Alternative dispute resolution (“ADR”) provisions are common in contracts because they may offer a less costly and speedier resolution to disputes. Corporate clients heavily favor ADR because it may shield them from a jury trial—a venue often not preferred by big companies.
In California, it is clear that pre-dispute waivers of the right to a jury trial are unenforceable.[1] However, courts and statutes citing judicial economy allow parties, in essence, to waive a jury trial pre-dispute via binding arbitration or judicial reference. These ADR methods are similar in that both: 1) offer the opportunity to choose a decision maker with expertise in the subject matter; 2) may be speedier and less expensive than litigation; and 3) decision makers are paid for by the parties. Although they share these similarities, it is important to understand the differences and consequences of each, in order to make an informed decision.[2]
Disputes resolved in arbitration are private proceedings and contain strict confidentiality. On the other hand, since judicial reference involves referral to a court-appointed referee to conduct a quasi-judicial proceeding, these hearings are open to the public.
Follow Rules of Law
Arbitrators are not required to follow the rules of law, including the rules of civil procedure and evidence. In fact, arbitrators are more likely to admit any evidence that is material to the issues of the lawsuit. This generally leads to an arbitration award based upon broad principles of “justice” and “equity” and not necessarily on rules of law. Referees, on the other hand, are court appointed and are required to conduct the proceedings in the same manner as a court, including applying the rules of evidence.
Right to Appeal
In the case of binding arbitration, after an arbitration award has issued there is generally no right of appeal even if the arbitrator made a mistake of fact or law. With a judicial reference, the decision rendered by the referee will become a judgment that can be enforced and appealed. The right to appeal can increase the cost incurred by the parties and extend the time to final resolution.
Enforceability of Provisions
Arbitration provisions have been tested by the courts and their enforceability generally confirmed. However, unlike arbitration provisions, law pertaining to the enforceability of judicial reference provisions is still in flux. For example, a recent California Supreme Court decision[3] determined that “a trial court has discretion to deny a reference motion pursuant to an otherwise valid pre-dispute reference agreement.” Meaning, even if there is an otherwise valid judicial reference provision in an agreement, the court has discretion to deny the motion to appoint a referee. Even so, it is likely that in most circumstances,[4] especially those involving two sophisticated parties, courts will enforce the judicial reference provision because public policy strongly favors parties resolving their disputes privately rather than in the courts.
The purpose of this article is to briefly compare two forms of ADR. There are other types of ADR available and ultimately the right choice depends on an analysis of each client’s goals and objectives in the context of a particular transaction. Our attorneys are available to discuss any specific ADR needs you may have.
[1] Grafton Partners, L.P. v. Superior Court, 36 Cal. 4th 944 (2005).
[2] It is important to note there are other forms of ADR, such as mediation.
[3] Tarrant Bell Properties v. Superior Court, 51 Cal.4th 538 (2011)
[4] Except in circumstances involving multiple agreements where some contain judicial reference agreements and others do no. See Tarrant Bell Properties v. Superior Court, 51 Cal.4th 538 (2011)