By: Pete Singh

There is dense language at the end of most contracts that some call “boilerplate” (meaning it’s standard stuff and not worth reading, understanding, or negotiating). Overlooking these terms may seem prudent or efficient upfront, but they can have very real ramifications. Buried in those “miscellaneous” or “general” sections, you’ll see choice of law, governing law, jurisdiction, waivers, and sometimes arbitration or mediation. What you agree to here dictates the choices you have to solve problems if there is an issue as the contract moves from two dimensions to reality.

Disagreements and conflicts can arise between even the best of friends, business partners, and parties to any contract. There are three formal processes that people can use when they have issues and find themselves at an impasse: litigation, arbitration, and mediation. Arbitration and mediation, known as alternative dispute resolution (ADR) methods, are alternatives to traditional litigation, but often used in conjunction with it – parties try to negotiate first, and if that fails, they move forward to trial.

Litigation

Courts provide a forum for parties to confront each other and lay out all the facts for a judge or jury to decide who wins what. There are procedures, fees, and formalities throughout lawsuits, but ultimately, there is a clear winner and loser of an award that is usually monetary. 

Parties can have voir dire (jury selection) to weed out jurors that may be biased or unfit to serve for whatever reason, but it is the luck of the draw that determines which judge is assigned to your case or which jurors are in the pool. The decision may be in the hands of someone that has no idea how your business or industry works.

It doesn’t make much business sense to take some issues to court to go through the long and costly process of pleadings, discovery, motions, trial, winning (or losing) and appeal to boot. It can take years for these steps to play out. Often, it is only the litigators/lawyers that enjoy the contest and come out ahead.

In some contexts, though, it can be important to a party to set precedent. Vindication and publicity may be priorities. Litigation is usually (but not always) public. Since arbitration decisions and settlement agreements following mediations usually contain confidentiality clauses, these methods are not the way forward for a party that wants to send a message or set a tone that reverberates.

Arbitration

This is also an adversarial procedure where parties present evidence and make arguments so a neutral third party can make a decision. The main difference between litigation and arbitration, though, is that arbitration is much less expensive and time consuming. Efficiency is the hallmark of this process.

With arbitration, the parties choose who hears their case from a roster of neutrals. Specialized knowledge and expertise can grease the wheels so parties dive right in to explaining the issues at hand without any remedial lessons to set a framework of understanding that most judges and juries need.

Arbitration is usually binding, which means the decision of the arbitrator or panel is the end of the road. There are no appeals. This gives parties a sense of finality. With non-binding arbitration, there may be an opportunity to pursue the issue further in or out of court, but even losing parties are armed with an analysis that addresses the strengths and weaknesses of their positions.

Confidentiality is another reason arbitration makes sense for some parties. Keeping certain problems private could matter considering the reputation of your products, services, or professionals.  Resolving intellectual property disputes this way greatly reduces the risk of an adverse decision by only dealing with a particular claim and claimant. In litigation, a company may lose the particular case as well as the underlying patent, copyright, or trademark rights. 

Fun fact – just about every TV court show is actually an arbitration dressed up. Participants agree to air their dirty laundry in exchange for studios to pay the purse, and the final outcome is binding. This is obviously not a confidential process once it’s broadcast, but some parties think it’s worth it to waive that right.

Mediation

Facts are less important than objectives and outcomes with mediation. The neutral tries to get to the heart of the matter and help parties have difficult discussions. Ultimately, the parties themselves decide whether and how to move forward with a settlement agreement. The mediator’s role is to facilitate conversations, unearth motives and interests, and help each side better understand the other.

The parties come together in an environment where they can speak freely, with confidentiality, and present their positions, probe the others, and explore creative solutions that may go far beyond dollar amounts. Parties may discover ways forward that don’t only involve recovery of damages, but could entail changes to an existing arrangement, new policies or procedures to address and avoid such issues, or any number of concessions or promises that can be embodied in a settlement agreement.

ADR can be a great way to solve problems and resolve conflicts.

Here are factors that can weigh in one direction or another:

  • Cost
  • Confidentiality
  • Timing
  • Ongoing Relationship

You should consider whether ADR is appropriate at the outset because it is something that needs to be pre-agreed to in your contracts.