This article first appeared here.
Even the most perfectly drafted contracts sometimes become contested nightmares, as performance breakdowns and compliance issues are never completely avoidable. However, the manner in which any such disputes are decided varies, usually depending on the scope of the issues at stake and the severity of the alleged breach. In addition, many contracts directly stipulate how certain matters will be decided, such as mandated arbitration or a requirement to seek mediation before resorting to the court system. It is important for everyone involved in contracting to understand these potential mechanisms for redress, so here is a brief overview.
Mediation is the most amicable dispute settlement of the bunch. Although the disagreeing parties hire the services of a professionally trained mediator, that person’s role is really about facilitation. The mediator is a neutral third party that guides the discussion so that it focuses on the primary issue of contention, ensuring productivity and a mutually satisfactory resolution of the problem at hand. Without a mediator, these discussions can easily derail. Thus, this manner of resolving a dispute is the most inexpensive and the least adversarial. In general, this is a great conflict resolution method when there is mainly a difference of opinion and interpretation, but a willingness to compromise.
People often confuse mediation with arbitration. However, they are distinct processes and the role of an arbitrator as opposed to a mediator is quite different. During an arbitration, the arbitrator actually presides over the proceedings. It is not about negotiating a compromise. Rather, the parties present facts and basically their side of the story. The arbitrator listens to each position and reviews the evidence and circumstances to make a decision. These days, consenting to arbitration generally entails consenting to abide by the final decision of the arbitrator. There may be some leeway to appeal certain procedural aspects, but the decision rendered is normally considered binding.
In essence, arbitration is an informal mini-trial. It is generally less expensive than litigation, as the preparation and proceeding itself do not require as much time or resources. More and more contracts are building in clauses that mandate arbitration as the first method of dispute resolution. In some cases, the clause even specifies that the parties must waive their right to appeal and/ or initiate a lawsuit. Unlike mediation, arbitration is basically an adversarial process, just as litigation is, albeit in a less formal setting and with less rigid rules.
There are enough courtroom dramas on television for people to know how a trial more or less plays out. If a contract dispute ends up being litigated, there are likely a lot of important issues (usually meaning substantial sums of money) at stake. Many lawsuits do end up settling out of court, but that does not mean that a judge is not involved throughout the process. A complaint must be filed to initiate the proceeding, and various hearings will be heard to evaluate certain issues and evidence. In some cases, the lawsuit settles moments before a trial is slated to begin. Therefore, at that juncture, quite a bit of time and resources have been devoted to trial preparation. Thus, most companies are litigation-averse and will strive to settle a dispute in a more efficient manner.
One other point to note has to do with the notion of “adjudication.” This is not a separate type of proceeding, as some folks mistakenly believe. Rather, this word merely means that a formal judgment is rendered, thereby deciding the final outcome of a particular dispute. Thus, irrespective of how disputes are settled, they are all eventually adjudicated in some fashion.