Since you've agreed (at least for purposes of this article) to keep an open mind, let's take a look at the benefits and disadvantages of mediation, arbitration, and litigation, and then let's see how you can best set up the format for resolving the disputes in the manner that you want.
Determine Which Is Best for You
The rule of thumb used to be that arbitration is faster, more efficient, and more cost-effective than court, so it is the better way to go. That certainly isn't true anymore. All too often, arbitration proceedings become lengthy, arduous experiences, involving discovery and depositions and forcing the parties to endure endless sessions and ever-mounting costs. All too often it appears that the arbitrators are using the process for their retirement funds, having no interest in ending hearings where they get paid for each day they appear, plus "study time."
(There are ways to control those problems. And, I will note that the arbitration folks are listening. I went to a conference given by the American Arbitration Association in Los Angeles a few years ago. The opening statements were to the effect that the system is broken and needs to be fixed. So there is hope.)
For all the bad and negativity that surrounds arbitration, there is a primary benefit that, to me, outweighs the detriments and makes arbitration the favored way to resolve disputes—being able to select arbitrators with experience in the field, who know the issues and can review, address, and resolve those issues fairly. Rarely do you get that benefit in court. While there are some very good judges out there, there are too many others who have no experience in construction and cannot provide a fair or effective review of a dispute. (Did I put that mildly enough?) And, do you really want a jury composed of people who do not want to be there and who have no clue what the evidence is showing or what is being said to hear and resolve your dispute?
Therefore, I typically lean toward arbitration for dispute resolution, unless the project circumstance almost cries out for a court where I think I can get some home cooking and a better result than arbitration.
Does Mediation Work?
I've found mediation to be a pretty useful process, especially where the parties are serious about trying to resolve the issues. Sometimes, mediation is used just to get a better feel for the other side's case and see what backup they have. But, where the parties are serious and are willing to devote the time and energy to address and resolve the issues, mediation can be very effective—with a good mediator, of course. There are a number of effective mediators out there. We've been fortunate to recently work with a few, and they were very helpful in getting our clients' issues resolved. Oddly, in one matter, the mediator that we selected had been an arbitrator in a different case that we had years earlier. He was a better mediator than arbitrator, though.
How do you select a mediator? Mediation can be done informally—where the parties agree on an individual to perform the mediation and control the process. Otherwise, mediation can be done formally through a specific tribunal, such as JAMS or the American Arbitration Association. When it is done formally, those tribunals will provide a list of proposed mediators. You then work with the other side to select the one with whom you are most comfortable. When I am trying to select a mediator, I can get good feedback and recon from colleagues or from the references shown on a mediator's résumé. Those folks can help narrow down the field.
There are exceptions, of course. We recently did a mediation in Long Island, but the mediator was not as billed. We heard a lot of good stories from the mediator and paid a lot for his time, but he was not helpful in resolving the dispute. The other attorney and I did wind up settling the matter ourselves—mostly out of fear that we'd have to sit though more war stories. (Perhaps that was the mediator's strategy?)
If you are going to mediate, clarify the process. Mediation is a nonbinding process. That is, no matter what is done, you will not be forced to accept any result unless you want to. I see some folks who talk about "binding mediation." If the result is binding, then the process is not mediation. Therefore, if you are agreeing to mediate a dispute, make sure that the other side agrees that everything is nonbinding—and that everything will be kept confidential. Usually, whatever is said during the mediation process is and should remain confidential and not subject to disclosure in any later arbitration or court proceeding.
What Is the Process?
Make sure that your contract identifies the dispute resolution process. It's essential to make sure that the agreements are clear on the point that you have the right to mediate and/or arbitrate disputes that arise on the project or with respect to the contract. As mentioned, if the agreement does not specify and mandate mediation and/or arbitration, then the general recourse and remedy will "default" to the courts. Therefore, decide at the inception and prior to contract signing which dispute resolution process is preferred, and be sure it is in the agreement.
Many form contracts have arbitration clauses in them. For example, the American Institute of Architects (AIA) form agreements generally have mediation and arbitration clauses. Depending on which version you use, the form may require mediation and arbitration (unless the clauses are crossed out), or they may have options that require you to actually fill in your choice. The earlier AIA forms also required arbitration to be administered by the American Arbitration Association. The forms were relaxed, and, at some point, the American Arbitration Association was removed as the "default" tribunal.
If you choose to arbitrate and/or mediate, make sure the contract clause is clear and unequivocal. Since there is a constitutional right to access the courts for dispute resolution, the courts require parties to a contract to show a knowing and clear intention to give up and forfeit that right and go to arbitration—before a court will force the parties to arbitrate. Some arbitration tribunals will offer suggested language to use in the contract to require arbitration as the dispute resolution mechanism. Generally, the clause must state, in no uncertain terms, that the disputes will be resolved by arbitration. The clause must also say which tribunal will administer the arbitration (or mediation) and which rules will apply.
