Many of my small business clients ask whether they should include Mediation and Arbitration clauses in their contracts.* Like with most things, it depends on what you wish to accomplish. Both Mediation and Arbitration fall under the category Alternative Dispute Resolution (ADR), as they are an alternative to a standard judge or jury trial court proceedings.
Let's start by defining these two types of ADR mechanisms.
Mediation is traditionally non-binding, while a decision in Arbitration is normally binding. In both, the parties "pick" the Mediator or Arbitrator using the process spelled out in the contract. Mediators encourage compromise and help the parties voluntarily resolve matters. Arbitrators sit as judges and decide the case for the parties, with limited appeal rights.
Unlike a judge or jury, Mediators and Arbitrators are paid by the parties for their services. Depending on the agreement, the fee is either split, paid for one party, or paid by the company. Expect Mediators and Arbitrators to charge rates similar to the hourly rates attorneys or other professionals charge in your area.
It is customary for one Mediator to Mediate a case, but you can sometimes see multiple Arbitrators hired to handle an Arbitration. This is because Mediation is non-binding, while an Arbitrator's decision is final. As such, parties wishing to affect the process select Arbitrators they think might better understand their position. (e.g., a CPA litigant might prefer someone familiar with accounting principles).
In the event of multiple Arbitrators, the two party selected Arbitrators will consult and select a third Arbitrator. The cost of the Arbitration process is understandably more expensive when you have multiple Arbitrators than when you hire a single Arbitrator.
Why might you want to include a Mediation or Arbitration clause in your contracts?
First, traditional litigation can be expensive. Court dockets are crowded, and it can take many months to get routine motions heard, and years to get to trial. That means you are paying your attorney and expert witnesses for a longer period of time.
Second, Mediation and Arbitration can lead to a quicker resolution. The discovery process in court can be long. Motions can take months to get resolved. Rulings can be reconsidered or appealed. While discovery is often allowed in Arbitration and Mediation, the parties can spell out the limits in advance the Mediation or Arbitration agreement.
Third, the Arbitrators or Mediator will be familiar with your case and the parties. Judges handle thousands of cases, and across a wide spectrum of practice areas. Often you will have a number of judge throughout the process. The judge you have this week likely will not be the one you see at trial. The Mediator of Arbitrators you pick will be with you the entire process.
Fourth, the parties have more privacy in Mediation and Arbitration. The Clerk of Court has a duty to record and make public most court filings. This is not the case in Mediation or Arbitration. If you or your company's reputation might be harmed by the publication of disputed issues, then ADR might be preferred.
Fifth, ADR can help minimize the likelihood of an unexpectedly large verdict. Unlike juries, Arbitrators have a reputation of being more reasoned and conservative in their deliberations.
Looking at the other side, why might you prefer a Court trial to ADR? Mediation is voluntary and non-binding, so I will focus on Arbitration.
First, if you are the David in a David and Goliath situation, then a jury gives you a greater chance for a large verdict. The uncertainty of a jury ruling will motivate a larger opponent, especially one from out of state, to look for ways to resolve a matter fairly and a little more quickly.
Second, you have better appeal rights in a court or jury trial than in Arbitration. Your attorney can explain the particulars, but the Arbitration process is designed for finality, while the court and jury system leaves many opportunities for challenging issues throughout the process.
In conclusion, both Arbitration and Mediation can be valuable tools for businesses. They can reduce the time and expense of a full blown trial. They offer more certainly. Mediation has few downsides, and Arbitration might be beneficial if you are the more sophisticated party, want to streamline the process, or prefer to keep your business disputes private.
Chris Staubes is a certified mediator, and has over two decades of experience assisting businesses and business owners with their legal needs. Chris is the President of the Mount Pleasant Chamber of Commerce, and represents Mount Pleasant on the Charleston County School Board.
Copyright (c) 2017 Chris Staubes
*There are specific rules for how to draft ADR clauses to make them enforceable, so make sure to consult an attorney.