Mediation can be very helpful if both parties are open to finding a solution.
Arbitration can allow the parties to focus on having a third party adjudicate their dispute in a less formal manner.
But both can be used as extra steps / hurdles along the way to reaching a final resolution. Med, then Arb, then start again in court (if even only on a narrow appeal/judicial review).
When putting an ADR clause into a contract, I would consider if you are the stronger party, if so you’re giving yourself extra tools in the advent of dispute. If not, you’re handing them over to the other side.
Being an independent business owner for more than 25 years I would highly recommend this clause but one must understand their relationship to the other party in the contract and who is controlling the transaction flow. For instance, if you are planning to be an outside Sales Representative for a Florida manufacturer and you are based in California that clause should be in the state in California. Also, it draws the party with control of the transaction into your state for what would most likely be sales commissions due you in this example. Additionally, arbitration or mediation is much cheaper than a court filing in any jurisdiction.....again depending on who's in the most strongest leveraged position in the Agreement.
Yes. I cringe when a client shows me a 4 paragraph contract. I think mediation/Arbitration clauses are one of basic essentials that protect all parties to a contract. I reviewed a 227 page contract regarding the purchase/sale/stock swap etceter. Buried near the end of the contract were two elementary clauses "choice of law" and "mediation/arbitration."
Most disagreements or disputes can be resolved using mediation or arbitration. Usually the dispute will be resolved faster and with less expense than through litigation.
Things like the results of home inspections and repairs that are identified, earnest money disputes, claims of misrepresentation about the condition of the property, or the condition of the appliances or fixtures-these all are potentially arenas in which mediation and arbitration may be effective and less expensive.
On the other hand, someone has made a good point here in identifying that the clauses function primarily to protect the large companies and sometimes that is not the best thing for individual consumers.
We real estate professionals are instructed not to advise the party with whom we have an agency relationship as to whether to agree to these clauses. Let them make their own best decision.
Good question, with no simple answer. First, for clarification, what is the difference between the two?
A mediator is like a marriage counselor for litigants or pre-litigants. The mediator is a neutral, with no axe to grind, who will get together with the parties and try to come up with an agreed resolution of the dispute or lawsuit. It works surprisingly well with an experienced and trained mediator, and probably resolves over half of the suits/disputes that are mediated. The choice of mediator is critical and should take into account the personalities of the parties and the subject of the dispute. Different mediators work well with different kinds of people. Some are better with some types of cases rather than others.
Requiring mediation in a contract? Why? I've seen it only once and it is very unusual. Which makes sense. Almost anybody in litigation will agree to a mediation if one side or the other suggests it. So off you go to mediation, even without it in your contract. But if you are on the other side of a dispute with somebody who flat out refuses to go to mediation (somebody well invested in 'the principal of thing,' or 'scorched earth,' or 'not a dime!' or somebody who is just plain crazy and/or profoundly unrealistic) then having mediation required by the contract doesn't gain you much. Such a person will go to the mediation because they have to, but the mediation is doomed because they don't want to resolve it -- they want their day in court. "I'll see you in court!" types (attorneys or clients) don't make for good mediation subjects. And what fun you will have in trying to get that sort of person to agree to a particular mediator in the first place. For such people, to quote a great legal mind, Groucho Marx, their position is: "whatever it is, I'm against it." (Horsefeathers?) In short, there is no real downside to having a pre-suit mediation requirement in a contract, but it is probably unnecessary if you suggest mediation at an early, appropriate time. The worst that can happen is that you waste half the cost of the mediation, which is generally not all that expensive. Note that I said "pre-suit" -- to get the most out of it, make sure there has to be a mediation before either party files a suit on the contract. And the agreement should require the parties to split the cost of the mediation.
It is hard to say anything negative about mediation in general. It can save a lot of time and money, and if you settle your dispute you know the outcome.
Arbitration is profoundly different. Your constitutional right to a jury is gone if you agree to go to binding arbitration. Instead of 12 or 6 people that you helped select for your trial for your jury, typically either a single arbitrator or a panel of three will hear your case and supervise all the factual discovery leading up to the BINDING hearing and result. (There is an animal called "non-binding arbitration," which was once very popular in many jurisdictions but is almost extinct today. It was a more court-like version of mediation, sort of.)
Historically, risk managers and in-house attorneys such as general counsel and assistant general counsel (often not trial attorneys themselves...) thought binding arbitration was a really smart alternative and the magic bullet to take care of what they were convinced was the real threat from litigation: the irrational and overly generous juror. To eliminate that threat, much emphasis was placed on taking the case out of the civil jury system and into private arbitration. Note my use of the past tense: "was." It was all the rage and in many, many contracts about 20 to 25 years ago. These days you see it much less often. There are reasons for that.
