The Lesser Known Strategy to Avoiding Costly Legal Disputes in the Courtroom With a 'when in doubt – sue' society, this tactic can help avoid expensive legal bills.

By Adam Knight

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

From employment disputes to issues with vendors and unhappy customers – even a problem with the general public just passing by along your office property — the potential for arguments that lead to litigation is a constant danger for business owners. And these lawsuits have the potential to become public nightmares that can ultimately cost thousands, and sometimes, millions of dollars for which many businesses do not budget.

Consider the fast-food lawsuit that lives in infamy, Liebeck v. McDonalds, in which 79-year-old Stella Liebeck spilled scalding hot coffee on her lap causing third-degree burns. For a plaintiff who requested $90,000 for medical expenses and pain and suffering, she fared much better in the hands of a jury, which awarded her $2.7 million damages. (Though a judge later reduced the award to $640,000, seven times the amount requested, the case also cost McDonalds hundreds of thousands in legal fees and bad publicity.) I am guessing your business does not want to be the next McDonald's.

Related: 6 Ways to Protect Your Home in a Business Lawsuit

Thankfully, there is another less stressful and certainly less expensive way to deal with legal disputes which many entrepreneurs fail to use: arbitration.

Taking the road less traveled can make a big difference

When an arbitration clause is negotiated in a contract, an independent third party, not a judge or jury, can mediate disputes. While there are circumstances in which a rock-solid legal case may benefit from a trial, by and large, there are many reasons why arbitration can be a better route:

It's cheaper: Generally speaking, arbitration can be a much less expensive method for handling business disputes. For one, it takes less time. Unless specifically negotiated, there isn't a discovery period or series of legal hearings before an arbitration hearing. Instead, a case can be quickly set up, arbitrated and finished. The efficiency of the process, which can last just a few months rather than a few years, can save companies tens to hundreds of thousands of dollars in legal fees.

Related: The Type of Insurance You Need for Your New Business

It's private: When lawsuits are filed in civil court, they become part of the public record, and thus public scrutiny. Arbitration can be handled privately, affording your business confidentiality while you are dealing with sensitive matters.

It's controllable: Arbitration can be applied to almost every aspect of your business. In fact, you may not even be aware that when purchasing a Blue Ray player at your local electronics store, by signing the bottom of the receipt (and presumably ignoring the fine, watermarked print on the back), you've bound yourself into arbitration should you decide to sue the store or manufacturer.

It's flexible: Since arbitration resides within the contract, its parameters can be negotiable among parties. Meaning, disputing parties can craft a mutually agreeable process for working out their issues when drafting contracts or even throughout the arbitration process, which can actually maintain relationships in the midst of difficult circumstances.

Mastering the art of arbitration

This isn't to say that arbitration comes easily. As a malleable creature of contract, it can be manipulated to either work for or against your business. To avoid potential issues with arbitration, it will take some savvy legal pre-planning to stack the odds in your favor and make the dispute resolution process worth your time.

Use the right arbitrator: One of the benefits of arbitration is being able to select your arbitrator. Use this to your advantage by finding qualified mediators who are experts in your industry, so that the mediator is keenly aware of the nuances that may have led to the dispute at hand.

Consider the upper hand: When crafting contracts with arbitration provisions, understand who has the upper hand in the agreement. If you are the dominant party, you have more leverage in arbitration infrastructure, such as requiring that the other party pays for any such provision and assuring that the arbitration venue is close to your place of business.

Negotiate protections: The flexibility that arbitration offers means companies must foresee and implement the right strategies in their arbitration clauses. That is, consider if you'll want to include the scope of discovery and other legal procedures to bolster your arguments -- this can be negotiated. This is where you may also want to negotiate strict confidentiality agreements to protect your intellectual property, trade secrets and personnel matters.

Understand its finality: Arbitration is a take-it-or-leave-it dispute resolution tool. All awards are final and enforceable. There are virtually no appeals and arbitration awards are almost never set aside or modified. Thus, it's important to always have an attorney look over contracts containing arbitration clauses to make sure that the right protections are in your favor.

Related: The Legal Side of Owning a Food Truck

Adam Knight

Attorney in Nashville

Adam Knight is an attorney in Nashville.  

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