This guide explains how to draft a great arbitration and/or mediation clause for a legal document - one that avoids the problems I see in many of the documents I review for businesses and other lawyers.
Don't Cut and Paste a Clause From a Document Found Online.
I see many legal documents where the drafter clearly copied an arbitration and/or mediation clause found online. This is fraught with peril, but the most common problem is that these clauses often require arbitration before one of the large national arbitration organizations such as the American Arbitration Association (AAA). That may not be what you want. This kind of arbitration can be expensive and some of the rules can be as or more complex than the civil procedure rules the parties hoped to avoid by agreeing to arbitrate their dispute rather than litigate it.
Specify the Mediator and/or Arbitrator in the Document.
I often see documents that state the parties agree to mediate or arbitrate any disputes, but that fail to specify who the arbiter or mediator will be or how they will be selected. Why not specify that in advance? For example, "The parties agree that in any dispute arising out of this Agreement, they will submit to binding arbitration to be conducted by Jane Jones, Attorney at Law, of Boulder, Colorado."
Avoid Complex Schemes for Picking a Mediator or Arbitrator.
All too often I see agreements in which the parties state that they will agree on a mediator or arbitrator, and if they cannot agree they will each pick a mediator or arbitrator, and those two will then pick the mediator or arbitrator. What is the point of this? It's overly complex and it's unlikely that the mediator or aribtrator each side picks will be willing to meet and agree on a neutral mediator or arbitrator unless they are paid to do so.
Specify Who Will Pay the Costs of the Mediation or Arbitration.
I've seen agreements that fail to make clear who will pay the costs of the mediation or arbitration. The drafter should specify this in advance. Typically, in mediation the parties agree to share the costs equally. In arbitration, on the other hand, the agreement will usually provide that the losing party shall pay the costs of the arbitration.
Specify Whether the Arbitrator May or Must Award Attorney's Fees and Costs.
A good agreement should specify whether the arbitrator may or must award attorney's fees and costs to the prevailing party. In most jurisdicitons, the prevailing party in arbitration is not entitled to attorney's fees and costs unless the agreement states otherwise.
Specify Where the Mediation or Arbitration Will Be Held.
In modern commerce the parties to an agreement may not have their principal office in the same jurisdiction or even in the same country. Therefore, the document should make clear where the mediation or arbitration will be held.
Put Time Limits On Any Mediation.
Mediators charge for their services. The parties will either settle their dispute or they won't. There is no point in continuing mediation when the parties are at an impasse. I suggest specifying that any mediation will not last longer than 4 (or 8) hours, unless the parties agree otherwise. Including a time limit also provides the parties with an incentive to get to the point in mediation and not play games.
Consider The Place of Technology.
With the advent of email and services such as Skype, it may not always be necessary for the parties to be present at the same location for mediation or arbitration. Consider including language that mediation or arbitration shall be conducted using such technology.
Specify the Consequences of Failing to Participate in Mediation or Arbitration.
What happens if a party refuses to participate in mediation or arbitration even though the agreement requires it? Certainly the other party may go to court and seek an order to compel mediation or arbitration, but that takes time and costs money. If the parties want a mediation clause in their agreement, consider language stating that any party that fails to participate in mediation will pay the other party's costs and attorney's fees incurred as a result of that failure. If the agreement requires arbitration, you should also consider language making clear that the arbitrator may grant relief by default.
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