Contracting Pitfalls Part Seven: Mediation, Arbitration, Litigation

The vast majority of contracts are performed more or less as originally intended.  Given the number of contracts entered into daily, only a very small percentage of them ever wind up in a serious dispute that the parties cannot work through.  However, it does happen and when it does, there can be serious consequences. Contracts may anticipate how a dispute will be handled.  There are pros and cons to each approach.  But, having some idea of what the language means will be helpful in identifying whether or not you may be satisfied with what is being proposed.  

            Mediation is a process whereby the parties are forced to meet with a facilitator who attempts to engage the parties in negotiations to come to a resolution of the dispute.  It is possible to contract for a mediation prior to filing any type of litigation. Mediation can also occur after litigation is filed and is frequently court order.  Some contracts require mediation before the parties can move on to arbitration or litigation.

            Arbitration is a process designed to finally decide a dispute.  Whereas mediation only can reach a resolution if the parties agree, arbitration is quasi-judicial process where one or more arbitrators will decide the case.  Generally speaking, arbitration has to be contracted for by the parties before the dispute arises or the parties have to agree to submit it to arbitration after it arises.  The latter rarely happens.  Arbitration does have the advantage of being a private process which can be closed to the public.  But, it tends to be more expensive than going to court because you have to pay for the arbitrators, the location of the arbitration, and other expenses that are ordinarily picked up by the taxpayers.  And, these can be substantial.  There are also some procedural limitations with arbitration that can be troublesome. For example, discovery is greatly limited, the rules of evidence are fairly lax, and there generally is no appeal from the decision of the arbitrator.  Some would argue that these are advantages and they may well be in certain cases. In other situations, they would not be. If the dispute is going to be in a specialized area of knowledge, it is sometimes possible to find arbitrators who are experienced in that area.  So, hopefully you get a better informed decisionmaker.  Another consideration with arbitration is that if the parties will not consensually agree to follow the arbitrator’s award, a lawsuit is necessary to enforce the mediation award.  While this type of lawsuit is usually not particularly complicated, it is additional time and expense.  

            If the contract does not set out some sort of dispute resolution alternative, then litigation is the default.  For some considerations relative to that, I recommend your attention to Part Three of this series in which we discussed choice of law, jurisdiction, and venue.