Basic Contract Skills: Dispute Resolution Clauses
Mediation or arbitration clauses are found in just about every standard contract these days. These alternate dispute resolution clauses should be carefully reviewed before including the clause in any contract.
Arbitration and mediation are different. When contracting parties agree to mediate, they are agreeing to informally discuss settlement with a neutral, third party. The mediator’s opinion is not binding. When contracting parties agree to arbitrate, they are agreeing to let a neutral, third party actually decide who wins and who loses. The arbitrator’s decision is binding.
Arbitration can be quicker and less expensive than formal court proceedings. However, arbitration is not always less expensive. This is especially true when the amount in dispute is small. When the amount in dispute is large or the issues are complex, arbitration may not provide adequate access to the other party’s case. We lawyers call this discovery, as in discovering the facts of the case. If the opposing party is being difficult or uncooperative, a judge has many more rules and tools at her disposal to deal with the situation. Judges can award punitive damages. An arbitrator may not have the power to award anything other than actual damages.
Arbitration clauses should include details about the arbitration process. Reputable arbitration groups typically have published rules of arbitration. Particular attention should be paid to the number of arbitrators, where the arbitration will be held, who pays the arbitrator fees, limitations on the use of legal counsel and how many arbitrators will make up the arbitration panel. All these factors will impact the cost of the arbitration. These factors will also influence the decision to arbitrate in the first place.
Pay attention to arbitration clauses that can only be invoked by one party to the contract. For example, we have seen construction arbitration clauses where the contractor can require arbitration and the homeowner cannot. We suspect this is to limit the potential for recovery of punitive damages by the homeowner. Another possibility is that this may reduce lawsuits against the contractor by disgruntled homeowners. A homeowner must make the difficult decision about whether to file a formal, expensive lawsuit. If the homeowner does file, then the contractor can choose which process is best for the contractor.
Mediation clauses should be tailored to the industry, county and court. For example, most mediation clauses simply require mediation before filing a lawsuit. Most county and district courts in Colorado require mediation as part of the lawsuit. Typically, the mediation as part of the lawsuit occurs shortly before the trial date. A looming trial date gets everybody thinking toward settlement. Holding mediation before a lawsuit is filed may not be as effective because there is no looming trial date. Pre-lawsuit mediation may not qualify as the court-ordered mediation, meaning mediation will occur, twice. Under these circumstances, the mediation clause in the contract might be more effective if it allows for filing the lawsuit before requiring mediation.
Mediation and arbitration clauses come in many different shapes and sizes. Be sure to choose the one that is right for the situation at hand.
