CHAPTER 3
Arbitration/Alternative Dispute Resolution

Alternative dispute resolution (ADR) is any method of dispute resolution used in lieu of formal arbitration proceedings such as court litigation or administrative proceedings. ADR is classified into the following subtypes: (a) negotiation, (b) mediation, (c) arbitration. and (d) mini-trial. The following provides a brief description of each:

(a) The parties may elect to engage in negotiations where participation is voluntary, and where a mediator is not present to facilitate the resolution process or enforce a resolution.

(b) A third party called the mediator facilitates the resolution process. The mediator may suggest a non-binding resolution. This is commonly referred to as a mediator’s proposal.

(c) In arbitration, a neutral third party is selected to act as a private judge who has the authority to impose resolution. This is commonly referred to as binding arbitration.

(d) In a mini-trial, attorneys from each side provide a synopsis of their case to a neutral party and to a person from each company empowered to decide on behalf of that company. Following the attorneys’ summaries, the decision-makers attempt to negotiate a settlement, which the neutral party facilitates.

RISK

If a contract does not contain a provision for ADR, a dispute between the parties to the contract is handled through litigation. Litigation has the following disadvantages:

1) Significant costs associated with pre-trial motions and in conducting discovery.

2) A typically slow process—civil disputes often take two to five years from the complaint filing date to trial.

3) A typical consequence of unfriendly relations between the parties.

4) The consequence that the litigation becomes a matter of public record.

RESPONSE

Stress to buyer that ADR is desirable for the following reasons: (a) substantial savings in legal fees may be had by both parties, (b) prompt resolution is highly probable, (c) potential preservation of the buyer/seller relationship is more likely, and (d) parties are safeguarded from public embarrassment since the issues and resolutions are not disseminated outside the buyer/seller relationship.

Seller may suggest a three-step approach to resolving a dispute:

1) Direct negotiations between representatives of the parties, each of whom has decision-making authority.

2) Non-binding resolution, such as mediation.

3) If negotiation and mediation are unsuccessful, try a binding resolution such as binding arbitration.

During contract negotiations, suggest the following long version of the ADR. If this does not work, propose the short version:

SAMPLE OF ARBITRATION, LONG CLAUSE

The parties shall use and strictly adhere to the following dispute resolution processes, except as otherwise expressly provided in this section, to resolve any and all disputes, controversies, or claims (hereinafter Dispute(s)) whether based on contract, tort, statute, fraud, misrepresentations, or any other legal or equitable theory arising out of or relating to this Agreement (and any prior agreement or understanding that this Agreement supersedes), including without limitation, its making, termination, non-renewal, its alleged breach, and the subject matter of this Agreement (e.g., products or services furnished hereunder or those related to those furnished):

Negotiation: The parties shall first attempt to settle each dispute through good faith negotiations. The aggrieved party shall initiate the dispute resolution process and negotiations by giving the other party a written notice of existence and nature of each dispute. The other party shall in writing to the aggrieved party, acknowledge such notice of dispute within ten business days. The acknowledgment may also set forth the existence and nature of any dispute that the acknowledging party desires to have resolved as part of the dispute resolution process initiated by the other party.

Mediation: Thereafter, if any dispute is not resolved by the parties through negotiation within thirty calendar days of the date of the notice of acknowledgement, either party may terminate negotiations with respect to that dispute and request that the dispute be submitted to non-binding mediation. Any mediation of a dispute under this section shall be conducted in accordance with the then current conflict prevention and resolution (CPR) model for resolution of business disputes (model procedures), and the procedures specified in this section to the extent that they modify or add to such model procedures. Any demand for initiation of the dispute mediation process must be given in writing to both parties involved and to the CPR. The demand must set forth the nature of each dispute. Each party to mediation shall bear its own expense with respect to mediation and the parties shall share equally the fees and expenses of the CPR and the mediator. The failure by a party to timely pay its share of the mediation fees and expenses of the CPR and the mediator shall be a bar to arbitration under the following arbitration provision of the party’s dispute(s). Any mediation under this section shall be conducted according to the laws and regulations of the state of [insert state] at a site selected by the mediator that is reasonably convenient to the parties. Each party shall be represented in the mediation by a representative with authority to authorize a final settlement respect to the dispute(s).

Arbitration: Any dispute not finally resolved after mediation in accordance with the negotiation and mediation sections noted above, shall, upon delivery of the written demand of any involved party to the other party and the CPR, be finally resolved through binding arbitration in accordance with the then current CPR Non-administered Arbitration Rules (Arbitration Rules) and the procedures specified in this section, to the extent that this section modifies or adds to such arbitration rules. Any dispute of any party not resolved after mediation pursuant to this section may be made a part of the arbitration demanded by the other party, if written notice of demand for arbitration of that dispute is received by the CPR before an arbitrator has been selected. Each party shall bear its own expenses with respect to arbitration and the parties shall share equally the fees and expenses of the CPR and the arbitrator. Unless otherwise mutually agreed by the parties in writing, the arbitration shall be conducted by a neutral arbitrator. The arbitration shall be conducted in the state of [insert state] at a site selected by the arbitrator that is reasonably convenient to the parties. The arbitrator shall be bound by and strictly enforce the terms of the agreement and may not limit, expand, or otherwise modify the terms of this agreement. The arbitrator shall make a good faith effort to apply applicable law, but an arbitration decision and award shall not be subject to review because of errors of law. The arbitrator shall have the sole authority to resolve any and all issues as to the arbitrability of any dispute, including the applicability or running of any statute of limitation. The arbitrator shall not have power to award damages in connection with any dispute in excess of actual compensatory damages or to award consequential or punitive damages or any damages that are excluded under the limitation of liability section of this agreement, and each party hereby irrevocably waives any claim thereto. The arbitrator shall have the power to order pre-hearing discovery of documents or the taking of depositions. The arbitrator’s decision and award shall be made and delivered to the parties within six months of selection of the arbitrator, and judgment on the award made by the arbitrator may be entered by any court having competent jurisdiction. The agreement to arbitration of disputes under this section shall not be construed as an agreement to the joinder or consolidation of arbitration under this agreement with an arbitration of disputes arising out of or related to any other agreement regardless of the nature of the issues or disputes involved or the identity of the parties to the disputes.