First, many people have come to realize that jurors generally aren't crazy most of the time. The outliers make it in the news, of course, but for every hot-coffee-in-the-lap verdict there are thousands and thousands of verdicts that make perfect sense. Most jurors try to do the right and fair thing. If you are unlikable and your case is weak, there is a good chance you'll lose a jury trial. Nothing crazy about that.
Second, the supposed economy of going to private arbitration rather than pursuing civil litigation hasn't been borne out in many, many cases. Arbitration can be tedious, very expensive, and seemingly endless. Some arbitrators don't seem particularly interested in moving it along and getting to the point. "Let's have another hearing on this issue, everybody have your calendars...?" Arbitrators, at least in my jurisdiction, are charging very high rates (much higher than lawyers, even) for their time. Imagine paying for three of them to bill at once, plus your own lawyer. There are financial incentives to keep the process going rather than getting on with it and reaching the end result. Arbitrators and their organizations make more money the longer it drags on. Of course not every arbitrator approaches the work that way, and I don't mean to besmirch arbitrators generally, but I think that is a fair conclusion one can draw from experience in some cases.
Third, other potential biases can be at work against you. If you are an arbitrator on the approved panel for, let's say, a major health care provider with a mandatory binding arbitration agreement for all its "members," what do you think will happen if you award a large amount of money on a case in front of you? An award in the ballpark of what a sensible jury would award? You may not be used again. Now you're on the bottom of the list, or off of it, for that organization. What if half that arbitrator's work is referrals from the major health care provider? Is this a level playing field? Another example...what if one firm on one side has 150 lawyers and the other firm has 10. If your award is against the larger firm, what have you done to your potential future source of business?
Fourth, in a trial, the judge is bound by the rules of evidence. Rules that have evolved over 150 years or more to make sure quality evidence is accepted in a trial and unreliable evidence is kept out. No guarantee that the rules will be followed in arbitration. The arbitrator is often free to do whatever she/he feels like doing, and all kinds of factual stray cats and dogs are permitted to be presented with the caveat that the arbitrator will be careful to consider what weight to give facts that never would have gone to a jury.
Fifth, the arbitrator generally doesn't have to follow the law. Amazing, isn't it? They should, but they don't have to. If a trial judge made an alarmingly erroneous ruling on law on a key point in your case, or a deeply flawed ruling on what evidence is admissible, you'd have an appellate court to help you straighten him/her out. In a civil trial, if the judge erroneously keeps out your 'smoking gun' piece of evidence, you've got recourse. Every time, the Court of Appeals is there for you to try and correct big mistakes by the court or the jury. (In my state, a defendant losing a small claims case can appeal.) You don't have that with a binding arbitration. It takes something truly extraordinary to get a binding arbitration award overturned. A huge undisclosed conflict of interest on the part of one or more arbitrators? Well, maybe. A bribe? OK, but not much else. Wrong law, misunderstanding the facts, etc.? Not a chance; you have to live with your supposedly streamlined and economical result. Binding means binding. Like it or not.
Sixth, arbitrators don't have to follow their own organization's rules. Organizations such as the AAA (American Arbitration Association) are often stipulated as the arbitrators in contracts. The AAA has rules about fact discovery leading up to arbitrations. (Discovery includes things like demands for documents from the other side, written questions to the other side that must be answered under oath, depositions under oath, and so forth.) My experience has been that many times arbitrators will not allow parties to conduct the basic discovery they need for their case, even when their organization has rules for conducting such discovery. When pressed on this point, the arbitrators don't seem to even know their own rules.
I could go on but I think my point of view on the question is quite apparent from the above. It was taken as a given a couple decades ago that binding arbitration was smart and cheap. I don't hear that from in-house counsel these days. More typically, when I go over a contract with a sophisticated client and they see that provision they groan. The groan of painful experience. I never recommend it.
If you must sign a contract with a binding arbitration provision in it, then for heaven's sake write into the contract who that arbitrator or those arbitrators are going to be. The arbitrator will be ________________. If ________________ is unavailable or unwilling to serve as arbitrator, then the parties agree it will be ___________________. Pick somebody smart, and trustworthy, and fair, known for experience in the type of law that might come up in the event somebody claims a breach. The arbitration will be pursuant to [insert your state here]'s Rules of Evidence, etc. You can draft your away around some of the problems of binding arbitration. The court will enforce your agreement and then send you off to your private resolution.
One of the challenges of Alignable discussions is that they are not limited to any particular jurisdiction. My comments are from a California lawyer. They may not be valid opinions in other places. And, being opinions, you may not consider them valid at all.
