The Value of Mediation and Arbitration Clauses in Contracts

Mediation and arbitration clauses in contracts are effective ways to avoid lengthy and costly litigation. These clauses provide clarity and structure, so that if a dispute arises, there is a defined process for resolution which can preserve relationships and avoid the delay, expense and unpredictability of going to court. Furthermore, mediation and arbitration take place in confidential settings.

Mediation and arbitration differ in approach. In mediation, a neutral third party (the mediator) facilitates negotiation between the parties to help them reach a mutually agreeable but non-binding solution. Arbitration more resembles a trial. An arbitrator (or a panel of arbitrators) hears arguments, reviews evidence and renders a binding decision.

Mediation is preferable when the parties have an ongoing relationship they wish to preserve, such as in business partnerships or family agreements. Since mediation is collaborative, it allows parties to negotiate and find creative solutions that might not be available in arbitration or court. Mediation works best when both parties are open to compromise and communication. It is especially beneficial in situations where the emotional or business ties between parties are significant, as it fosters cooperation rather than confrontation.

Mediation is useful when the dispute involves complex issues that require flexible or customized solutions. The mediator or arbitrator does not have to be a lawyer. Mediators now receive special training and can be very effective in helping the parties come to an agreement. One good feature of mediation is that the mediator can help educate the clients as to the soundness of their position.

Arbitration is preferable when the parties seek a definitive resolution to a dispute, as the arbitrator’s decision is binding and enforceable in court. It is ideal for cases where the parties are unlikely to agree and where one or both desire a faster, more formal process than mediation. Arbitration is like a trial but is generally quicker and more cost-effective because it substantially limits what is called discovery in court litigation. It is also private and informal, meaning you would be in the law firm conference room, not the court house, and the company name is not part of a public record.

Arbitration is particularly useful when the contract involves technical or specialized issues, such as construction, technology or commercial contracts. In such cases, an arbitrator with specific industry expertise can be selected to provide a knowledgeable and informed resolution.

The choice of whether to include mediation or arbitration in your agreement is extremely important. The pros and cons should be discussed with a business contracts attorney before deciding that question. Well-drafted mediation and arbitration clauses can help the parties take control over the resolution process, ensuring that disputes are handled in a manner that suits their specific needs and priorities.

Law Offices of Donald W. Hudspeth P.C. in Phoenix, Arizona takes a plain-English approach to contracts and is dedicated to drafting agreements that make practical sense. Call us today at 866-696-2033 or contact us online to arrange a consultation.