ADR Clauses in Contracts: Should You Mediate, Arbitrate or Litigate?
Should you negotiate means for Alternative Dispute Resolution into your next business contract?
Alternative Dispute Resolution (ADR) refers to either mediation or arbitration, which provide alternatives to litigation. ADR, by comparison to traditional litigation, can sometimes be a less expensive, less risky means for parties to a contract to resolve their disputes.
Unsurprisingly, then, parties to business contracts routinely include ADR clauses as a precaution against potentially becoming embroiled in a lengthy, protracted dispute with their counterparts in court. However, there are circumstances in which an ADR clause might not be appropriate, depending on the sophistication of the parties, the nature of the contract and the kinds of disputes that can arise from it, among other factors.
In this post, we focus on whether and the extent to which ADR, specifically, mediation (arbitration was discussed here) should be negotiated into your next business contract. For now, it will suffice to know that, while arbitration and mediation share similar pros and cons, the most important difference between the two is that arbitration automatically yields a binding decision, whereas mediation does not. In practical terms, this means if the parties to a dispute cannot reach a settlement through mediation, they remain free to pursue their claims in court (or through arbitration).
What Are the Objectives of Mediation?
The objective of mediation is to resolve a dispute by informally talking through issues in a low-pressure environment conducive to open communication. Discussions are facilitated by the mediator, who is usually an attorney, and who might also have experience practicing in whatever area of law is relevant or applicable to the parties’ dispute. The mediator seeks to ease tensions and facilitate negotiation and dialogue between the parties by speaking to them both jointly and individually.
What Are the Benefits of Mediation?
There are no “winners” and “losers” in mediation. The only outcome that can be reached through mediation is one that both parties agree on.
Some statistics suggest mediation might be a more productive forum for dispute resolution to traditional litigation. For example, the Federal Mediation & Conciliation Service (a federal agency designed to mediate labor disputes that was created in 1947 under the Taft-Hartley Act, 29 U.S.C. §§ 141–197) reported that 87.1% of the negotiations it was involved with in 2017 achieved settlements.
Moreover, if the parties cannot reach an accord through mediation, they can still decide to litigate (or arbitrate) their dispute. The costs of litigation (and to a lesser albeit similar extent, arbitration), however, provide a significant incentive for parties to reach settlements at mediation. By avoiding litigation and everything it involves (depositions, document requests, subpoenas, motion practice, trial, etc.) the parties are better able to control costs and mitigate risks. The costs of attending mediation, which are nominal compared to the costs of filing a lawsuit, are borne equally by the parties. Mediation and its outcome are also private and just between the parties. The privacy of mediation is generally regarded as a benefit, unless an aggrieved party wants to bring public attention to an issue, in which case a lawsuit, which naturally becomes part of the public record, may be more appropriate.
Mediation can also bring closure to a dispute much faster than litigation. From this perspective, contracts containing ADR clauses likely also alleviate burdens on the court system. Indeed, courts frequently encourage or, in some circumstances, even order litigants to attend mediation before permitting their case to proceed to trial. Not doing so might mean backlogged court dockets for years or even decades. For (an extreme) example, some courts in India have a backlog of cases through the year 2330.
When Should Mediation Be Avoided?
Of course, there are also times when mediation might not be the best means for resolving a dispute. The history of the parties’ business relationship, for example, might not make it worthwhile to negotiate an ADR provision into a contract. Mediation usually works best between parties who approach it with a ready and open willingness to communicate and resolve their dispute. Mediation is less likely to produce a successful resolution if one party goes into it with an inflated belief in the strength of its position—whether that belief is true or not.
Mediation is also not well suited for resolving disputes that arise from intentionally deceptive or other bad faith conduct. For instance, parties that stand accused of engaging in deceptive behavior seldom admit to engaging in that conduct, which leaves very little, if any, neutral ground for negotiation. Claims arising from this conduct are therefore best pursued through arbitration or litigation.
Of course, if the parties negotiating a contract are uncertain about the desirability of mediation, they can always propose revisions tempering the restrictiveness of the ADR clause. For example, the parties can agree that they “may” rather than “must” resolve any disputes arising from their contract through arbitration or mediation. Parties can also agree to attempt to resolve disputes through mediation first before escalating to arbitration or litigation.
This article is meant to be utilized as a general guideline for mediation clauses in contracts. Nothing in this blog is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first. If you have questions about your particular legal situation, you should contact a legal professional.
Max Julian is an attorney at The Gertsburg Law Firm. Julian’s practice is focused on commercial litigation. He can be reached at email@example.com or by phone at (440) 571-7541.