My comments do not apply to employment contracts, where mandatory arbitration is often favored. When such provisions are enforceable.
I am becoming a fan of arbitration, though I don't think it's necessarily the best option for everyone in every situation. It really depends on your circumstances.
I write lots of business and real estate contracts, and I make a decision about the dispute resolution clause
each and every time. In the past, I have gone with the traditional language, which basically says the dispute will be resolved by the court in the county where my client lives (i.e. to give my client an advantage with forum). But, nowadays, I think carefully about my client's business reputation. Generally speaking, it's not good for an individual or a business to have lawsuits pending in State or Federal court. That information is public, and it can be a turn-off to anyone who might run across it. Even if you are completely innocent, it just doesn't look good to be involved in litigation. That is one great reason to use an arbitration clause.
Another thing is that the arbitration can be must less expensive and time-consuming than regular litigation. Now, whether that is a good or bad thing depends upon your particular circumstances. If you are the one with the deep pockets, maybe you don't want cheap and fast. But, there is no question that a quick resolution has its charm.
Mediation is helpful but voluntary. It is simply using a disinterested neutral to assist in resolving the dispute. I would never agree to binding arbitration in a contract that I can negotiate. So while I am stuck with arbitration if I have a dispute with my cell phone company, credit card company, or investment broker, I would not give up my Seventh Amendment right to a jury trial in a civil case if I have any negotiation power. Would you give up your First Amendment right to free speech?
Yes. I have defended employers in employment lawsuits for
over 30 years, and I believe it is far better for an employer to defend a
former employee’s claims in the arbitration setting rather than in the court
setting. Arbitration is faster and less expensive than litigation in
court, and when I draft arbitration agreements for my employer clients I can
build into the agreements various things that provide even more advantages to
my clients (such as a shortened statute of limitations and a mediation
option).
A clause is only as good as the enforcement. Too many times people will put clauses in their contracts to “cover all the bases,” the problem is when someone finally does breach the contract the non-offending party doesn’t want to enforce. Then you lose the benefit of the clause.
Business owners need to take a serious look at their contracts and only put in the clauses that they will actually use, otherwise it’s just a waste of time and resources.
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Answers (21-30)
Mediation can be very helpful if both parties are open to finding a solution.
Arbitration can allow the parties to focus on having a third party adjudicate their dispute in a less formal manner.
But both can be used as extra steps / hurdles along the way to reaching a final resolution. Med, then Arb, then start again in court (if even only on a narrow appeal/judicial review).
When putting an ADR clause into a contract, I would consider if you are the stronger party, if so you’re giving yourself extra tools in the advent of dispute. If not, you’re handing them over to the other side.
Being an independent business owner for more than 25 years I would highly recommend this clause but one must understand their relationship to the other party in the contract and who is controlling the transaction flow. For instance, if you are planning to be an outside Sales Representative for a Florida manufacturer and you are based in California that clause should be in the state in California. Also, it draws the party with control of the transaction into your state for what would most likely be sales commissions due you in this example. Additionally, arbitration or mediation is much cheaper than a court filing in any jurisdiction.....again depending on who's in the most strongest leveraged position in the Agreement.
Yes. I cringe when a client shows me a 4 paragraph contract. I think mediation/Arbitration clauses are one of basic essentials that protect all parties to a contract. I reviewed a 227 page contract regarding the purchase/sale/stock swap etceter. Buried near the end of the contract were two elementary clauses "choice of law" and "mediation/arbitration."
Most disagreements or disputes can be resolved using mediation or arbitration. Usually the dispute will be resolved faster and with less expense than through litigation.
Things like the results of home inspections and repairs that are identified, earnest money disputes, claims of misrepresentation about the condition of the property, or the condition of the appliances or fixtures-these all are potentially arenas in which mediation and arbitration may be effective and less expensive.
On the other hand, someone has made a good point here in identifying that the clauses function primarily to protect the large companies and sometimes that is not the best thing for individual consumers.
We real estate professionals are instructed not to advise the party with whom we have an agency relationship as to whether to agree to these clauses. Let them make their own best decision.
Yes - it directs the courts on what they must do versus they deciding for you in a legal fight. Also much much less cash to spend.
Good question, with no simple answer. First, for clarification, what is the difference between the two?
A mediator is like a marriage counselor for litigants or pre-litigants. The mediator is a neutral, with no axe to grind, who will get together with the parties and try to come up with an agreed resolution of the dispute or lawsuit. It works surprisingly well with an experienced and trained mediator, and probably resolves over half of the suits/disputes that are mediated. The choice of mediator is critical and should take into account the personalities of the parties and the subject of the dispute. Different mediators work well with different kinds of people. Some are better with some types of cases rather than others.
