No company is immune from conflict, which is why a growing number of business contracts routinely contain an arbitration clause. Inserted for the benefit of both parties, these clauses generally help thwart lengthy, expensive lawsuits that lead to potential exorbitant costs, damages and legal fees. While many executives may be familiar with the terms mediation and arbitration as methods of alternative dispute resolution (ADR), truly understanding them may ultimately decide a company’s long-term financial health.
Simply put, mediation is a negotiation process between the disputing parties led by a skilled facilitator who assists in helping the parties reach a mutually beneficial solution. The mediator does not take sides and does not give legal or factual advice. Arbitration, by contrast, utilizes one or more skilled individuals, who hear formal presentations by the parties before deciding which party is entitled to an award. Arbitration is similar to the trial process, and the award granted by an arbitrator or arbitration panel is akin to a court judgment. Mediation, on the other hand, can result in an agreement which may contain any number of items not originally part of the parties’ lawsuit. That agreement may be enforceable in court.
Arbitration is less formal than a trial, but bears many similarities. The parties generally choose the arbitrator and set a hearing. The arbitrator has latitude in scheduling the time and place of the hearing. Nonetheless, it is an established process with rules and procedures and one in which witnesses are sworn and examined. Exhibits are presented. The formal rules of evidence do not apply, but the arbitrator can limit evidence if he feels it is not reliable. The parties may be represented by counsel. Some discovery, including depositions, is typical, but may be limited depending on the nature of the case and the rules under which the arbitration is conducted. Following the hearing, the arbitrator renders a decision within a short time.
There are different types of arbitration. Binding arbitration means just that – the decision by the arbitrator is final and binding – and can only be overturned in extraordinary situations, such as proof of fraud in the process. Most business contracts have binding arbitration clauses. A person who has a dispute with another where there is such a clause is prevented from suing and obtaining a jury trial.
In most civil cases filed in the state courts of Nevada, where the amount in dispute is less than $50,000, non-binding arbitration is mandated. The hearing and procedural issues are similar to binding arbitration, but either party may choose to overturn the award and seek further court action through a short, modified jury trial or a trial de novo. However, if the party who is seeking to overturn the award does not significantly improve that award, he or she may be required to pay the opposing counsel’s fees and costs.
The most important thing a person facing arbitration should do is prepare. Many times, items that could not be admitted in court are allowed in arbitration. Counsel should be furnished with any and all information relating to the matter. Even innocuous-looking material that would never be admitted in a court proceeding can be important in an arbitration hearing. Since there is less time to prepare for an arbitration case, organizing the information is also critical.
Arbitration can be a more predictable and less expensive alternative to a trial, but every executive should spend considerable time discussing the benefits and risks with company counsel before signing or submitting a contract with this clause.