United States: Resolving Disputes Out Of Court: Understanding Mediation & Arbitration

These words lend wisdom and provide insight to parties trying to decide how best to resolve a business dispute. But although alternatives to the courtroom exist, they are not a one-size-fits-all solution. Whether parties decide to litigate or proceed through alternative dispute resolution depends on many factors, including the parties and their relationship to each other, the amount in dispute, where the dispute arises, and the parties' resources.

Certain disputes may be better suited to alternative dispute resolution rather than litigation. This discussion focuses on when and if alternative dispute resolution may present a better option than litigation.

What exactly does alternative dispute resolution mean?

Alternative dispute resolution, or ADR, presents different options to resolve conflicts outside of court. This does not mean that the process falls outside the legal system. In fact, sometimes courts require parties to attempt alternative means of resolution before they approach the courts. There are rules and processes that manage ADR which all parties must subscribe to, and a successful finding can be made an order of the court and carries the same weight as a judgment in a court.

The critical foundation for ADR is consent. It is not possible for only one party to the dispute to proceed with ADR. All parties must consent to ADR and agree to the processes, rules, and outcome.

Any process that seeks to find a resolution to a dispute could be classified as an alternative dispute mechanism, but there are two formally accepted ADR processes that are recognized globally. They are mediation and arbitration.

MEDIATION

Mediation does not decide the merits of a dispute. Instead, it focuses on resolving the parties' dispute through negotiation. Ideally, the parties reach an agreed-upon resolution through the assistance of a neutral third party, the 'mediator.' Most typically, the mediator is an expert with knowledge specific to the underlying dispute of the parties. The mediator is able to address the strengths and weaknesses of the parties' respective positions on the underlying conflict.

Mediation sessions are usually attended by the parties in conflict, their attorneys, and the independent mediator. The mediator evaluates the conflict and works to help the parties reach a mutually acceptable resolution, and the parties are only required to negotiate in good faith. The mediator does not decide the dispute and cannot force the parties to agree to a resolution. Mediation is non-binding, and either party can end negotiations at any time and seek a resolution in court or another forum. The mediation process is strictly confidential and cannot be used for any type of evidentiary inference if litigation takes place in the future.

As with arbitration, mediation is voluntary and by consent. Although parties can elect to mediate at any stage, they can also agree to mediate contractually, in which case the courts will uphold this contractual obligation.

ARBITRATION

In arbitration, the parties agree that an independent arbitrator will hear evidence, as well as the parties' positions, and decide the dispute between them. Typically, arbitration occurs because the parties agreed to arbitrate their disputes by contract. Sometimes, even in the absence of a contractual obligation, parties may agree to arbitrate in order to have their dispute decided quickly, rather than wait on typical court process. In the absence of an agreement or contract, arbitration is often pursued early in litigation where parties can see that it will allow them to make the best of their resources in terms of time, cost, and productivity. In highly complex technical matters, the parties may feel that an independent arbitrator who is also an expert in that field may resolve their dispute more efficiently than navigating the legal process. Similarly, matters involving multiple litigants and complex issues may be referred, by agreement, to arbitration where a quicker and less costly outcome is expected.

What are the benefits of mediation and arbitration?

PROCEDURAL AND JURISDICTIONAL CERTAINTY

When parties in dispute are situated in different locations, across state lines, or even in different countries, mediation and arbitration can provide a perceived guarantee of neutrality where all parties are placed on the same footing. When parties must agree on process, location of hearing, and most importantly the arbitrator, it ensures that no party feels advantaged and a level playing field is set up. In multiple jurisdictions, arbitration can curtail costs significantly because parties are not obliged to take advice and follow particular jurisdictional procedures or argue over which location has jurisdiction to hear the dispute.

This is true of mediation too, where it is even more important for the parties to be in agreement with the rules of engagement. Here the focus of the process is on resolution rather than the dispute.

PROCEDURAL FLEXIBILITY

A significant advantage of arbitration and mediation is that the parties are able to 'tailor' the process and proceedings to suit the particular dispute. This is particularly useful with highly technical matters; parties can decide rules of evidence and expert witness without the constraints of often-onerous rules of different courts and jurisdictions. Parties are free to agree on evidential requirements while the only rule the arbitrator is bound by is that of fairness. Provided that the arbitrator is satisfied that the process is fair to all parties, parties are free to agree on whatever process they determine will best serve resolution of the dispute.

Mediation is even more flexible. The mediator's only constraint is the good faith of the parties, and as such, mediation lends itself to high-stakes business disputes such as class actions, complex commercial, and employment matters.

THE ARBITRATOR OR MEDIATOR

Many parties believe the greatest advantage arbitration provides is their ability to choose an arbitrator that is mutually acceptable. This is particularly so where the matter is highly technical, and the parties may believe a judge in a conventional court may not have the expertise to grasp technical issues. In these instances, parties may feel an impartial, independent but skilled expert may be better placed to decide technical disputes. Even in matters that are not particularly technical, parties may perceive a skilled professional as more reliable than a judge arbitrarily appointed to judge a dispute.