Interpretation and enforcement: This section shall be interpreted as governed by and enforced in accordance with the United States Arbitration Act 9 USC Section 1-16. This statute shall govern choice of law, arbitration of disputes, and all other substantive matters pertaining to the interpretation and enforcement of this agreement. Any party to a dispute that is the subject of a notice initiating the dispute resolution process under this section, may seek a temporary injunction in any state or federal court of competent jurisdiction to the limited extent necessary to preserve the status quo during the pendency of final resolution of a dispute in accordance with this section. An arbitrator appointed pursuant to the arbitration provision above may issue such injunctive orders and shall have the power to require a party to seek modification or dissolution of any injunctive order from any court to the extent such order affects the final resolution of the dispute. The parties, their employees and agents, other participants, the mediator, and arbitrator shall hold the substance and result of any negotiation, mediation, and arbitration under this section in strict confidence except to the limited extent necessary to comply with a court order, to enforce a final settlement agreement, or to obtain and secure enforcement of a judgment on the arbitrator’s decision and award. All information and documents disclosed in negotiation, mediation, or arbitration by any party shall remain private and confidential to the disclosing party and may not be disclosed by any other party. No privilege or right with respect to any information or document disclosed in negotiation, mediation, or arbitration shall be waived or lost by such disclosure.

Statutes of limitation: The statute(s) of limitation applicable to any dispute shall be tolled upon initiation of the dispute resolution procedures under this section and shall remain tolled under until the dispute is resolved under this section. However, tolling shall cease if the aggrieved party to the dispute does not initiate mediation within sixty calendar days after good faith negotiations are terminated or if, after mediation of a dispute, the aggrieved party does not initiate a demand for arbitration of the dispute within sixty calendar days after mediation is terminated.

Trademarks, patents, and copyrights: Unless the parties mutually agree in writing, disputes relating to trademarks (including service marks), patents, and copyrights shall not be resolved in accordance with the dispute resolution procedures set forth in this section.

SAMPLE OF ARBITRATION, SHORT CLAUSE

If a dispute arises out of or relates to this agreement or its breach and the dispute cannot be settled within twenty (20) business days through negotiation, either party may submit the dispute to binding arbitration. Such arbitration will be conducted by a sole arbitrator designated by the conflict prevention and resolution (CPR) board for dispute resolution and will be in accordance with the CPR’s arbitration rules. The arbitration will be held at a neutral site in [insert city] selected by the arbitrator that is reasonably convenient to both parties. The arbitrator will determine issues of arbitrability, including the applicability of any statute of limitation, but may not limit, expand, or otherwise modify the terms of this agreement. The arbitrator will not have the power to order pre-hearing discovery of documents or the taking of depositions, but may compel the attendance of witnesses and production of documents at the hearing, to the extent provided by the United States Arbitration Act. The arbitrator’s decision and award will be in writing, setting forth the legal and factual basis therefore (except with respect to the validity, infringement, or misappropriation of any patents or other proprietary rights of any party, with respect to which such award will be without findings of any statement of legal or factual basis). The arbitrator may in appropriate circumstances provide for injunctive relief (including interim relief). An arbitration decision and award will not be subject to review because of errors of law. Each party will bear its own expenses in connection with the arbitration, but those related to the site and compensation of the arbitrator will be borne equally. The parties, other participants, and the arbitrator will hold the existence, content, and result of the arbitration in confidence, except to the extent necessary to enforce a final settlement agreement or to obtain and enforce a judgment on an arbitration award. This section will be governed by and enforced in accordance with the United States Arbitration Act.

SAMPLE OF ARBITRATION CLAUSE, INTERNATIONAL

If a dispute arises out of or relates to this agreement, or its breach, the parties agree to submit the dispute to a sole mediator selected by the parties or at anytime at the option of a party to conciliation (mediation) pursuant to the Conciliation of Rules of the United Nations Commission on International Trade Law (UNCITRAL). If not resolved, the dispute shall be referred to a sole arbitrator selected by the parties within thirty days of the conciliation or, in the absence of such selection, to final and binding arbitration by a sole arbitrator under the UNCITRAL arbitration rules in effect on the date of this agreement.

The appointing institution and authority of conciliation and arbitration shall be [pick one of the following: the American Arbitration Association; Center for Public Resources; the Singapore International Arbitration Centre; the London Court of International Arbitration].

The language to be used in the arbitral proceeding shall be English. The place of arbitration shall be [insert country].