Five Myths about Arbitration and Mediation Every Business Owner Should Know

Why these popular alternatives to litigation are not “one size fits all”

Litigation has always been time-consuming and expensive. Now, with courts prioritizing certain types of cases due to Covid-19, the wait for trial in a civil lawsuit is even longer and the price just as high.

In the 1980s, as businesses became frustrated with both the time and cost associated with civil litigation, there was a rise in popularity of alternative ways to resolve disputes. Most commonly that meant arbitration (where a private “judge” holds a less formal trial and makes a determination on legal claims) or mediation (where a neutral third party helps two parties try to reach a settlement). Many businesses became so enthralled by these alternatives, they began putting mandatory arbitration and mediation clauses in all of their contracts.

Now, with a few decades of experience to look back on, it is time to reexamine whether these alternatives are the panacea they were promised to be. Below are 5 myths about arbitration and mediation that could help you decide if you want to require them in your contracts.

Myth 1: Arbitration is faster
While arbitrations offer the potential for being a faster path to a decision, that largely depends on the parties and arbitrator. While the court systems have rules that hold parties to a certain pace, many arbitrators will allow the parties to dictate the pace in arbitration.. If speed is your concern, you should consider using an arbitration service with rules and a reputation for moving things along. Otherwise, your opponent might end up dictating your schedule.

Myth 2: Arbitration is cheaper
The promise of arbitration was a less formal, form of trial without the many rules that require extra legal time and expense. The pre-trial discovery process was supposed to be streamlined as an arbitrator could work with the parties to get right to the point. However, more often than not parties feel compelled to do complete and thorough discovery and present all evidence that might help their case. So the process often simply mirrors the civil court process but without the built in predictability of standard rules and enforcement measures. That means cost savings may be minimal or nonexistent. Moreover, while the judicial system is generally paid for by tax dollars, private arbitrators are paid for by the parties. To get an experienced arbitrator, you could end up spending thousands of dollars on your “judge” as well as your lawyer.

Myth 3: Arbitration is better for businesses
While lawsuits become public record, private arbitrations can be kept confidential. They also provide protection against particularly onerous legal tactics like class-actions. However, they may also make it difficult to obtain immediate relief in the form of an injunction. They can also make it difficult to create a lien against property or subpoena parties out of state. It is also often impossible to join necessary third parties which can keep cases from being fully resolved. So it becomes a question of priorities with privacy on one side and a greater range of options on the other.

Myth 4: Arbitration or mediation requires a clause in my contract
In most cases, all parties must agree to arbitration or mediation. However, nothing prevents parties from agreeing to either arbitration or mediation at any time in the dispute. There can be advantages to getting agreement up front but that also presupposes that you know exactly how you want to handle a dispute before it even happens. Some businesses trap themselves into one path only to regret not having more options when a dispute arises.

Myth 5: Forcing mediation will allow you to avoid trial or arbitration
There are some contracts (real estate is a common example) that require the parties to engage in mediation before either party can bring a claim in arbitration or in court. While that can be helpful, it is often futile to “force” a party to do something which is inherently voluntary. Mediators cannot decide the outcome of the case and so if one party does not want to discuss settlement, forcing them by contract might not only be fruitless, it could delay the ultimate resolution a business needs by requiring time be spent on a step that the other party does not want. There are areas where these mandatory mediation clauses make sense, but they will not fit every dispute.

Arbitration and mediation are both still valuable tools that parties can use to resolve disputes. Good litigators will be experienced in both as well as traditional litigation. But businesses should be aware that they are not always the cheaper, more efficient option and they may not end up being the best tool for every dispute. Before you decide to include a provision requiring arbitration and/or mediation in every contract you sign, consult an experienced litigator to see if these tools are really right for you and your business.

For questions and advice contact Buckley Law P.C. attorneys at 503-620-8900 or at info@buckley-law.com. We are a full-service firm, leveraging expertise in business law, employment law, real estate law, estate planning, business succession, and family law.