During the course of a year, you’re likely to enter into dozens of contracts. These could be with your input suppliers, grain elevators, equipment dealers and/or landlords. The contract most likely has a few provisions you pay attention to and pages of “boilerplate language” you flip through before signing your name on the dotted line. One type of provision commonly tucked into contracts is an arbitration or mediation clause. Although these provisions can often be overlooked, they might significantly impact your rights should a contract performance dispute arise.
An overwhelming majority of contracts are completed with no snags and without a need to resort to the fine print. However, should you find yourself in a contract dispute, this often overlooked boilerplate language might limit your options when it comes to resolving a dispute. Often termed as “alternative dispute resolution,” mandatory and binding arbitration and mediation clauses are increasingly common elements of modern contracts.
What is mediation? As my clients often remind me, attorneys are expensive. Because of the rigors of litigation, taking a case to court can be cost-prohibitive. Parties to a contract oftentimes have an interest in resolving a dispute outside of a courtroom, saving both sides the time and expense of a protracted court case. Resolving matters through mediation or arbitration allows parties to avoid these costs.
Mediation is a process where the two parties involved in a contract attempt to reach a negotiated settlement through an independent third party. The third party is usually a retired judge or attorney who specializes in mediations. The role of the mediator is to serve as a facilitator between the two sides. Although the mediator can offer suggestions for areas of common ground, the mediator cannot force either side to enter into an agreement. If both sides are able to reach an agreement, the mediator is generally charged with drafting the settlement agreement.
Courts will refer particular cases to mediation if the judge believes it might assist parties in resolving a case. Also, some government programs, including Natural Resources Conservation Service and Farm Service Agency, provide mediation as an option to resolving a dispute. If mediation is successful, the resulting settlement can be enforced as a contract. If mediation is unsuccessful, the dispute will typically return to standard court proceedings.
What is arbitration? In contrast, arbitration works like a private court system. The parties select a third-party arbiter who will hear evidence from both sides, although arbitration proceedings are generally less formal than traditional court hearings. After considering the evidence, the arbiter will issue a decision. Unlike a traditional court case, an arbiter’s decision generally cannot be appealed. If you agree to what is known as “binding” arbitration, you cannot take the case to court later if you don’t agree with the outcome.
One of the primary benefits to arbitration is efficiency. Traditional contract disputes can languish in litigation for more than a year before the parties have their day in court. In contrast, arbitration can resolve a dispute in a matter of weeks, which can result in substantial cost savings.
However, there are risks to participating in binding arbitration. You only have one chance before the arbiter. If you feel the arbiter made a faulty decision, you don’t have an opportunity to challenge or appeal the arbiter’s ruling.
There are many positive benefits to participating in alternative dispute resolution, but it’s important to understand what you’re committing yourself to as well as the rights you’re giving up. If you have a question about an alternative dispute resolution clause, contact your attorney.
This column is not a substitute for legal advice.