Contracts containing provisions requiring the mediation and/or arbitration of disputes are more common than not, driven largely by the time and expense required to resolve disputes through litigation.
As a mechanism for the resolution of contract disputes, litigation is expensive and time-consuming. It can take years for a legal action to work its way through the courts, and the outcome, particularly when a case is tried to a jury, is always uncertain.
Mediation and arbitration, as alternative methods of dispute resolution, have steadily gained ground, to the extent that they are standard for contracts of all kinds. Anyone considering or drafting a contract should understand how mediation and arbitration differ, and what those differences mean for the parties to a contract.
“Mediation” refers to the process whereby a neutral third party works to narrow the points of contention in a dispute, and bring the parties to a mutually acceptable resolution. A mediator does not impose a resolution or settlement; he or she may make recommendations, but the parties can agree, or not.
“Arbitration” more closely resembles court-based litigation, in that the neutral third party arbitrator functions as judge and jury. He or she will solicit statements of the case from the parties; examine documentary and testamentary evidence, and render a decision based on the document at issue, the facts of the matter and applicable law.
Arbitration clauses may, by their terms, be expressly binding or non-binding. For the decision of an arbitrator to be binding on both parties to a contract, the contract must provide that the decision of the arbitrator is “final and binding”, and that the decision of the arbitrator is enforceable in a court of applicable jurisdiction. “Applicable” means that the party seeking enforcement would have been able to bring a lawsuit in the court where he or she is seeking to enforce the decision of the arbitrator.
Contracts that lack the necessary “final and binding” language in the arbitration provision will most likely not be enforceable in court. Note, however, that the standard arbitration agreement used by the American Arbitration Association (“AAA”) provides that parties who agree to submit to arbitration by AAA are deemed to agree that judgment on an award by the arbitrator may be entered in a court of applicable jurisdiction.
In addition to “final and binding” language, arbitration provisions should specify the individual or organization that will serve as the arbitrator; the number of arbitrators (an odd number is preferable); the place where the arbitration will take place; the procedure for initiating arbitration; the rules for the arbitration; and an allocation of the costs of the arbitration.
In summary, arbitration is an efficient and effective alternative to litigation, but care must be taken in drafting an effective arbitration provision.