Most commercial contracts contain mandatory arbitration clauses, which govern how disputes will be resolved. The concepts of mediation, arbitration and litigation are widely misunderstood, even by sophisticated business people who regularly deal with them. The purpose of this article is to informally discuss these mechanisms, their evolution and the most efficient combination of them.
Mediation is a non-binding process, conducted by a neutral party whose goal is simply to end a dispute. The neutral party ideally has some sort of mediation training and is familiar with the subject industry. Mediations conducted during litigation are “settlement conferences”: valuable meetings before a judge who shares prior subject matter experience and perspective on how much the trial may cost and the likely result. A mediator cannot order anyone to do anything and does not “decide” who wins. The mediator simply tries to bring the parties together, negotiate an agreement to resolve their dispute and save them from expensive and time consuming legal proceedings. It is often said the most successful mediation is one where both parties leave unhappy — a clear indicator both compromised more than they wanted in order to end their conflict.
Arbitration is a private trial, with a private judge but no jury. It differs from mediation in that an arbitrator can order the parties to do things and ultimately decides who wins. The arbitrator authors a decision, which is enforceable by a court, just like a verdict following a jury trial. Usually, the arbitrator is a retired judge or very experienced attorney, and often has applicable expertise like a CPA or an engineering degree. Arbitration is a confidential proceeding, tried by a sophisticated and experienced individual, and the result cannot be appealed. It is, however, significantly less efficient than litigation and free settlement conferences are not available.
Litigation consists of court filings, discovery and a trial in a court of law. It is open to the public, conducted by generally trained judges and not at all like what we see on television. It is not glamorous, exciting or fun. While litigation was traditionally slow and expensive, judges are becoming much more proactive in moving cases along quickly, cognizant of the expenses incurred by the parties, and willing to provide free settlement conferences.
In the ’80s, business people began to tire of court cases with lengthy discovery and expensive trials, so arbitration became all the rage. The idea was to replace a sluggish judicial system and unpredictable juries with an efficient, private and sophisticated process. Arbitration was embraced as a way of lightening judicial loads, and laws were passed to facilitate it. Commercial arbitration businesses sprung up, and arbitration was generally a successful mechanism for a period. Over time, however, it fell prey to the same inefficiencies it was intended to replace. Up-front administrative fees, high hourly rates for arbitrators, and massive discovery and continuances have caused the process to become slower and more expensive than litigation.
Today, many sophisticated business people have been through both arbitration and litigation, with rare satisfaction. They know 98 percent of disputes are resolved short of trial and are afraid of juries. So, they approach disputes as an inevitable consequence of doing business and seek to limit the high cost of our adversarial process.
Many attorneys are suggesting businesses replace arbitration provisions with mandatory mediation and/or litigation provisions. Some prefer to include both informal and formal mandatory mediation provisions as conditions precedent to the filing of litigation. The first gives the parties the chance to meet on their own with no outside expenses and be reasonable. If they cannot reach a deal, but make some progress, a trained, experienced mediator may bring them to that point of “unhappy compromise.” If mediation fails, litigation may be filed. With judges now being held more accountable for their dockets, aggressive attorneys can limit discovery and try their cases more efficiently.
Arbitration is certainly not a bad or outdated process, and it may work well for your particular kind of business or conflict. But, consider your dispute resolution options and your attorney’s views of the practicalities of the actual provisions in your contracts. If you have confidence in your “people skills” and view disputes as financial drains, you may consider replacing your arbitration provisions with mandatory mediation and litigation provisions and specific venue clauses. If you simply cannot negotiate the resolution of a dispute, or you decide, as a matter of principle, the expenses associated with obtaining a decision are secondary, you can always have a trial!
Matthew C. Addison is a partner with the Nevada law firm of McDonald Carano Wilson LLP.
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