How to Resolve Contract Disputes Through Mediation or Arbitration
Contract disputes can threaten your business relationships or financial stability. While litigation may seem like the only path forward, alternative dispute resolution methods, such as mediation and arbitration, often provide faster and more cost-effective solutions.
At the Law Offices of David H. Schwartz, INC, Attorney David Schwartz has spent over 45 years helping clients throughout the San Francisco Bay Area, including San Jose, Santa Clara, San Mateo, Alameda County, and Oakland, resolve complex business disputes by providing strategic legal guidance.
With decades of experience handling trade secrets, commercial litigation, civil RICO cases, and shareholder derivative actions, he understands that every contract dispute requires a tailored strategy. His extensive background in business litigation makes him uniquely qualified to guide clients through mediation and arbitration processes, helping them achieve favorable outcomes while preserving and protecting their business relationships.
Understanding Contract Disputes
Contract disputes arise when parties disagree about the terms, performance, or interpretation of their agreement. Some common issues include breach of contract, failure to deliver goods or services, payment disputes, and disagreements over contract modifications. These conflicts can escalate rapidly, damage business relationships, and result in substantial financial losses.
Traditional litigation involves presenting your case in court, where a judge or jury renders the final decision. However, this process can be lengthy, expensive, and public. The adversarial nature of courtroom proceedings can often permanently damage business relationships. Alternative dispute resolution methods offer different approaches that may better serve your interests.
An Overview of Mediation
Mediation is a voluntary process in which a neutral third party, known as a mediator, assists disputing parties in reaching a mutually acceptable agreement. Unlike a judge, the mediator doesn't make binding decisions. Instead, they facilitate communication, help parties understand each other's perspectives, and guide them toward finding common ground.
Parties may enter mediation before a lawsuit is filed, but more typically, parties mediate after litigation has commenced. Courts often require that litigants before them mediate either using private mediators paid for by the parties or free panel mediators who will provide a few hours of mediation without cost. Difficult cases may require more than one mediation session to reach resolution.
The mediation process typically begins with each party presenting their side of the dispute. The mediator may meet with parties separately in private sessions called caucuses, where sensitive information can be shared confidentially. Throughout the process, the mediator helps identify areas of agreement and potential solutions. Mediation offers several advantages over traditional litigation, including the following:
The parties maintain control over the outcome of the case rather than leaving the decision to a judge or jury.
A private settlement may provide for remedies that a court would be unable to provide.
The confidential nature of mediation protects sensitive business information from becoming public record.
Mediation often preserves business relationships because it focuses on problem-solving rather than assigning blame.
Mediation isn't always successful. If the parties can't reach an agreement, they will need to resolve their dispute through litigation or arbitration. Additionally, mediation requires good faith participation from all parties. If one side refuses to compromise or participate meaningfully, the process may fail to achieve its objectives.
An Overview of Arbitration
Arbitration is a more formal alternative dispute resolution process in which the parties present their cases to one or more arbitrators, who then make binding decisions regarding the case. Unlike mediation, arbitration results in a final, enforceable award similar to a court judgment.
The arbitration process is often billed as providing a simplified process that does away with many of the time-consuming and expensive aspects of litigation in court, such as extensive discovery processes and involved law and motion practice, resulting in less cost to the litigants. However, arbitration can and often does become significantly more complicated than advertised. Arbitration will, usually, end up being faster than using clogged state or federal courts.
The elimination of much of the procedural complications of court litigation also can make proving or defending your case more problematic. Arbitrators often will severly limit the amount of discovery that can be conducted, which means that a party must rely on the "good faith" of the opposing party to provide all requested documents. Limitations on depositions mean that witnesses are questioned for the first time at the arbitration hearing creating greater risk that the opposing party will be "surprised" or "sandbagged" by a witness' testimony without the ability to effectively cross-examine. Most importantly, under the terms of most arbitration agreements, the arbitrator is not required to strictly follow the law, but may instead decide the case by providing "substantial justice" and the arbitrator's ruling is not subject to any substantive review on the merits. Thus, arbitration outcomes are often perplexing.
