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Occasionally, a sales representative becomes involved in a serious dispute with a principal. By “serious” I am referring to a dispute with potentially significant negative financial consequence to the representative. Examples of such would be a reduction in an agreed commission rate, the reduction or elimination of a representative’s territory, termination of the relationship, or an outright refusal to pay earned commissions. If informal negotiations prove unsuccessful, the parties will be faced with arbitration, litigation, or mediation as the means to resolve the dispute. This article discusses the features of these three types of dispute resolution.
Mediation refers to negotiations supervised by a neutral third party mediator. Mediators are often lawyers or former judges who provide insight, based on experience, of how the dispute would likely be resolved if it were to advance to the arbitration or litigation process. Mediators facilitate discussions to help each party understand the legitimate claims of the other and ultimately come to a mutually agreeable compromise. These proceedings are not required to follow the procedural or substantive rules that apply in arbitration or litigation. Instead, the sole focus is to resolve the dispute by reaching an agreement or settlement. As the mediator is not obligated to ensure that an outcome is legally correct, just, or fair, a party should never attempt to engage in mediation without being represented by counsel.
Resolving a dispute by mediation is generally far less expensive than arbitration or litigation, but it will only succeed if the parties are motivated to reach an agreement. Sales rep agreements that mandate pre-arbitration or pre-litigation mediation should place a time limit on the mediation to avoid abuse by one party using the process to force the other party with limited resources to engage in a meaningless and wasteful endeavor.
Arbitration is a formal dispute resolution process that applies substantive law selected by the parties and follows procedures established by either the parties themselves or by an arbitral body selected by the parties. Unlike a mediator, an arbitrator (or in some cases a panel of arbitrators) will issue a binding
final decision.
Litigation involves the filing of a lawsuit in a court supervised by a judge and heard by a jury. Arbitration is largely perceived as faster, cheaper, and more likely to result in a fair resolution than a decision by a jury. But is arbitration really faster and cheaper than litigation? In my experience the answer is not necessarily.
Litigation begins when a complaint is filed and a filing fee of a few hundred dollars is paid. An arbitration proceeding can cost a party substantially more money to initiate. For example, the American Arbitration Association, a leading organization in the arbitration field, requires a filing fee which is based upon the amount in dispute. This fee can therefore cost several thousand dollars. Additionally, arbitrator’s fees are typically billed at hourly rates of several hundred dollars per hour and must be paid by the parties.
Upon commencement of both arbitration and litigation proceedings, parties assemble evidence and learn of the opposition’s evidence through the use of discovery. Settlement is often reached during this initial phase of the proceeding. Absent reaching a settlement, arbitration provides a date certain for reaching resolution, typically within 6 to 12 months. In litigation, the timeline is usually 12 to 18 months. However, in exchange for potentially faster resolution under arbitration, parties lose certain advantages and protections offered by litigation.
For example, a dispute initiated by a representative against a principal usually involves a claim that the rep was not paid the promised amount for work performed. If utilizing litigation, the dispute is presented to a jury for resolution where the average juror is likely to sympathize with the rep and be offended by the conduct of the principal. In contrast, an arbitrator is often an experienced commercial litigation lawyer who may focus on technical legal aspects of the dispute, possibly losing sight of the main issue. It seems to me that arbitrators strive to find a middle ground that gives both parties some of what they seek while a jury is more inclined to do what is “right,” regardless of the consequences to the party perceived as having done “wrong.” Further, a jury is more willing to award penalty damages as punishment to the wrongdoer.
Also, in litigation if the court makes a mistake and issues an unfavorable decision the matter may be taken to a higher court for review to seek a reversal. No such right exists in the context of arbitration. The arbitrator’s decision is almost always final regardless of how incorrect that decision may be. Arbitration, while perhaps a little faster, will almost always be as expensive as litigation and it will typically not result in as just a final decision.
In conclusion, if the parties have agreed to submit disputes to resolution by arbitration within the sales rep agreement, such an agreement will be binding on the parties. Therefore these dispute resolution clauses should be carefully considered and negotiated at the onset of the relationship. As a general rule when preparing these agreements for sales rep clients, I will not include a clause requiring the parties to arbitrate. However, if the principal insists on including an arbitration clause, certain revisions can be made to help reduce costs and increase the chance of a more just conclusion. An experienced attorney can help you with such revisions; however, in my opinion, the most favorably written arbitration clause will never be as advantageous to the rep as an agreement to resolve disputes through litigation.
