December 26, 2014

Anatomy Of The Asset Purchase Agreement Part 5: Mediation and Arbitration Provisions

In our final post in this series, we look at ways to structure asset purchase agreements to resolve disputes that may arise after the asset purchase agreement has been executed.  Although the goal of every agreement is to clearly define the rights and obligations of the buyer and seller, disputes can arise even with the most careful planning and best intentions.  A well-crafted asset purchase agreement will have mechanisms for resolving potential disputes in a fair and cost-effective manner so that you can continue to build your medical or dental practice.

Generally speaking, there are two options you can pursue outside the traditional legal system in resolving disputes: mediation and arbitration.  Each of these has its own pros and cons that you must consider in negotiating and drafting the asset purchase agreement.

Mediation

Mediation is a non-binding process in which the parties will work with a neutral third party to try to reach a compromise.  In a mediation, the parties will typically be separated into different conference rooms, and the mediator, usually a lawyer with experience in the healthcare field, will go back and forth between the two conference rooms, listening to each side’s position.  The mediator will act as a devil’s advocate, pointing out weaknesses in the parties’ cases in order to bring them to a resolution somewhere in the middle.

The benefits of mediation are that it provides an efficient and relatively inexpensive way for resolving disputes.  The mediation generally only takes a day, and sometimes less, and usually does not involve the protracted discovery common in litigation, and even arbitration.  It works best when the dispute is relatively minor, and each party genuinely wants to resolve the dispute and move on.

The drawbacks of mediation include the fact that it is not binding, and its success relies on the good faith of the parties.  If you feel that the other side is not acting honestly, or is so firmly entrenched in his position that he will not move toward a compromise, mediation will likely not be successful.

Arbitration

Arbitration, on the other hand, is a binding process in which a third party determines a winner and a loser.  The arbitration hearing will usually take place at the arbitrator’s office.  Therefore, if you are outside of the Phoenix or Tucson metropolitan areas, you may need to travel for the arbitration, unless you are willing to pay extra for the arbitrator’s travel expenses.  During the hearing, the arbitrator acts much like a court, listening to evidence and testimony and making a decision in favor of one party over the other.  The arbitrator also usually has the ability to award attorneys’ fees and the costs of the arbitration to the successful party, whereas the costs of mediation are usually split between the parties.  Therefore, arbitration carries significantly more risk and reward than mediation.

There are several companies which provide arbitration services, the most well-known of which is the American Arbitration Association (“AAA”).  The AAA has its own procedural rules for arbitration, which are similar to the rules of procedure found in the court system, and AAA arbitrators are usually retired judges with experience in hearing complex commercial disputes.

Although arbitration is in many ways like a trial, it can often be done more cost-effectively and quicker than a regular trial, since the discovery process is much more limited and there are fewer scheduling obstacles than you would find in a traditional trial.  Instead of the two to three years it can often take for a civil case to go to trial, an arbitration can usually be resolved in less than six months.

However, arbitration also has its downsides.  You will lose your right to a jury trial and you will typically be precluded from appealing the decision in the event it is unfavorable.  Also, while arbitration is usually cheaper than a civil trial, the costs can still quickly run into the tens of thousands of dollars, as your attorney will often need to conduct discovery and retain expert witnesses to help prove your case.  Additionally, the arbitrator’s fees can quickly escalate, since he is paid an hourly fee for his time spent on the case.  Finally, certain claims, such as claims for injunctive relief to prevent violation of a non-compete agreement cannot be resolved through arbitration because the arbitrators lack the legal authority to enforce injunctions.

Arbitration Provisions in the Asset Purchase Agreement

Courts generally favor arbitration agreements as part of the overarching policy to encourage parties to resolve disputes outside of the court system.  Unless you can show a very compelling reason why it should not be enforced, you will generally be bound by the arbitration provision.  Therefore, you should not automatically include an arbitration provision in an asset purchase agreement.  Instead, you should consider and evaluate whether you want to limit your remedies as you negotiate the agreement with the other party.

If you include an arbitration provision, it is often a good idea to combine it with a mediation provision.  This allows an opportunity for an early resolution of the case at a relatively low cost.  The way these are typically structured is to first have the mediation and then, if mediation is unsuccessful, the parties will proceed to arbitration.  For example, in a recent agreement we drafted for the sale of a doctor’s practice, the mediation and arbitration provisions were structured as follows:

MEDIATION AND ARBITRATION:  It is the intention of the parties to bring all disputes between them to an early, efficient and final resolution.  Therefore, it is hereby agreed that all disputes, claims and controversies between the parties hereto, whether individual, joint in class in nature, or otherwise, shall be resolved as provided herein under the rules and auspices of American Arbitration Association (“AAA”).

Mediation. If a dispute arises between the Parties that cannot be resolved through good-faith negotiation, the Parties agree to first participate in mediation before a mutually agreed-upon mediator. If the Parties cannot agree upon a mediator, each shall select one name from a list of mediators maintained by any bona fide dispute resolution provider or other private mediator; the two selected shall then choose a third person who will serve as mediator.  The Parties agree to have the principals participate in the mediation process, including being present throughout the mediation session(s). The Parties further confirm their motivating purpose in selecting mediation is to find a solution that serves their respective and mutual interests, including their continuing professional relationship.

Arbitration. Any dispute that is not resolved through mediation shall be submitted to binding arbitration though AAA in Arizona.  Arbitration must commence not later than ninety (90) days after either party submits a written demand for arbitration to AAA, otherwise such demanding party shall be entitled to an order compelling arbitration as provided by law.  The decision by the arbitrator shall be final and binding upon the parties and/or their heirs, successors and assigns.  Judgment upon the award and the entry of a judgment or for any other relief with respect to the award as provided by law.

Considerations

Every transaction is unique, and depending on your particular circumstances, an arbitration clause may be something that you will or will not want to include in the asset purchase agreement.  To briefly summarize, the general pros and cons of mediation, arbitration and trial are as follows:

Mediation

Pros:

  • The most cost-effective approach
  • Quick resolution
  • Less antagonistic than arbitration

Cons:

  • Non-binding
  • Requires good faith from both sides
  • Must be willing to compromise

Arbitration

Pros:

  • Usually cheaper than trial
  • Much quicker than going to trial
  • Possibility of complete relief

Cons:

  • Lose right to jury trial
  • Lose right to appeal adverse decision
  • Greater liability exposure than mediation
  • No ability to seek injunction

Trial

Pros:

  • Preserve right to jury trial and appeal
  • Able to obtain injunction to enforce a non-compete
  • Greater opportunity for discovery

Cons:

  • Higher cost
  • Much longer until a decision is made
  • Possibility that the case will be decided by the judge without a trial

The above are just some of the general factors to consider in determining whether to include an arbitration or mediation provision in the asset purchase agreement.    Whether you are buying or selling a practice, you should consult with an experienced advisor to determine whether to include these provisions in your asset purchase agreement.