Alternative Dispute Resolution: Using Mediation and Arbitration to Resolve Contract Disputes

The Challenge

It has happened to every business owner. A client starts to miss payment deadlines, slow pays invoices, and finally, the invoice doesn’t get paid at all. You spend time and resources calling and talking to the client, asking for updates, offering payment plans, and generally trying to work things out. But in the end, the client refuses to pay for your services

Your next call is probably to your lawyer, who explains to you the process of collection. As you listen, you realize that collecting the amount due is going to be costly and time-consuming. Is it even worth it? Is there a better way?

If it’s a smaller amount owed, you may be able to do it yourself through small claims court. Larger amounts will have to be filed in District or Superior Court (in North Carolina), and a business cannot represent themselves. You need to hire an attorney.

Mediation and arbitration are alternatives to lawsuits. Used correctly, they offer faster, cheaper ways to resolve disputes. A well-drafted agreement often contains provisions requiring mediation before a lawsuit is filed or requiring the dispute to be resolved through binding arbitration rather than litigation. This post will discuss both.

Mediation

Mediation is a process where a neutral third party is hired to help parties negotiate a private resolution to their dispute. It is a non-binding process, meaning either party can choose to end the mediation without a resolution. The parties choose the mediator, who is often an experienced attorney or retired judge. The mediator talks to both sides and tries to find common ground. If successful, the parties will sign a mediated settlement agreement at the conclusion of the mediation that memorializes their agreement.

Mediation is required in most lawsuits filed in North Carolina. It is surprisingly successful. Disputes that the parties think will never settle are often resolved once the parties discuss the dispute with the mediator. Mediation keeps the parties in control of the result, assuming they can agree, rather than turning the matter over to a judge, jury, or arbitrator. More cases resolve at mediation than ever go to trial.

Mediation can be conducted outside of a lawsuit. Often, well-drafted agreements include a provision that the parties may or must attempt to mediate the dispute before filing a lawsuit. If successful, this greatly decreases the time and effort to resolve the dispute (and hopefully get you paid!).

In sum, mediation offers:

• Faster resolution: Often completed in a day.
•  Cost-effective outcomes: Minimizes the legal fees and resource drain.
• Preserves relationships: Ideal for dealing with clients that you may want to keep.

Arbitration

Arbitration is a more formal process. A neutral arbitrator hears both sides and makes a binding decision. In other words, an arbitrator is more like a judge. The process of arbitrating a case is often less structured and time-consuming than a lawsuit filed in court. But the result is the same, a decision that is binding and enforceable.

Like mediation provisions, well-drafted contracts often require disputes to be submitted to arbitration rather than mediation. Many such provisions designate the American Arbitration Association (AAA) as the entity through which the arbitration must be conducted. The AAA provides the arbitrator, sets the applicable rules for the arbitration, and has a set fee structure depending on the type of matter. Arbitrations are not inexpensive, as the parties must pay for the administrative fees and the arbitrator’s time. But the proceedings offer flexibility as to scheduling and usually allow for quicker resolutions.

Benefits of arbitration:

• Binding and efficient: quicker than a lawsuit, with flexibility in scheduling.
• Customizable rules: choose the rules and forum that best fit your needs.

Practical Tips

If mediation or arbitration sounds promising, there are some practical steps to consider:

• Include mediation clauses to protect your business interests, and tailor them to your specific needs.
• Choosing a good mediator is crucial. They are experienced negotiators, and they can break down barriers that are preventing the parties from resolving their dispute.
• Similarly, if you proceed with an arbitration clause, make sure you know the rules that you will arbitrate under and consider the costs of the arbitration organization.
• Evidence remains critical. Be sure to preserve contracts, communications, and other documents that support your case.
• Be flexible. Mediation can be a good time to “think outside the box” about potential resolutions.
• And of course, consult a lawyer. It is important that mediation and arbitration clauses are properly drafted in the beginning. A lawyer can help you choose the right mediator and/or the right arbitration forum.

Conclusion

Mediation and arbitration offer practical ways to resolve contract disputes without court battles. Visit Revolution Law for more insights, and consult a lawyer to navigate disputes effectively.