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.
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.
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
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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.