Legal Briefs

Litigation Alternatives

Use mediation and arbitration to save time and money in solving contract disputes.

As business litigation costs and length increase, more commercial real estate companies are turning to alternative dispute resolution to solve disagreements with partners, suppliers, customers, and other professionals with whom they have contractual relationships. ADR offers parties the ability to control the process by writing dispute resolution terms into contracts.

ADR generally describes mediation and arbitration, two processes that often go hand in hand. Mediation is a nonbinding negotiation led by a neutral expert; if it fails to produce an acceptable solution, the parties then can send the case to arbitration, a more formal procedure in which a mutually agreed-upon arbitrator or panel of arbitrators renders a binding decision on the dispute.

Why Arbitrate?

Arbitration is purely a creature of contract between parties. An arbitration provision amounts to a mutual waiver of the right to a civil trial, and the contract outlines the dispute settlement process. While much arbitration follows certain standards - such as the American Arbitration Association's published rules - contracts often are drafted to include variations to meet the parties' individual needs. This freedom to specify the engagement rules may be ADR's most appealing aspect.

The construction industry was one of the first to use arbitration extensively, primarily due to the need for swift resolution of development disputes. The ability to choose industry experts as mediators and arbitrators is another appealing benefit.

As interest in ADR spreads, commercial real estate professionals are writing arbitration clauses into their contracts, especially property management contracts and leases. Lenders also are including arbitration provisions in mortgages. While these dispute resolution provisions may save time and even help preserve lender/borrower relationships, they do not always result in favorable outcomes for lenders.

The ADR Process

Original business contracts clearly should define the ADR process that the parties desire to use to resolve any disputes that arise. Parties without arbitration clauses can elect to use ADR when disputes arise, but getting both sides to consent to the dispute resolution terms often is difficult if relationships sour.

ADR contract provisions often specify the time the parties have to negotiate disputes before turning to outside help. If they can't agree on a solution, they usually move on to mediation.

After being chosen by the parties and reviewing the documentation pertaining to the dispute, a mediator typically talks privately and confidentially to each party. Once the mediator has heard both sides, he facilitates the resolution process.

Mediators must be mutually agreed-upon, neutral individuals who are knowledgeable about the subject matter involved in the dispute. While mediators have no national qualification requirements, ADR service providers such as AAA, local bar associations, and trade organizations can supply lists of active and experienced mediators.

Mediation's biggest advantage is the ability for the two parties to strike deals that arbitrators or judges are not empowered to make. Arbitration and court judgments generally are monetary, whereas mediators can work out any agreement that satisfies both parties, including resolutions that involve nonmonetary, more mutually advantageous business terms.

Disputes proceed to arbitration if mediation doesn't result in a satisfactory resolution. The first step is to select an arbitrator or panel of arbitrators, depending on the arrangement set forth in the contract. Clearly neither party wants the other side to have the freedom to select a biased arbitrator, and there are many ways to structure the selection process. For example, in some agreements each side chooses its own arbitrator and the two party-appointed arbitrators mutually select a third.

As with mediators, arbitrators can be located through a variety of sources. If the contract specifies that disputes will be administered through an ADR service provider such as AAA, the organization will provide lists of potential arbitrators and help the parties with their selection process.

Arbitration significantly differs from litigation in several respects. Although witnesses are questioned and cross-examined at the hearing, the evidentiary rules followed in litigation do not bind arbitrators; thus they may accept hearsay evidence. In fact, arbitrators tend to want to hear or see all of the information involved in a dispute and decide for themselves what evidence to rely upon in reaching an equitable result.

Another important point about arbitration is the limited grounds for appeal. A judge may grant an appeal if a party can show that the arbitrator was unfairly biased or failed to allow one side to present its case adequately. Some state and federal circuit court jurisdictions may overturn an arbitrator whose ruling displays manifest disregard for the law. However, since these situations rarely occur, parties must be prepared to abide by the arbitrator's ruling.

Arbitration hearings usually are resolved more quickly than jury trials. Arbitrators who understand the real estate industry do not need to hear the preliminary explanatory information that juries require. Moreover, hearings encounter fewer delays than court cases over questions of admissibility, relevance, and other evidentiary issues.

Direct cost savings for the procedure itself often are not a significant reason for choosing arbitration over litigation. An arbitrator or arbitration panel's hourly rate can be expensive compared to civil court costs. However, companies save on legal fees because the discovery process in arbitration is limited. In addition, the arbitration process allows companies to avoid the lengthy delays associated with the crowded court system, thus allowing the parties to return more quickly to focus on their respective businesses rather than their disputes.

Time and money savings as well as control over the process make ADR an increasingly popular choice for resolving contractual disputes. Commercial real estate professionals must remember to include arbitration clauses when drawing up contracts with vendors, clients, and other professionals. As with any contractual or legal matter, qualified attorneys should craft and review arbitration clauses to ensure that they avoid potential pitfalls and maximize benefits.

John A. Sherrill, JD

John A. Sherrill, JD, is an attorney and partner in Seyfarth Shaw LLP\'s Atlanta office and has served as an American Arbitration Association arbitrator for construction and real estate matters for more than 20 years. Contact him at (404) 885-6703 or


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