Arbitrators can be specialists in the relevant industry or legal area, bringing specific knowledge to the dispute.
Arbitration can be either binding or non-binding, though binding arbitration is more common in commercial contracts. In binding arbitration, the arbitrator's decision is final and can only be challenged in court under particular circumstances, such as arbitrator misconduct or fraud.
California Laws Governing Mediation and Arbitration
California strongly supports alternative dispute resolution methods through comprehensive legislation. The California Arbitration Act, found in Code of Civil Procedure Sections 1280-1294.2, governs arbitration agreements and proceedings within the state. This act generally enforces arbitration agreements and limits court intervention in the arbitration process.
Under California law, arbitration agreements must be clear and unambiguous to be enforceable. The courts will enforce valid arbitration clauses, even if they appear in standard form contracts. However, California courts may refuse to enforce arbitration agreements that are unconscionable or violate public policy.
The California Evidence Code protects mediation communications through strict confidentiality rules. Section 1119 makes mediation communications generally inadmissible in court proceedings, encouraging open dialogue during mediation. This protection extends to mediators, who cannot be compelled to testify about mediation sessions.
California also recognizes the Federal Arbitration Act, which applies to contracts involving interstate commerce. When both state and federal laws apply, the courts must determine which takes precedence based on the specific circumstances of each case.
Recent California court decisions have clarified essential aspects of alternative dispute resolution. The courts have strengthened protections for mediation confidentiality while also addressing concerns about unconscionable arbitration agreements, particularly in employment and consumer contexts.
Choosing Between Mediation and Arbitration
The choice between mediation and arbitration depends on several factors specific to your situation. When relationships matter, the parties want to maintain control over the outcome, confidentiality is important, and there's potential for creative solutions that courts might not order, then mediation may be the best option..
However, arbitration may be preferable when the parties require a final, binding decision, disputes involve complex legal or technical issues that necessitate specialized knowledge, when contractual obligations stipulate arbitration, or when the parties wish to avoid having their dispute open to the public through public court records. Some contracts include multi-step dispute resolution clauses requiring mediation first, followed by arbitration if mediation fails.
Both mediation and arbitration require the agreement of the parties to the dispute. Where the parties have not already agreed to mediation and/or arbitration, these processes cannot be forced but must be the product of agreement.
Time considerations also matter. Mediation can often be scheduled quickly and completed in days or weeks. Arbitration typically takes longer but proceeds more quickly than court litigation. Cost considerations also vary, mediation almost always will typically cost less than full litigation. Arbitration may be cheaper than litigation, but that is not always the case. Arbitrators and mediators charge for their services, and skilled and in-demand arbitrators charge hundreds to thousands of dollars per hour. Court judges are free to litigants save for required filing fees.
How to Prepare for Alternative Dispute Resolution (ADR)
To be successful in mediation or arbitration, careful preparation is required. Gather all relevant documents, including the original contract, correspondence, invoices, and evidence supporting your position. Identify your goals and priorities, distinguishing between what you must have and what you'd like to achieve.
Consider the other party's likely position and interests. Understanding their perspective helps identify potential areas of compromise in mediation or strengthens your arguments in arbitration. Prepare a clear timeline of events and organize evidence logically.
Choose your representatives carefully. In mediation, send someone with authority to make binding agreements. For arbitration, legal representation becomes more critical due to the formal nature of proceedings and binding outcomes.
Contract Disputes Attorney Serving the San Francisco Bay Area
Attorney David Schwartz brings over four decades of litigation experience to contract disputes. He treats legal strategy as tactical warfare, knowing when to focus on individual battles versus long-term objectives. Having successfully handled trade secret cases, complex commercial disputes, civil RICO matters, and shareholder derivative actions throughout California, the Law Offices of David H. Schwartz, INC takes on demanding litigation challenges, allowing businesses to focus on their operations.
Based in San Francisco, California, his firm has served clients throughout the San Francisco Bay Area, including San Jose, Santa Clara, San Mateo, Alameda County, and Oakland, for over four decades. Contact his office to schedule a consultation for contract disputes and other matters.