Arbitration, mediation or lawsuits? A key contract provision not to overlook

November 23, 2019

Why you must read everything before signing.

It should be common sense: read before signing. A number of physicians and healthcare providers don’t read the contracts they sign until it a breach occurs or something goes sour in the relationship. Not appreciating the venue for recourse can make a difference.                

While arbitration, mediation and lawsuits differ, there are two things that they all have in common – expensive attorneys’ fees and the Latin term contra proferentem. Contra proferentem is utilized by judges and refers to the principle that “a judge will construe an ambiguous term against the party that imposed the inclusion of term in the contract during negotiation or drafting.” This term is important because it puts the onus on the drafting party of the contract. Still, the non-drafting party needs to appreciate the difference between agreeing to arbitration, mediation or the immediate use of a lawsuit to resolve a dispute.

Arbitration and mediation fall into the category of alternative dispute resolution (“ADR”), as litigation is something that people generally seek to avoid. Sometimes ADR is used in conjunction with litigation (e.g., the parties may first try to negotiate and if no agreement is reached, move forward to trial). Sometimes, there is a single mediation that occurs before a suit is filed and other times, there are multiple mediations that occur before and after a lawsuit is filed.

Both arbitration and mediation utilize a neutral third party – mediation has one mediator and arbitration may have a single arbitrator or a panel of three arbitrators. A key difference is that a mediator is a facilitator, while an arbitrator has decision making authority, which in some ways is similar to a judge.

Arbitration clauses are found in all types of contracts and agreements. This requires that the parties go through the arbitration process. Here are some key aspects to keep in mind. First an arbitration clause may be mandatory or voluntary. A contractual provision will mandate arbitration, although the parties may agree to do a mediation first – this has pros and cons as evidence rules may come into play. Alternatively, the parties may agree to arbitration in lieu of litigation, even without a contractual provision. Second, binding versus non-binding needs to be appreciated. In binding arbitration, the arbitrator(s)’s decisions is/are final. It may not be reviewed or overturned by a court, except in very limited circumstances such as fraud or the arbitrator’s abuse of discretion. By way of contrast, non-binding arbitration enables either party to reject the arbitration award and demand a trial instead. Additionally, a United States District Court has appellate review over an arbitration decision, much like its role with a Bankruptcy Court. Finally, choosing a single or a three-arbitrator panel needs to be considered. Often, an arbitration agreement will designate the American Arbitration Association (www.adr.org), JAMS (www.jamsadr.com), or the National Arbitration Forum ( www.arb-forum.com) to handle the arbitration. These entities typically set an amount or a percentage of the amount in dispute as the filing fee, as well as an additional amount or percentage as a “case service fee.”

Whether considering arbitration or trial in particular, jurisdiction, choice of law and venue provisions cannot be overlooked. And, if multiple contracts are involved, make sure that these items are consistent throughout. Otherwise, it is grounds for a dispute that could have been avoided.

Of the three – mediation, arbitration and trial – mediation is the least expensive with both parties usually splitting the cost of the mediator and also paying for their respective counsel’s time. Preparing for mediation should not be taken lightly, as it can enable the parties to reach a resolution without engaging in more expensive litigation. Additionally, reputational damage is avoided because a mediation is not a public proceedings and the terms of settlement are often confidential. Same with arbitration, so long as the decision is not appealed to a United States District Court. In sum, there are pros and cons to each. Working with counsel to both draft and understand the provisions are crucial to mitigating costs and other risks down the line.

Rachel V. Rose, JD, MBA, advises clients on compliance and transactions in healthcare, cybersecurity, corporate and securities law, while representing plaintiffs in False Claims Act and Dodd-Frank whistleblower cases. She also teaches bioethics at Baylor College of Medicine in Houston. Rachel can be reached through her website, www.rvrose.com.