Mediation and Arbitration Clauses: What Florida Business Owners Need to Know About Mandatory ADR

Mediation and arbitration can serve as cost-effective alternatives to litigation, and many companies use mandatory alternative dispute resolution (ADR) clauses to avoid the need to go to court. But, while mandatory ADR clauses can have benefits, they can have drawbacks as well—and, as a result, it is essential for business owners to make informed decisions about how and when they include these clauses in their contracts. Learn more from an experienced Miami business dispute attorney at Gonzalez Law Firm, P.A.:

Mediation vs. Arbitration: An Overview

While mediation and arbitration often get lumped together, they are two very different forms of ADR. As a result, when considering a mandatory ADR clause, one of the first key considerations is whether to require mediation, arbitration or both.

So, what’s the difference?

In mediation, the goal is to find a way for the parties to come to terms. The mediator is not a decision-maker, and the mediation process does not end with a binding order. Instead, the mediator’s role is to help facilitate good-faith negotiations with the goal of reaching a settlement that allows the parties to move on.

Arbitration, in contrast, does involve a third-party decision-maker and does end with a binding order (or an “award”). This, of course, is subject to the proviso that the parties can still agree to settle at any time. Arbitration is much more similar to a stripped-down and streamlined version of litigation, though there are several key differences, and, overall, the process is still much more informal.

Benefits of Mandatory Mediation and Arbitration Clauses

If your company is negotiating a commercial contract, why should you consider a mandatory mediation or arbitration clause? While there are several reasons to consider a mandatory ADR clause, there are two considerations in particular that often lead business owners to include these provisions in their companies’ contracts.

The first is cost. Mediation and arbitration both typically cost much less than litigation. In fact, in many cases, it will be cost-effective to require mediation for a period of time and then require arbitration if mediation does not produce a settlement. In the event that your company needs to take legal action to protect its interests, you do not want the costs involved to be prohibitive.

The second is preserving the business relationship. By its nature, litigation almost always brings the parties’ business relationship to an end. However, with mediation in particular, the goal is to find a way forward that is satisfactory to both parties. If protecting your company’s interests includes (or may include) protecting the relationship in question, then negotiating a mandatory mediation clause—and perhaps also a mandatory arbitration clause—will likely be a good option.

Drawbacks of Mandatory Mediation and Arbitration Clauses

While mediation and arbitration can both offer several benefits, mandatory ADR clauses can have drawbacks as well. It is worth noting, however, that many of these drawbacks can be overcome with strategic contract drafting.

For example, one potential drawback of requiring ADR is that it precludes going to court. While it will often be desirable to avoid litigation, having the right to go to court in certain circumstances can be essential. To address this concern, companies can exclude certain types of claims from their mandatory ADR clauses. This is most common when one party might need to seek immediate injunctive relief to protect proprietary information, business relationships, or other intangible assets.

Another potential drawback is that, despite being facially neutral, mandatory ADR clauses can be one-sided in practice. This is typically the case when the parties have unequal bargaining power. If, for example, a mandatory ADR clause requires the parties to mediate or arbitrate in the city where one of the parties’ principal offices is located, this can make ADR significantly more expensive for one party than the other.

5 Key Considerations for Including a Mandatory ADR Clause in a Commercial Contract

With all of this in mind, what do business owners need to consider when deciding whether to include a mandatory ADR clause in a commercial contract? Here are five key considerations:

• Is Mandatory ADR in Your Company’s Best Interests? First and foremost, business owners need to make an informed decision about whether mandatory ADR is in their company’s best interests. While this will likely be the case, it is important not to make assumptions during the contract negotiation process—especially when it comes to enforcement.
• Should You Require Mediation, Arbitration or Both? If it makes sense to include a mandatory ADR clause, should you require mediation, arbitration or both? All three options have merit, and here too, it is important to make an informed decision based on the specific circumstances (and risks) at hand.
• What Exceptions Should Apply? As we discussed above, it will often make sense to exclude certain types of disputes from mandatory ADR. What exceptions does your company need based on the subject matter of the contract and the other legal, practical and financial considerations involved?
• Where Should Any Mandatory ADR Take Place? Should you assert your company’s bargaining power to seek a favorable location for mandatory ADR? Or, does it make more sense to target a neutral location that involves equal costs for both parties?
• What Are the Other Party’s Interests and Priorities? As with all commercial contract negotiations, negotiating a mandatory ADR clause is a two-way street. To negotiate effectively, it is important to have a clear understanding of the other party’s interests and priorities as well.

While these are some of the key considerations, they are not the only considerations involved in negotiating a mandatory ADR clause. To ensure that you are making informed and strategic decisions, you will want to discuss your options with an experienced Miami business dispute attorney in confidence.

Request a Confidential Consultation with an Experienced Miami Business Dispute Attorney

At Gonzalez Law Offices, P.A., we represent businesses in commercial contract negotiations and disputes across South Florida. If you have questions about mandatory mediation or arbitration, we invite you to get in touch. To request a confidential consultation with an experienced Miami business dispute attorney, please call 305-676-6677 or tell us how we can help online today.