This advantage is arguably even more pertinent in mediation where the parties rely on the skill of the mediator to guide the parties to a mutually acceptable settlement. Mediators tend to be seasoned lawyers or retired judges and may even have expertise in the subject matter of the mediation. There are no general rules relating to mediators, although each state may have its own rules or guidelines.

FLEXIBILITY OF VENUE

An unexpected advantage of ADR that emerged in the COVID pandemic is that, unlike traditional courts, these proceedings are not dependant on a supporting system and structure. Mediation and arbitration proceedings are perfectly suited to online technology. These proceedings largely continued without interruption by lockdowns and work-from-home limitations. There are of course challenges, such as technology requirements, evidentiary issues, and security matters. But, by and large, ADR processes adapted with more success than courts, leading to a spike in these forums as disputing parties turned to effective dispute resolution mechanisms and courts encouraged parties to resolve disputes through mediation or arbitration.

PRIVACY AND CONFIDENTIALITY

Matters heard in courts are public and documents filed are generally in the public domain. While this is generally commendable and in the public interest, a public airing of disputes can have significant consequences for a business. For this reason, parties may choose arbitration, especially where the subject matter relates to intellectual property, trade secrets, or company confidences. It should be noted that while arbitration proceedings are private, they may not be confidential. Parties that choose arbitration for privacy reasons should take care to ensure that this is clearly articulated.

In contrast, mediation proceedings are both private and confidential. Accordingly, parties are encouraged to share information they might otherwise not. Generally speaking, representations or statements made during mediation are not admissible in court to preserve the confidentiality of the proceedings; although facts and documents used in mediation may also be used in court if mediation breaks down.

COST

It is easier to manage the expense of arbitration because parties are not bound by court processes which often extend the process and increase costs. This does not mean that arbitration proceedings come without significant expense. Some of the costs of litigation, such as attorneys' fees and the arbitrator's fees, are not avoided in arbitration. However, costs can be more controlled and contained in arbitration vs. litigation, where greater uncertainty in the process exists. Also, keep in mind that an experienced arbitrator can help manage costs efficiently for the parties.

Mediation is also usually cost-effective and avoids some of the costs of litigation or arbitration. Because the focus of mediation is reaching a settlement as opposed to deciding the dispute, many of the costs associated with presenting evidence and conducting discovery may be largely avoided.

SPEEDY RESOLUTION AND FINALITY

Despite the best of intentions, many courts are overburdened and under-resourced, leading to lengthy delays and ongoing uncertainty. Arbitration is often a speedier process if it is efficiently run and all parties abide by the agreed procedures. But, because arbitration relies on the consent of the parties and their willingness to abide by the agreed rules, any party can unnecessarily delay proceedings or disrupt the process. In these cases, costs can escalate and proceedings can be delayed.

Once the process is completed, the arbitration award (or decision) is considered final and courts are reluctant to override an outcome that parties have submitted themselves to in advance. This is in contrast to court decisions where the outcomes are subject to appeal. A party that agrees to arbitration cannot complain to the courts when the outcome does not suit them. This may well influence a decision to arbitrate or litigate.

Mediation, aimed at reaching a negotiated settlement, brings certainty and finality in the form of a settlement agreement. Once concluded, the parties rely on the settlement agreement rather than the original dispute. It is possible that the settlement agreement will include an ADR clause activated if there is a further dispute or a dispute arising out of the settlement. The courts will enforce settlement agreements in the same way they would enforce any other contractual agreement.

ENFORCEMENT

Both the Federal Arbitration Act (FAA) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provide irrefutable grounds for enforcement of the arbitration process and awards across borders. This makes it convenient to pursue arbitration and easy to enforce arbitration clauses, even across borders. It is interesting to note that U.S. courts routinely enforce arbitration awards, but may be less consistent with enforcing foreign judgments.

There is growing public policy support for mediation processes and the courts will support written settlement agreements signed by parties arising out of mediation. Mediation can be embarked on at any stage before or even during litigation proceedings; provided, of course, that the parties agree to mediate.

It is becoming increasingly common for courts to order parties to pursue ADR, especially mediation. Both arbitration and mediation free up the courts for matters which are better suited for litigation while ensuring that the parties reach a suitable resolution to their dispute.

Making the Choice

Alternative dispute resolution, be that arbitration or mediation, is not a process to be lightly undertaken. In determining which process is appropriate for a particular dispute, factors such as the nature of the dispute, the parties involved, the potential costs, and the nature of the award sought should all be carefully considered. ADR is not an alternative to legal proceedings but rather an alternative means of proceedings and still requires experienced management if it is to be an effective means of dispute resolution.

Originally published June 15, 2021

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.