a judge or an arbitrator?

Bizar Male

If you’re a New Hampshire business owner and written contracts are important in your business, a basic legal issue your contracts should usually address is how you and the other party or parties to the contract should resolve disputes among the contract parties. This is true, for example, for multi-member LLC operating agreements and for contracts with suppliers, customers, employees, and independent contractors.

In the case of most New Hampshire contracts, the default rule if a contract doesn’t address the dispute resolution issue is that any disputes between parties must be resolved in the state or federal courts in New Hampshire. But, as discussed below, in many cases the contract should provide instead for the resolution of contract disputes by mediation or arbitration. And even if the parties choose to resolve disputes by litigation, it may be appropriate for the contract to qualify the applicable litigation procedural rules to the extent permitted by law. In addition, if the parties agree to resolve disputes in mediation followed, if necessary, by arbitration, it will often be appropriate for their contract to contain complex mediation and arbitration rules.

Here are basic guidelines for choosing among these three methods for resolving contract disputes:

■Many contracts should provide that if the parties can’t resolve disputes voluntarily, they should seek to resolve them by mediation. In mediation, a mediator will sit down with the parties and help them to reach a voluntary resolution. It’s amazing how often a skilled mediator can help the parties agree to a dispute resolution they would never otherwise have thought of.

■However, mediation sometimes fails. So a contract should provide that in the event of such a failure, disputes should be resolved either by litigation (i.e., a proceeding in court before a judge) or arbitration (in which the resolver of the dispute will be, in effect, a private judge).

■A major advantage of arbitration over litigation is that, unless the parties agree otherwise, it will be strictly private unless a party needs to enforce the arbitration award in court. Especially in disputes in a family-owned business, this privacy can be critical.

■In addition, if the parties cooperate, they can often agree on the identity of an arbitrator who has substantial expertise about the matter in dispute and whom all relevant parties trust. A judge may merit that trust but may lack the necessary expertise. But if the parties can’t so agree about who should be the arbitrator, their contract should normally provide that they will choose an arbitrator from a slate of potential arbitrators proposed by an organization such as the American Arbitration Association (the AAA). The key issue here is for each party to ensure that the arbitrator ultimately chosen is entirely impartial – sometimes a difficult task. By contrast, in most cases they can totally rely on the impartiality of a New Hampshire judge.

■In addition, as long as the parties agree that their dispute will be resolved by just one arbitrator, rather than by three, arbitration will often be faster and cheaper than litigation, even though a competent AAA arbitrator is likely to charge several hundred dollars an hour for his or her services. Obviously, litigation may be expensive, but there will be no charge for the judge’s services. (The scheduling of arbitration sessions with a panel of three arbitrators can be very difficult, and the arbitration fees can be prohibitive.)

■A potentially major problem with arbitration is that, unless, in their contract, the parties provide in significant detail for the procedural rules that will govern their arbitration, arbitration issues may arise on which the procedural rules are unclear and which the arbitrator may resolve in a manner that is unfair to one or more parties.

■The most important advantages of litigation, in addition to the judge’s impartiality, are the clarity and comprehensiveness of litigation procedural rules and, in many cases, the availability of appeal. In arbitration, unless the parties agree otherwise, the arbitrator is not required to issue a written award nor to follow legal precedent in the award. Furthermore, any appeal of the award may be extremely limited or even unavailable. Among other considerations, appeal to the New Hampshire Supreme Court won’t be available except in matters first decided in a New Hampshire trial court.

To sum up: Choosing between an arbitrator and a judge as the decider of a contract dispute is often a difficult task that requires consideration of numerous complex issues and potentially complex contract drafting.

However, here’s a general guideline likely to be useful if you have to make this choice: The greater the financial or personal stakes in a contract dispute, the more you should lean toward litigation. This is especially the case if you agree to litigate your dispute in the special New Hampshire trial court for business disputes called the “Business Docket” (assuming your dispute meets the requirements for Business Docket litigation). The Business Docket is an excellent court.

(John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. His telephone number is (603) 856-7172, his e-mail address is [email protected], and the link to his website is www.llc199A.com.)

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