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BHGR Newsletter: Contracting, Drafting and Negotiation: Understanding the Differences between Litigation, Arbitration and Mediation

January 2010

Contracts usually include “Disputes” provisions governing how disputes will be resolved. The most common dispute processes are litigation, arbitration and/or mediation. Understanding the differences between these processes and the many options available in drafting dispute provisions allows a business to better negotiate contract terms, and to tailor these provisions so that they fit the company’s business needs.

Many business owners are familiar with litigation. One party hires an attorney who files a lawsuit requiring the other party to defend the lawsuit. Litigation is the “default” dispute resolution forum if the parties to a contract fail to specify another form of dispute resolution. Typically, litigation is expensive, emotionally draining, unpredictable, and can be a lengthy process. The outcome is determined once the judge or jury decides who is right and who is wrong, and that initial judgment can be appealed which prolongs finality.

Arbitration and mediation are alternatives to litigation and employ a neutral third party to resolve the dispute. Typically, mediation is a non-binding procedure where the neutral mediator analyzes the strengths and weaknesses of each party’s position and, using shuttle diplomacy, helps to facilitate a settlement. The mediator cannot impose a result on the parties; rather, the parties must voluntarily agree to enter into a settlement agreement on some, or all of the issues. In contrast, arbitration is usually a binding procedure whereby the parties agree in advance that disputes will be referred to and resolved by, one or more arbitrators, who, similar to a judge, hears the case and renders a final award.

Mediation can be used as a preliminary alternative dispute resolution process, whether the parties litigate or agree to arbitrate. Many contracts (and courts) require that the parties mediate. Given that it is likely the parties will mediate without regard to whether they arbitrate or litigate, the remaining question in negotiating and drafting dispute clauses is whether to litigate or arbitrate.

Generally, some of the advantages of arbitration include: the ability to tailor the arbitration clause to fit your company’s business needs, savings of time and cost, obtaining hearings at convenient times, confidentiality in the process, limited discovery, reduced attorney fees, a faster final resolution, and allowing the parties to mutually choose an arbitrator with experience in the subject matter. The main disadvantages of arbitration are filing and arbitrator fees, and limited rights to appeal. Other complaints about arbitration include the possible lack of reasoning included in the final award and a perception that arbitrators often “split the baby” by arriving at an outcome somewhere in the middle.

Prior to negotiating and drafting any contract, a party to a contract is well-advised to discuss the types of disputes that are likely to occur and what will be important to your company during that process. It is prudent to discuss with legal counsel your options regarding the drafting of a dispute resolution clause most advantageous to your company’s business needs early in the contract process, rather than after the dispute has occurred.

 

To learn more, please contact our Construction Law Practice Group 

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