People who are unfamiliar with arbitration and mediation often confuse the two processes. They may not know that arbitration results in a final and binding award that is enforceable in court, and subject to limited judicial review. They may not know that mediation is non-binding, and that the goal of mediation is for the parties to reach a voluntary agreement to settle with the assistance of a neutral third-party mediator. In this article, the authors explain the basics of both processes for those who need an introduction to ADR.
Many civil disputes are still decided in courts of appropriate jurisdiction. However in our litigious era, courts in virtually every state have become overloaded, causing justice to be unreasonably delayed. In Colorado, where this is being written, the backlog of civil cases in many courts requires three or more years between filing and trial of the case. Mary Mullarkey, Chief Justice of the Colorado Supreme Court, noted1 that every judge in Colorado needs to make a decision each and every day in order to keep up with the backlog. Obviously that is impossible.
The result has been to look for other means of resolving disputes. The common option for commercial disputes is called alternative dispute resolution (ADR), which primarily means arbitration and mediation.2 ADR processes, when properly designed, provide due process and an opportunity to be heard in a less formal and therefore less intimidating setting than the courtroom. And the cost is generally dramatically less.
The two common ADR processes, arbitration and mediation, are often confused by the general public. However, they are very different. Arbitration is an adjudicatory process in which one or more neutral arbitrators hear the parties' evidence and arguments and then issue a binding award. Mediation, by contrast, does not include a third-party decision maker. Rather, a neutral mediator facilitates and guides negotiations among the parties to allow them to reach a voluntary settlement.
The procedures used to resolve disputes in the two processes are, as one might suspect, very different.
ABCs of Arbitration
Agreement of the Parties. Theoretically anyone with a legitimate legal claim can file a lawsuit. The defendant need not consent to be sued. Filing an arbitration is completely different, for arbitration is the product of an agreement by all parties to arbitrate a current dispute, or specified disputes that may arise in the future.3 Thus, a party that has not agreed to arbitrate cannot be compelled to do so.4 An agreement to arbitrate must be written into transaction documents between the parties in a clause that may be headed "Arbitration" or "Dispute Resolution" or just "Disputes." The provisions agreeing to arbitrate can be simple, or in a complex relationship, can be very detailed.
Current Importance of Arbitration. Although arbitration is hardly new (it goes back more than 400 years in Britain), it is only over the last 15 years that it has become essential for the resolution of a wide variety of commercial disputes. Its acceptance by business, governments and the legal profession means arbitration is common for all kinds of disputes, including employment, construction, breach of contract, real estate taxation, credit card, banking, and legal fees, among others. The broad acceptability and use of arbitration is also due to supportive decisions by the U.S. Supreme Court.5
Arbitration is also well accepted for international business transactions because international arbitration awards are enforceable in the many countries that are signatories to the United Nations Convention on the Recognition and Enforcement of Arbitral Awards/' Agreeing to arbitrate an international dispute avoids having to litigate in a foreign court with unfamiliar laws or unpredictable enforcement. In an arbitration clause, the parties can specify the applicable law, arbitration procedures and …