Requiring mediation in a contract? Why? I've seen it only once and it is very unusual. Which makes sense. Almost anybody in litigation will agree to a mediation if one side or the other suggests it. So off you go to mediation, even without it in your contract. But if you are on the other side of a dispute with somebody who flat out refuses to go to mediation (somebody well invested in 'the principal of thing,' or 'scorched earth,' or 'not a dime!' or somebody who is just plain crazy and/or profoundly unrealistic) then having mediation required by the contract doesn't gain you much. Such a person will go to the mediation because they have to, but the mediation is doomed because they don't want to resolve it -- they want their day in court. "I'll see you in court!" types (attorneys or clients) don't make for good mediation subjects. And what fun you will have in trying to get that sort of person to agree to a particular mediator in the first place. For such people, to quote a great legal mind, Groucho Marx, their position is: "whatever it is, I'm against it." (Horsefeathers?) In short, there is no real downside to having a pre-suit mediation requirement in a contract, but it is probably unnecessary if you suggest mediation at an early, appropriate time. The worst that can happen is that you waste half the cost of the mediation, which is generally not all that expensive. Note that I said "pre-suit" -- to get the most out of it, make sure there has to be a mediation before either party files a suit on the contract. And the agreement should require the parties to split the cost of the mediation.
It is hard to say anything negative about mediation in general. It can save a lot of time and money, and if you settle your dispute you know the outcome.
Arbitration is profoundly different. Your constitutional right to a jury is gone if you agree to go to binding arbitration. Instead of 12 or 6 people that you helped select for your trial for your jury, typically either a single arbitrator or a panel of three will hear your case and supervise all the factual discovery leading up to the BINDING hearing and result. (There is an animal called "non-binding arbitration," which was once very popular in many jurisdictions but is almost extinct today. It was a more court-like version of mediation, sort of.)
Historically, risk managers and in-house attorneys such as general counsel and assistant general counsel (often not trial attorneys themselves...) thought binding arbitration was a really smart alternative and the magic bullet to take care of what they were convinced was the real threat from litigation: the irrational and overly generous juror. To eliminate that threat, much emphasis was placed on taking the case out of the civil jury system and into private arbitration. Note my use of the past tense: "was." It was all the rage and in many, many contracts about 20 to 25 years ago. These days you see it much less often. There are reasons for that.
First, many people have come to realize that jurors generally aren't crazy most of the time. The outliers make it in the news, of course, but for every hot-coffee-in-the-lap verdict there are thousands and thousands of verdicts that make perfect sense. Most jurors try to do the right and fair thing. If you are unlikable and your case is weak, there is a good chance you'll lose a jury trial. Nothing crazy about that.
Second, the supposed economy of going to private arbitration rather than pursuing civil litigation hasn't been borne out in many, many cases. Arbitration can be tedious, very expensive, and seemingly endless. Some arbitrators don't seem particularly interested in moving it along and getting to the point. "Let's have another hearing on this issue, everybody have your calendars...?" Arbitrators, at least in my jurisdiction, are charging very high rates (much higher than lawyers, even) for their time. Imagine paying for three of them to bill at once, plus your own lawyer. There are financial incentives to keep the process going rather than getting on with it and reaching the end result. Arbitrators and their organizations make more money the longer it drags on. Of course not every arbitrator approaches the work that way, and I don't mean to besmirch arbitrators generally, but I think that is a fair conclusion one can draw from experience in some cases.
Third, other potential biases can be at work against you. If you are an arbitrator on the approved panel for, let's say, a major health care provider with a mandatory binding arbitration agreement for all its "members," what do you think will happen if you award a large amount of money on a case in front of you? An award in the ballpark of what a sensible jury would award? You may not be used again. Now you're on the bottom of the list, or off of it, for that organization. What if half that arbitrator's work is referrals from the major health care provider? Is this a level playing field? Another example...what if one firm on one side has 150 lawyers and the other firm has 10. If your award is against the larger firm, what have you done to your potential future source of business?
Fourth, in a trial, the judge is bound by the rules of evidence. Rules that have evolved over 150 years or more to make sure quality evidence is accepted in a trial and unreliable evidence is kept out. No guarantee that the rules will be followed in arbitration. The arbitrator is often free to do whatever she/he feels like doing, and all kinds of factual stray cats and dogs are permitted to be presented with the caveat that the arbitrator will be careful to consider what weight to give facts that never would have gone to a jury.
