Avoiding the Courtroom Through Mediation or Arbitration

By Kevin Sido, Partner, Hinshaw & Culbertson LLP, Chicago December 1, 2005

Critics can point to any number of reasons why litigation is not the ideal means of dispute resolution: the expense of complying with formal procedures of pleading and discovery; the arbitrariness and unpredictability of juries; and many other points long associated with civil litigation.

There are, however, other options. Alternative dispute resolution (ADR) provides an alternative to litigating a dispute in a courtroom. There are several choices that come under the ADR heading, but the most prevalent are arbitration and mediation .

ADR is looked at as a confidential and efficient way to resolve disputes. But to better decide whether it is the best option for your case, we first need to define our terms.

Arbitration is a binding process where a single arbitrator— or in larger matters a panel of three arbitrators—finds the facts, applies the law and enters an “award” of zero or some other figure for damages. Indeed, the result is binding, because the award is fully enforceable in a court of law. In fact, short of undue influence or fraud, an award can hardly ever be set aside—certainly not simply because it is determined that a “wrong” result was reached.

Because arbitrators are chosen for their expertise in a given dispute, they can often streamline the fact-finding process. There’s no need for the elaborate education process often required for a judge or jury.

Mediation is different. The parties, working through a paid mediator, attempt to reach an agreement satisfactory to all. The parties themselves determine what is satisfactory; if they cannot agree, the matter remains unresolved and can go into arbitration or even litigation. No findings of fact or law are made in mediation. In fact, nothing is binding in mediation, except the final determination to forge an agreement of the terms of resolution. At the conclusion of a successful mediation, a memorandum of understanding is signed, to be followed, in most instances, with more elaborate documents. Above all, flexibility is the key.

Obtaining an ADR

Parties can at any time—even when the case has already gone to court—call for mediation, arbitration or both. But the best way of calling for ADR is to do it before a dispute arises, by inserting a clause in the written contract for services. An oral agreement for ADR is essentially worthless. In fact, specific written agreements are essential not just to obtain ADR, but also to establish all other essential terms of the agreement. Having an agreement unsigned by one party might still permit a court to order the parties to arbitration, but relying on the unsigned agreement is very risky.

Even if ADR was not contemplated at the time of contracting, parties can agree to submit a litigated matter to mediation or arbitration. Indeed, many court systems recognize the wisdom of mediation and have enacted mandatory mediation procedures. What some courts call mediation, however, is not the same as how the American Arbitration Assn. and others define and handle that process, so discern the differences in the processes at hand.

Parties can agree to arbitrate any matter, even a tort lawsuit where the parties had no contract, and in fact, had never even met before the accident. The parties simply need to agree to arbitrate, and all states have a statutory mechanism in place (i.e., the Uniform Arbitration Act or the Federal Arbitration Act) to supply the procedures.

Mediation or arbitration

In arbitration, determinations of fact and law are made by the arbitrator. There is no appeal from an adverse finding of fact or erroneous application of law. Arbitration typically permits little if any pre-hearing discovery. For example, there probably will be no depositions at all, unless by agreement, and certainly not anywhere near the level typical in litigated matters. The arbitrator can issue subpoenas to compel the appearance of witnesses to testify or bring records for the trial-like hearing.

Arbitration is often, if not universally, used with contracts of American companies performing overseas in order to avoid the uncertainty of foreign tribunals. Arbitration probably works best where the parties know well their respective positions and where only two parties are involved. Standard contracts like those of the American Institute of Architects, for example, do not contemplate that an owner could join into arbitration with any party other than the architect. Indeed, an owner might have an arbitration clause in the architect’s agreement and a separate clause in the contractor’s contract, yet find itself conducting two separate arbitrations with a risk of allegedly inconsistent results. Courts do typically enforce the arbitration agreement to the letter, reasoning that a party will not be presumed to substitute arbitration instead of a jury trial. Alternatively, if an owner and engineer have an arbitration clause but the owner sues the general contractor and subcontractors in court, the engineer cannot be made to join that litigation with the contractors. The rules of evidence are largely ignored in arbitration proceedings, for better or for worse, so don’t be surprised to have hearsay evidence wandering into the proceeding. What weight that hearsay evidence gets, however, is another matter.

One feature that both forms of ADR excel at is confidentiality. The public, including media representatives and competitors, does not observe private arbitrations or mediations. Owners and designers who tend to attract the press might find that attractive.

What attracts most people to mediation is the flexibility. While it might seem like an oxymoron that parties who have a dispute will agree to come together and talk, most quickly realize that litigation, even arbitration, can be an expensive process with hardly a guarantee on who might prevail and when. Mediation, therefore, can occur at any stage of the dispute under any procedure. For example, the parties might agree to a limited exchange of documents followed by depositions of each other’s expert. A mediator called in early might assist in framing that limited exchange and then later preside at the conference. Many neophyte mediation participants go to the conference thinking the task is to convince the mediator of the soundness of their position. That approach would be fine in arbitration or litigation. In mediation, however, you must convince the people sitting on the opposite side of the table—not at the head of the table—of the merits of your position—that is, convince those parties with whom you formed a contract in happier times.

So do you select a mediator or arbitrator? The skills for one do not necessarily translate to the other. Retired judges, for example, can make excellent arbitrators in that they are accustomed to resolving disputed stories to reach a result. As mediators, some retired judges have that ability to make parties reach an agreement, but their ability can hardly depend on pounding the gavel; very different skills are involved. In general, experienced lawyers and retired judges probably are the most effective mediators.

Construction professionals as arbitrators can bring the experience of a career to the resolution process. Those persons probably work best on smaller disputes that are essentially fact-driven or heavily dependent on industry customs. For larger disputes, especially those with the size to justify three arbitrators, having at least one lawyer or retired judge on the panel can easily facilitate the management of the process simply because those persons are quite experienced in the procedures of a tribunal: what might be a good level of discovery, how witnesses should be heard, which side goes first, how the award should be written up to ensure its enforcement and so forth.

Fees for arbitrators and mediators are advanced equally by the participating parties. While the winner might collect reimbursement from the loser, the fees can be significant in a lengthy arbitration or with three arbitrators. Almost always, mediation is conducted by just one person.

A win-win situation

Mediation is truly a “can’t lose” dispute resolution alternative for both litigation and arbitration. Arbitration compared to litigation offers what can be a faster, cheaper and confidential process before a more learned decision-maker. Balance that with increased filing fees, lack of an appeal, lack of discovery, resistance in some quarters to engaging in arbitration and you are on to way to making this important choice.