Why is a Mediation or Arbitration Clause Being Proposed and Are These Clauses in a Contract Enforceable?

Why is a Mediation or Arbitration Clause Being Proposed and Are These Clauses in a Contract Enforceable?

Litigation is generally something people seek to avoid.  It is expensive, time consuming, emotionally draining, unpredictable, and you can never be certain of the outcome until a judge or jury decides the case.  Despite your best efforts to stay out of the courtroom, you are likely to confront some disputes.  Accordingly, a well-tailored mediation/arbitration clause in a contract may be helpful to your business and serve as a safety net.  Here is how it works:

• When an employee or client signs a contract that contains a pre-litigation dispute resolution provision, in the form of a mediation or arbitration clause, they agree to settle disputes out of court.

• If a conflict arises, a mediator or arbitrator (a neutral third party) will be called in to help the parties resolve the dispute.

The goal of mediation and arbitration is the same, that is, to arrive at a resolution of a dispute. In both practices the parties mutually select the mediator or the arbitrator. However, both practices have their unique process in arriving to a decision:

Mediation is a much quicker process than arbitration.  The mediator helps the parties resolve the dispute in a cost efficient manner providing the parties more control over the final resolution.

Arbitration consists of an arbitration hearing, whereby the arbitrator decides how to settle the dispute based on evidence presented by the parties. Unlike mediation, the arbitrator, not the parties, renders the terms and condition of the dispute resolution.

Whether a particular mediation/arbitration clause in a contract is enforceable varies by jurisdiction and usually takes into account a balance of public policy concerns on the one hand with the general principle that parties are free to enter into a contract.  Attempting to resolve disputes before litigation can be a good choice, but a carefully crafted and clear provision is critical to making this choice enforceable when a dispute arise. If one wants to create a pre-litigation dispute resolution provision that is likely to be enforced, the provision should expressly state that it is a condition precedent to litigation and should be as specific as possible about the required process.

Florida courts favor the use of arbitration provisions in a contract.  However, because arbitration provisions are contractual in nature, construction of such provisions and the contracts in which they appear remains a matter of contractual interpretation.  Accordingly, the determination of whether an arbitration clause requires arbitration of a particular dispute necessarily “rests on the intent of the parties.”^[i] The enforcement of arbitration clauses is a matter of federal and state law. It should also be pointed out that there is no right to appeal an arbitrator’s award like there is for a judgment rendered in court.  Persuading a court to vacate an arbitration award is extremely difficult.

Unlike the enforcement of arbitration clauses, the enforcement of mediation clauses is generally a matter of state law.^[ii] In Florida, the state is therefore free to decide whether and how it will enforce agreements to mediate.

Like arbitration clauses, mediation clauses are contractual in nature, and parties typically make an informed decision as to whether or not they should include such a clause in a contract.  Therefore, as a matter of equity, it seems appropriate that a party to a contract with a mediation clause should be entitled to enforce that clause provided that they have followed the contractual  terms.^[iii]

In short, you should read each sentence of an arbitration/mediation provision in a contract carefully and try to understand it.  Sometimes the concept of arbitration or mediation may make sense but the clause itself can be too overbearing.  The opposite may likewise be true.  If the clause does not make sense to you, you may want to hire a lawyer to go over it with you prior to the signing of the contract. Asking the right questions will help you decide if you should agree to an arbitration or mediation clause or if you should try to negotiate your way out of it.

^[i] Seaboard Coast Line R.R. v. Trailer Train Co., 690 F.2d 1343, 1352 (11^th Cir. 1982), see also Regency Group, Inc. v. McDaniels 647 So.2d 192 193 (Fla. 1^st DCA 1994) (“The agreement of the parties determines the issues subject to arbitration.’) ^[ii] The Federal Arbitration Act (FAA), 9 USC §§1-16, which requires courts to enforce agreements to arbitrate disputes, does not apply to mediation.  See, Advanced Bodycare Solutions, LLC v. Thione Int’l, Inc., 524 F3d 1235, 1238-41 (11^th Cir 2008); but conflicting with this decision is Wolsey, Ltd. V. Foodmaker, Inc., 144 F3 1205, 1207-09 (9^th Cir 1998) (holding that FAA does apply to non-binding arbitration because the process still involves submission of a dispute for a decision by a third party). ^[iii] In Auchter Co. v. Zagloul, 949 So.2d 1189 (Fla 1^st DCA 2007) the First District Court of Appeals reversed a judgment, and the cause was remanded with directions that the trial court grant the contractor’s motion: compel the parties to submit to mediation and, if mediation failed, to binding arbitration; and stay the action pending the parties’ compliance.  There, the appeals court concluded “that the provisions were not intended to be a substitute for litigation in court,” but were intended to make it clear that, even if neither of the parties asks for arbitration, “they still must first submit disputes to the architect, and then to mediation, before they may proceed to litigation.”