Fifth, the arbitrator generally doesn't have to follow the law. Amazing, isn't it? They should, but they don't have to. If a trial judge made an alarmingly erroneous ruling on law on a key point in your case, or a deeply flawed ruling on what evidence is admissible, you'd have an appellate court to help you straighten him/her out. In a civil trial, if the judge erroneously keeps out your 'smoking gun' piece of evidence, you've got recourse. Every time, the Court of Appeals is there for you to try and correct big mistakes by the court or the jury. (In my state, a defendant losing a small claims case can appeal.) You don't have that with a binding arbitration. It takes something truly extraordinary to get a binding arbitration award overturned. A huge undisclosed conflict of interest on the part of one or more arbitrators? Well, maybe. A bribe? OK, but not much else. Wrong law, misunderstanding the facts, etc.? Not a chance; you have to live with your supposedly streamlined and economical result. Binding means binding. Like it or not.
Sixth, arbitrators don't have to follow their own organization's rules. Organizations such as the AAA (American Arbitration Association) are often stipulated as the arbitrators in contracts. The AAA has rules about fact discovery leading up to arbitrations. (Discovery includes things like demands for documents from the other side, written questions to the other side that must be answered under oath, depositions under oath, and so forth.) My experience has been that many times arbitrators will not allow parties to conduct the basic discovery they need for their case, even when their organization has rules for conducting such discovery. When pressed on this point, the arbitrators don't seem to even know their own rules.
I could go on but I think my point of view on the question is quite apparent from the above. It was taken as a given a couple decades ago that binding arbitration was smart and cheap. I don't hear that from in-house counsel these days. More typically, when I go over a contract with a sophisticated client and they see that provision they groan. The groan of painful experience. I never recommend it.
If you must sign a contract with a binding arbitration provision in it, then for heaven's sake write into the contract who that arbitrator or those arbitrators are going to be. The arbitrator will be ________________. If ________________ is unavailable or unwilling to serve as arbitrator, then the parties agree it will be ___________________. Pick somebody smart, and trustworthy, and fair, known for experience in the type of law that might come up in the event somebody claims a breach. The arbitration will be pursuant to [insert your state here]'s Rules of Evidence, etc. You can draft your away around some of the problems of binding arbitration. The court will enforce your agreement and then send you off to your private resolution.
One of the challenges of Alignable discussions is that they are not limited to any particular jurisdiction. My comments are from a California lawyer. They may not be valid opinions in other places. And, being opinions, you may not consider them valid at all.
My comments do not apply to employment contracts, where mandatory arbitration is often favored. When such provisions are enforceable.
I am becoming a fan of arbitration, though I don't think it's necessarily the best option for everyone in every situation. It really depends on your circumstances.
I write lots of business and real estate contracts, and I make a decision about the dispute resolution clause each and every time. In the past, I have gone with the traditional language, which basically says the dispute will be resolved by the court in the county where my client lives (i.e. to give my client an advantage with forum). But, nowadays, I think carefully about my client's business reputation. Generally speaking, it's not good for an individual or a business to have lawsuits pending in State or Federal court. That information is public, and it can be a turn-off to anyone who might run across it. Even if you are completely innocent, it just doesn't look good to be involved in litigation. That is one great reason to use an arbitration clause.
Another thing is that the arbitration can be must less expensive and time-consuming than regular litigation. Now, whether that is a good or bad thing depends upon your particular circumstances. If you are the one with the deep pockets, maybe you don't want cheap and fast. But, there is no question that a quick resolution has its charm.
~ Jeff Harrington, Esq.
Mediation is helpful but voluntary. It is simply using a disinterested neutral to assist in resolving the dispute. I would never agree to binding arbitration in a contract that I can negotiate. So while I am stuck with arbitration if I have a dispute with my cell phone company, credit card company, or investment broker, I would not give up my Seventh Amendment right to a jury trial in a civil case if I have any negotiation power. Would you give up your First Amendment right to free speech?
Yes. I have defended employers in employment lawsuits for over 30 years, and I believe it is far better for an employer to defend a former employee’s claims in the arbitration setting rather than in the court setting. Arbitration is faster and less expensive than litigation in court, and when I draft arbitration agreements for my employer clients I can build into the agreements various things that provide even more advantages to my clients (such as a shortened statute of limitations and a mediation option).
A clause is only as good as the enforcement. Too many times people will put clauses in their contracts to “cover all the bases,” the problem is when someone finally does breach the contract the non-offending party doesn’t want to enforce. Then you lose the benefit of the clause.
Business owners need to take a serious look at their contracts and only put in the clauses that they will actually use, otherwise it’s just a waste of time and resources.