How A $12 Contract Can Cost You $80,000 Or More, Part 3

What Are Your Options When It All Goes Wrong?

Your contract dictates (or should dictate) how problems are resolved between you and the other guy.  That’s the beauty of contracts…a clear agreement will let you know what you’ve got yourself into—good or bad. 

So, what does LegalZoom allow you to do?  Well, it gives you a choice only between arbitration and litigation without carefully laying out why you should select one over the other.  (LegalZoom ignores other forms of dispute resolution as precursors such as informal negotiation and mediation but that’s a story for another time.) 

Let’s break these options down in terms of money.  LegalZoom correctly states that arbitration is cheaper and faster than a full-blown court case but fails to mention that the term “cheaper” doesn’t mean “cheap.”  (I’ve been involved in complex arbitration cases before JAMS that went well over $ 100,000 in costs and attorneys’ fees, which quickly adds up when a lawyer charges $ 500 by the hour.)   In reality, the cheapest solution (though potentially not the best solution) for you is small claims court. 

Because LegalZoom chooses the American Arbitration Association (the “AAA”) as your arbitral body, here’s a side-by-side comparison of Small Claims’ initial costs to AAA’s initial costs:

 

AAA

Small Claims

Claims $5,000 to $10,000

$ 975 (Standard Fee Schedule)

$ 1,075 (Flexible Fee Schedule)[1]

$ 75[2]

Payment for Arbitrators/Attorneys?

YES

NO ATTORNEYS ALLOWED[3]

 As you can see, small claims may save you a significant amount of money in the beginning.  But, the gamble with this choice is: You can only sue up to $10,000 if you are an individual or sole proprietor and up to $5,000 if you are a corporation or other business entity.[4]  If you go over those limits, then you get bumped to what’s called a Limited Jurisdiction court, and then bumped again to Unlimited Jurisdiction court for actions over $25,000.  One thing to keep in mind, the more money a party claims, the more fees and costs involved to pursue or defend it.

Overall, you need to assess your liabilities and damages—how likely you would end up in a full-blown court case—before selecting an arbitration provision or submitting to a court’s jurisdiction in your agreement. 

Disclaimer: The information contained in this article is intended to provide general information and does not constitute and is not intended to constitute legal advice.  Further, any analyses of facts contained herein are the mere opinions and interpretations of Erica based upon her viewpoint.  This article is designed to help readers be aware of the dangers of using legal document self-help entities based on the information she obtained from LegalZoom on May 10, 2012; thus, the information and materials contained in this article may be invalid or outdated. The content provided is not warranted or checked to ensure that the content contained herein is up-to-date.


[1] See AAA Commercial Arbitration Rules, Fee Schedule Amended and Effective June 1, 2010, pp. 2 & 4, available at http://www.adr.org/aaa/ShowPDF?doc=ADRSTG_004102.

[2] See Superior Court of California, County of Los Angeles, Civil Fee Schedule (Jan. 1, 2012) at http://www.lasuperiorcourt.org/feesnet/pdf/fee-schedule-2012.pdf.

[3] See Small Claims, Small Claims Court, at http://www.lasuperiorcourt.org/smallclaims/ui/whatis.apx.

[4] See http://www.lasuperiorcourt.org/smallclaims/ui/whatis.aspx.

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