In today’s Freedom Friday blog and email newsletter, I want to talk about a topic that sometimes comes up with my contract drafting and review clients, and that’s ADR clauses. ADR stands for alternative dispute resolution, and many contracts include a clause which requires some form of ADR to resolve disputes, including requirements for mediation and/or arbitration, which can be a double-edged sword. So, in today’s Freedom Friday blog, I am answering the question, “Why can ADR clauses be a double-edged sword?”
First of all, as stated above, many contracts include some form of an ADR provision, either mediation, arbitration, or both. Mediation is an opportunity for disputing parties to come before a neutral mediator and resolve their dispute in a non-binding fashion. If your contract has a clause that requires mediation before filing a lawsuit, you must have a formal mediation session before filing suit. Even if you file a lawsuit before mediation, the judge can send you to mediation upon a motion of the other party requiring the same. However, if the mediation is not successful in resolving the dispute, then you can file suit or proceed with the suit you filed.
On the other hand, many contracts also require binding arbitration, either if mediation is not successful, or in place of filing suit. If you enter into a contract with a binding arbitration ADR clause, you are giving up your right to sue in court, have a jury trial, and appeal a possibly bad decision. Arbitration is a private dispute resolution process (kind of like private court). Your case is presented to either a single arbitrator or a panel of arbitrators, and the decision is final, binding, and can be enforced in court. While arbitration is usually faster than an actual lawsuit, there is less opportunity for discovery than in civil court, and contrary to popular beliefs, it can be more expensive because of the required arbitration fees.
When clients come to me wanting to sue for breach of contract, or similar claims, I always review the contract or agreement for many issues, one of which is whether the contract or agreement has an ADR clause, especially if mediation and/or arbitration is required. Now, even if the contract includes a mandatory arbitration clause, not all arbitration is bad. If the dispute is a smaller one or if confidentiality is important, arbitration can be a faster way to resolve the dispute privately. So, prior to signing any contract, either you or your attorney should review it to understand if there is any arbitration clause in it, and even if there is an arbitration clause, you should try to negotiate that clause to include cost-sharing provisions and full discovery rights.
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