Generally, businesses enter into a contract expecting things to go smoothly, with contract obligations fulfilled and no disputes along the way. Unfortunately, such expectations aren’t always satisfied. When a contract dispute arises, one party may resort to litigation in an effort to remedy an alleged contract breach or contract fraud by the other party.
Because litigation is time-consuming and costly, it’s important to be aware of two less-expensive dispute-resolution alternatives. In fact, contracts can be written to require that the parties try to resolve the contract dispute using these alternate dispute-resolution procedures first, with a costly lawsuit as a last resort.
Mediation and Arbitration
Mediation is a dispute-resolution technique in which a neutral third party meets with the contract participants to try to facilitate a settlement. The mediator is chosen by the parties in dispute, and is usually well-trained in the art of mediation. A skillful mediator can tone down both parties’ emotions and determine their true interests, then suggest creative solutions that may satisfy both sides, resolving disputes without a lawsuit. Mediation can also occur after a lawsuit has been filed and, if successful, can save both parties untold time and costs.
Arbitration is another form of dispute resolution. Unlike mediation, arbitration is a process in which one or more arbitrators, chosen by both parties, hear the merits of the dispute and render a decision on the issues. The decision is binding, and there is very little room for appeal.
Arbitration can be arranged privately or through a recognized service, such as the American Arbitration Association. An arbitration proceeding is less formal than a court proceeding. The American Arbitration Association’s rules are intended to result in an adjudication that is less costly and less time-consuming than ordinary litigation, and that goal is often satisfied. In fact, if the dispute involves total claims of less than $74,000, the American Arbitration Association has an expedited procedure that is even less costly and results in a shorter process and speedier decision.
Put It in the Contract
Arbitration and mediation are voluntary processes that the parties in a dispute must agree to. Therefore, many attorneys recommend including dispute-resolution provisions in a contract’s scope. Such provisions could, for example, provide for mediation first, followed by arbitration if the mediation is unsuccessful. The ability to plan ahead with these types of provisions is another good reason to have a signed rather than implied contract.
For example, the parties could insert a provision that says something like: “If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation or some other dispute-resolution procedure.”
If the dispute is not resolved through a mediation service, the parties “hereby agree to submit to arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. We further agree that the above controversy be submitted to (one to three) arbitrator(s). We further agree that we will faithfully observe this agreement and the rules, that we will abide by and perform any award rendered by the arbitrator(s), and that a judgment of any court having jurisdiction may be entered on the award.”*
American Arbitration Association arbitrators generally set their own fees – often an hourly rate. Therefore, the contract provision often states that a single arbitrator will resolve disputes between parties.
Unless agreed upon otherwise, the parties are responsible for paying their own attorney fees in contractual disputes. The parties may agree, however, that in the event of arbitration or litigation arising out of the contract, the “prevailing party” shall be entitled to recover its attorney fees and costs from the other party. If that’s the case, an arbitrator or court will be required to award attorney fees to the prevailing party. Such a fee-shifting provision could easily be included in the contract’s general dispute-resolution provision.
Generally, parties cannot be required to mediate or arbitrate a dispute without their consent. Including a dispute-resolution provision in a contract ensures each party’s consent, and may ultimately provide a less-costly and less-painful way to resolve any disputes that may arise. It's a good first step before engaging with a client to create a contract that outlines the dispute-resolution alternatives.
Davis McGrath is a law firm with substantial experience in litigation and counseling in the IT services industry. Serving a broad clientele from large businesses to entrepreneurs, and individuals, we also focus on intellectual property matters, with a specific emphasis on trademark, domain name, copyright and Internet law matters, as well as corporate law and contract transactions. In addition, we have proven skill and expertise in alternative dispute resolution. Davis McGrath L.L.C.
*See the AAA Web site at adr.org.
Brenna Lemieux - check her out at Google+ or Twitter