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Many contracts include provisions for alternative dispute
resolution mechanisms — ways to resolve conflicts without
going to court. There are two common forms of alternative dispute
resolution: mediation and arbitration.
Mediation is a process in which the disputing parties ask a
neutral third person to help negotiate and recommend a settlement.
The mediator's efforts and his or her recommendations are not
binding on the participants or enforceable by a court. Arbitration,
on the other hand, is an agreement to bypass a court action and
submit a dispute to the binding decision of an arbitrator or a
panel of arbitrators.
The key difference is that mediators negotiate and make
recommendations in an informal setting, while arbitrators perform a
judicial function and, at the end of a more formal hearing, make a
binding ruling that will be enforced, if necessary, by a court of
law.
Through their written agreement, the parties can, in advance of
a dispute, select their own private judge, agree to their own
schedule and even create their own discovery process and procedural
rules. An arbitrator's final ruling is legally binding and
often comes sooner than a traditional court ruling, with less
acrimony, at a lower cost and with little or any publicity.
Mediation and arbitration are not mutually exclusive, and some
contracts include both approaches. Under these provisions, if
negotiation with the help of an objective professional mediator
fails, then the parties can call for arbitration.
The benefits of carefully drafted mediation and arbitration
provisions include:
Minimized risks of a runaway jury
Reduced cost compared to in-court litigation
Simpler procedural and evidence rules and flexible
scheduling
Less hostility among the parties
Wider range of relief — more equitable remedies are
available
Avoidance of unwanted ripple effects of public lawsuits and
adverse judgments
Careful consideration
Although mediation and arbitration are common, the process may
not be best for every dispute. Weigh the pros and cons when
entering into a business contract or waiving your rights to a
trial.
In addition, take special care when drafting alternative dispute
resolution clauses in the consumer and employment context to avoid
legal challenges. Agreeing to boilerplate clauses without careful
review can cause unintended results, such as:
Loss of important procedural guarantees
Limited rights to necessary discovery
No written reasoned decision
Loss of appeal rights
Difficulty in bringing in necessary third parties
If drafted and implemented correctly, then alternative dispute
resolution provisions in contracts will be enforced. Consider your
needs when deciding whether to adopt these procedures as part of
your overall dispute resolution strategy.
Both mediation and arbitration work and, more often than not,
either approach will be faster and cheaper than traditional
litigation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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