Over the past 20 years, it has become fashionable to include language in agreements that requires mandatory arbitration or mediation of claims. What does this mean? It means that if you get into a dispute with the other party to the agreement, you can't go to court...you have to file for mediation or arbitration.
A little background here: in addition to my work as an attorney, I'm also a teacher. I am an Adjunct Professor of Leadership, Ethics and Values at North Central College, and I teach Negotiation and Conflict Resolution. Conflict Resolution is a study of Alternative Dispute Resolution (ADR) methods such as Mediation and Arbitration. This makes me uniquely qualified to counsel my clients in language relating to ADR and ADR clauses in agreements.
In the simplest of terms, mediation is the use of a trained, neutral third-party to help resolve a conflict between two or more people or businesses. A mediator does not decide the dispute and has no authority to force a resolution. The mediator simply works with the parties and tries to help them negotiate an equitable resolution. Mediation is intended to be a collaborative process that blunts the force of a dispute.
Arbitration, on the other hand, is the use of a trained, neutral third-party who acts in a capacity much like a judge. An arbitrator has the ability to decide the outcome of the conflict, and who "wins" and "loses".
ADR clauses have gained popularity because of their efficiency. ADR processes such as mediation and arbitration are usually much faster than litigation, and they can have greatly reduced cost as compared to litigation. Mediation, which is aimed at a collaborative outcome, can also produce far better results for both parties. Both mediation and arbitration are useful in the right circumstances. However, they are not perfect for all contracts.
Where ADR clauses are used, contracts will typically specify some professional organization of mediators or arbitrators who will be used to hear the dispute. This can be beneficial in some instances. For example, in cases where a dispute is likely to be highly technical in some specific field, it may be possible to specify that any dispute will use an arbitration organization that has arbitrators who specialize in this specific field. That can help ensure that the person hearing the dispute actually understands the dispute.
However, ADR can also have negative impacts on the parties. For low-intensity disputes, a litigant can typically get into a state court relatively inexpensively. A complicated ADR clause may preclude the litigant from using state court, and may require the litigant to go through an expensive ADR provider, where arbitrators will cost hundreds of dollars per hour. If you're the customer obtaining services under an agreement requiring arbitration, the cost of arbitration could be a significant limit on your ability to bring or resolve a dispute.
There are far too many proponents of ADR who view it as a 'one size fits all' solution to all contract problems. In reality, ADR can be greatly beneficial when it is used properly, in appropriate circumstances. It can reduce the cost of litigation and help ensure beneficial outcomes. However, it can also be a significant impediment to resolving disputes when it is employed in the wrong circumstances. If you're a customer in Illinois, do you really want to agree that any dispute you have will be arbitrated in California, before a California-specific arbitration service? Likely not.
There are some ADR concepts that can be adapted to nearly any contract, however. For example, nearly any contract can benefit from language indicating that if there is a dispute, the parties will have a sit-down meeting to talk through the dispute prior to firing off lawsuits in Court. For larger scale and higher-cost agreements, having some form of mandatory mediation, even if only as a step that has to be taken prior to filing a lawsuit, can be incredibly helpful. A good mediator may be able to narrow the scope of issues being fought over even if they cannot fully resolve the conflict.
Do you use ADR clauses in your agreements? Do you understand the ADR clauses in the agreements you've been asked to sign? Contact me today to talk more about how ADR impacts you. 630/292-4023 or email@example.com