The Arbitration Clause

11 08 2011

Arbitration, as we explained in our last post, is a more adversarial process than mediation. In a typical arbitration, a sole arbitrator or a panel of three arbitrators listen to each party present his or her side of the case, and then make a decision, which may or may not be binding on the parties. You have probably, at some time in your life, agreed to settle a dispute through arbitration. Many, if not most, contracts with big companies (credit card companies, etc.) include an arbitration clause.

Because an arbitration clause requires your dispute to be settled outside of court, you may think it is in your best interest. After all, litigation is expensive, time consuming, and stressful, so an alternative procedure must be better for you, as a consumer or small business. However, when you sign a contract with an arbitration clause, you are giving up (or at least delaying), your right to take the other party to court, and this may put you at a disadvantage.

An arbitration clause often specifies that the arbitrators will be associated with a specific organization or industry that is likely to favor, or at least understand, the other party’s position. If you and the other party to your contract work in the same industry and would be more comfortable settling a dispute in front of experts, this may be an advantage for you. If you are not working within a specialized industry, but contracting with one who is, you may not want to settle your dispute in front of a panel of experts who may already know and respect your adversary.

An arbitration procedure is likely to be more private than a lawsuit. This may benefit both parties, or it may put one at a disadvantage by removing the incentive of bad publicity. If you are a consumer or small business entering into a contract with a big company, you might find yourself wishing you didn’t sign that contract.

An arbitration clause may also subject you to unexpected costs. For example, it could require that your arbitration take place out of state, although a lawsuit could have been filed in the state where you live and work. It may also specify an arbitration procedure with significant, up front costs. These costs will still be lower than those associated with litigation. However, some types of litigation are commonly taken on contingency, and a contingency case often costs the client little or nothing up front.


Alternative Dispute Resolution

9 08 2011

Most people have heard of two types of Alternative Dispute Resolution: mediation and arbitration. Both are used to resolve disputes before or during litigation. Some mediations and arbitrations are required, either by the court, as part of the settlement process, or by the terms of a contract. Alternative dispute resolution processes are also chosen by parties to a dispute as an alternative to litigation, because they believe it will save money, result in a quicker resolution, preserve business or personal relationships, or be less stressful than a lawsuit.


A simple definition of mediation is a form of dispute resolution where a neutral third party (a mediator), helps the parties to the dispute reach a resolution. A mediator may take a very active role in the mediation, making suggestions and offering his or her own ideas as the mediation progresses, or a mediator might take a less active role, asking questions in order to help the parties come to their own decision. The parties might be together for the entire mediation, or the mediator might speak to each party individually. Sometimes, attorneys participate in the mediation, and sometimes mediation occurs without the involvement of attorneys.

Generally, a mediation will begin with an introduction by the mediator, followed by opening statements by each party. After the opening statements, the mediator asks questions in order to gather all the information, identifies the issues that need to be resolved, and assists the parties in negotiating an acceptable settlement. A mediation may last for several hours, several days, or several weeks. If an agreement is reached, the mediator will usually draft a document outlining the settlement.

Courts often require parties to go to mediation before a case goes to trial. Mediation is frequently used in highly emotional conflicts, such as divorce and custody disputes, where ongoing relationships make an amicable settlement crucial. Mediation may be used to resolve disputes between family, friends, or neighbors, even where legal action isn’t contemplated. Mediation may be used to resolve a dispute within a community. Some mediators specialize in corporate negotiations and disputes, resolving conflicts where millions of dollars are at stake.


Arbitration is usually a more adversarial process than mediation. In a typical arbitration, a sole arbitrator or a panel of three arbitrators listen to each party present his or her side of the case. Attorneys are often involved, witnesses may testify, and evidence might be submitted. At the end of the process, the arbitrators deliberate and render a decision.

Arbitrators, while not bound by traditional court rules, are often governed by arbitration rules. Arbitration may be used to resolve a dispute because an arbitration clause was included in a contract between the parties, because the parties agreed to participate in arbitration in order to achieve a quicker, less expensive result, or because a mandatory court arbitration program is in place.

Arbitration awards are often, but not always, binding, and while there may be a right to appeal, it is usually limited. It is important to note that where arbitration is mandated by a court, the arbitration award is of an advisory nature only.

Arbitration is especially effective when the matter of the dispute is very complex or technical, and an expert is needed to render a decision. Arbitrators often have expertise in the subject matter of the arbitration, making them better able to understand complicated technical issues. Arbitration is also very effective in situations where the dispute is entirely monetary.