Take control over the process. There are very good options available when you draft or mark up an arbitration clause in a contract. In fact, here is where you can take and keep control over the process. When I draft an arbitration clause in my construction contracts, I always have language limiting the number of sessions and prohibiting any party from taking any depositions. For example, depending on the contract amount in the agreement, I may say that no more than 4 sessions will be permitted; or, perhaps, no more than 10 sessions will be allowed for larger projects. My clauses also prohibit any depositions, since that is where the process can become more costly and inefficient. You can also set the location for the arbitration and specify how many arbitrators you will use for a dispute.
Whatever you decide, try to avoid the situation where you agree to three arbitrators, where each party gets to pick one, and then the two selected arbitrators will pick a third. To me, this seems rather useless—you might as well just go with one arbitrator since each party's selected arbitrator will rule in favor of that party.
Don't be fluffy or too creative with the arbitration or mediation clause. There are always cases where a court has to interpret an arbitration clause and decide if the parties knowingly chose arbitration or mediation as the process for resolving disputes. In a number of cases, the arbitration clause makes arbitration appear to be optional. For example, in a recent case, the court looked at a clause, which said the following.
All disputes between the parties concerning the interpretation or enforcement of any rights or obligations under this Agreement ... may be resolved by final and binding arbitration pursuant to the rules of the American Arbitration Association.
The issue was whether the use of the words "may be resolved" showed "a clear, explicit, and unequivocal agreement or mandate to arbitrate the subject dispute." The court found the owner and contractor agreed to arbitrate, even though they used the word "may."
Unilateral arbitration clauses. More recently, we are seeing construction contracts that say, if there is a dispute, one party may select arbitration or court at that party's option. There is a question whether that type of clause is enforceable. Therefore, if you are going to include that language in your agreements, make sure you know beforehand whether it is enforceable.
My view is that these one-party options clauses are not enforceable. My reason: as mentioned, for parties to give up a constitutional right to the courts, they must clearly and explicitly agree that they want to avoid the courts and use arbitration as a means to resolve disputes. An arbitration clause that gives one party an option to go to arbitration or court does not, at least in my view, show a knowing and irrevocable intention to use arbitration and bypass the courts.
Apparently, these unilateral arbitration clauses are pretty popular in international agreements. I Googled the term and found analyses discussing whether the clauses are valid in various foreign countries. For example, I bet you didn't know that Russia found these clauses unenforceable. So, if you are contracting with Vladimir Putin, and he uses a unilateral option to arbitrate, tell him in no uncertain terms that the clause is not enforceable.
Whom should you select as an arbitrator? I recognize that it is not realistic, but, if you can, try to have your agreement name one or more specific individuals who can act as arbitrators or mediators for any dispute that may arise. Otherwise, if a dispute results, you will be forced to rely on the lists issued by the tribunal administering your arbitration or mediation. Unfortunately, I do not have any faith in the process used by these tribunals.
Typically, after the proceeding is started, the tribunal will circulate a list of potential arbitrators. I know that, with the American Arbitration Association, I am seeing the same names being recycled on the lists. That makes it seem like the American Arbitration Association is pushing or favoring these individuals, for some reason. Once you make your choices and cross out names that are not acceptable, the list goes back to the American Arbitration Association and—as far as I know—goes into some black hole and a completely secretive process under which the arbitrator(s) are selected. Maybe it's me, but I've never gotten a good explanation of who gets selected or why. And that is scary to me.
Lawyers as arbitrators? Think twice about having lawyers as arbitrators. I used to be dead set against having a lawyer as an arbitrator. My experience was that the lawyers always tried to act as judges. On a single-person panel, the lawyer tried to conduct the hearing as a court trial and made rulings as if in court. (If we wanted to be in court, my position was always that we would not have selected arbitration as a means for resolving disputes.) On a three-person panel, I've found that the lawyer tends to take over and try to control the other two arbitrators. I don't like that, either. (Having said that, I do have to admit that we recently had a very good experience with a lawyer as an arbitrator on a matter involving claimed defective work by our client. So, it's not a given.)
All in all, then, I lean toward mediation and arbitration as the better mechanisms for resolving disputes. They are certainly better than court in most situations, unless there is some really compelling reason that you want to be in court. I say this, but must give you one overall suggestion: avoid them all, if possible! I've practiced construction and surety law and government contracts for over 35 years and have come to the conclusion that the best way to resolve disputes is to keep control over the process and not give anyone the ability to make decisions about your issues. Be reasonable and rational, and make every effort to personally work out the dispute and avoid court, arbitration, or mediation.