upon which courts can overturn an arbitration decision so narrow as to render such decisions essentially non-appealable. This provides certainty and finality as to the result but can leave parties without recourse if they believe the arbitrators made serious mistakes or reached the wrong result.
Given the advantages and disadvantages of both arbitration and litigation, clients and attorneys should always consider whether to include mandatory arbitration clauses in their real estate agreements. Once a dispute arises, agreements become more difficult to make. Consequently, absent an arbitration clause, parties rarely agree to arbitration after a dispute arises. The more the dispute parallels a collection action, the more the party initiating the action will want to preserve judicial remedies (i.e., foreclosure and other collection remedies). Lenders also tend to prefer the judicial process because they can resort to an appeal if case law is not applied properly. Outside the lending context, parties more frequently will consider mandatory arbitration for its stream-lined nature, confidentiality, and finality.
Arbitration clauses take many forms ranging from a few short sentences to much more elaborate provisions with detailed procedures. Basic provisions may simply state that the parties agree to settle any dispute arising under the contract through arbitration administered by American Arbitration Association (the “AAA”) or JAMS (which is an acronym for its former name the Judicial Arbitration and Mediation Services, Inc.) and the number of arbitrators. More elaborate arbitration clauses include additional details such as (i) the qualifications each arbitrator must have (e.g., at least 10 years of experience in a particular area of expertise), (ii) the rules that will apply (e.g., the commercial rules of the AAA or the Comprehensive Arbitration Rules and Procedures of JAMS), (iii) the location of the arbitration, (iv) the applicable governing law, (v) confidentiality provisions preventing any party from disclosing the content or results of the arbitration without the consent of all parties, (vi) discovery rights and limitations, and (vii) whether the arbitrators are allowed to award attorneys’ fees, punitive damages or special damages.
Both JAMS and the AAA also have established sets of arbitration rules for commercial disputes and industry specific disputes. Copies of JAMS’ and the AAA’s rules and procedures are available on their websites at www.jamsadr.com/rulesclauses and www.adr.org/aaa/faces/rules, respectively. The JAMS Comprehensive Arbitration Rules and Procedures (the “JAMS Comprehensive Rules”) govern arbitration of disputes submitted to JAMS over $250,000, unless the parties specifically agree to use a different set of JAMS rules such as one of the industry specific sets of JAMS rules. Parties with smaller disputes can also specifically agree to use the JAMS Comprehensive Rules. If parties elect to use the AAA to settle their disputes, then the AAA’s Commercial Arbitration Rules will apply to any domestic commercial dispute unless the parties specifically state otherwise. Both organizations also have separate sets of arbitration rules specifically designed for construction-related disputes, which builders, architects, engineers and other parties involved in construction-related disputes can opt to use instead of the general commercial dispute rules.
In certain respects, the JAMS and the AAA rules are very similar. For example, both organizations require the arbitrators to render a final award within thirty (30) days of the final hearing or receipt of all materials specified by the parties. Both organizations also offer expedited procedures which can limit discovery and resolve matters quickly. But there are differences between the two organizations and a client should consult with their attorneys to determine if the subtleties of one may serve the client better than the other.
All of this may seem like a lot to consider, but if parties drafting a contract spend a little time considering how they want to handle future disputes, it can wind up saving both parties considerable time and money in the future.
If you have any questions or would like more information on the issues discussed in this Insight, please contact Charles Solomont in our Boston office at +1.617.951.8996 or carl.solomont@morganlewis.com.
This article was originally published by Bingham McCutchen LLP.