This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.
The legal system is dysfunctional. It is very expensive, takes a long time, and causes a great deal of stress. In an effort to find a better method of resolving disputes, mediation and arbitration are becoming more popular.
MEDIATION allows the parties to meet with a neutral adviser who can listen to each side and try to craft a mutually agreeable solution.
For example, if Mr. C complains that Mr. T’s kids are too noisy, a mediator may suggest that Mr. T pays for a new fence between the properties. Everyone goes home (relatively) happy.
If a solution which is agreeable to all can be reached, litigation is avoided. If any one person disagrees with all proposed solutions, the litigation or arbitration alternatives remain available. Mediation tries to reach a win-win result for everyone.
ARBITRATION is a privately conducted trial to resolve a dispute. The legal system is so expensive and backlogged that many people prefer to hire a “rent a judge” to reach a verdict quickly in a (hopefully) less expensive procedure. A winner is declared. In terms of result, arbitration does not seek a win-win resolution.
Arbitration can be binding (in which case, there is NO appeal), or non-binding, in which case it is at best a reality check which may cause one party to realize that his case has problems.
Most arbitration is conducted by one person, although in appropriate circumstances, a three judge panel will make decisions.
Some contracts require that each party select one arbitrator. Each biased arbitrator then picks a third, neutral arbitrator to make up a 3 judge panel.
[Actually, this method is considered by many attorneys to be unnecessarily expensive; why have 2 arbitrators who are already committed to opposite sides, and leave the verdict up to the third arbitrator? Why pay the first two, when it is really up to the third? It is an unnecessary expense with no real benefit.]
There are several forums for both mediation and arbitration. Each has its own problems and advantages.
AAA (American Arbitration Association) is the best known panel. AAA has sample rules for cases, which rules may be altered by agreement of the parties. [Agreement to alter the standard rules may be reached at any time: either before a dispute arises (in the initial contract between the parties), or on the eve of the hearing.] AAA has several sets of rules, depending on the nature and amount of the case.
Arbitrators who are knowledgeable in the particular field of the dispute are selected from a panel chosen by AAA. For example, in a real estate dispute, 5 people knowledgeable about real estate law (either attorneys or brokers) might be chosen; each party to the dispute is given a biography on the potential arbitrators, and is allowed to eliminate two, leaving one arbitrator to act as judge.
The other major forum is JAMS, whose arbitrators include many retired judges (who make more money as private judges than when on the bench). Generally JAMS is more expensive than AAA, as retired judges charge more per hour, and expect more formal presentations from claimants, including formal briefs of legal and factual issues.
The rules of arbitration are 100% flexible, IF the parties can agree. If the parties cannot reach agreement, state law or the standard rules of the association may apply.
Issues to be agreed upon include the scope of discovery, types of evidence admissible at the trial, and a wide variety of other topics.
Discovery is the stage of litigation in which each side gets to looks at the opponent’s case. In the interests of justice, surprise witnesses and evidence are disfavored; rather, a thorough review of the opposition’s case is thought to give fairer results.
Discovery may be conducted by written questions (interrogatories), verbal cross- examination (depositions), and production of documents.
The important issue for arbitration is how much discovery is allowed?
Binding arbitration is non-appealable (in almost all cases unless fraud is committed by the arbitrator). The arbitrator can decide the case any way he wants, for whatever reasons he deems appropriate, and there is NO APPEAL!
The written decision can be: “$1,000,000 to the cute girl” and the decision is binding.
Since Arbitration provides a less expensive alternative, is it something which is right for all disputes? As a philosophical issue, probably.
However, we are not philosophers (during the work week); we are advocates. As advocates, we assert the position which will assist our client best. We try to predict the nature of any claim by or against our client, and whether he has an advantage by arbitrating that claim. If our client will benefit from arbitrating a potential future claim, we encourage a well-drafted, customized, arbitration clause in the contract.
Such a clause might state that any dispute of up to $30,000 would be subject to binding arbitration; larger claims must be litigated.
REAL ESTATE CONTRACTS
As a general rule, in the current real estate market climate, lawsuits about most residential real estate transactions are brought by Buyers who claim non-disclosure by Sellers of facts which the Buyer later discovered.
In the mid-1980s, with prices rising every ten minutes, Sellers would try to back out of contracts when a second (better) offer was received. This caused lawsuits by Buyers to compel performance by Sellers.
However, with today’s flat market values, the nature of lawsuits has changed. If a Buyer refuses to complete a purchase (having found a better deal next door), his deposit is at risk, but usually nothing more. The Seller may want to sue, but a lawsuit for recovery of a small deposit is often cost-prohibitive.
If we assume a general rule that Buyers are more litigious and arbitration is cheaper, requiring arbitration makes it easier for the Buyer to fight. A case which might be cost- prohibitive to litigate might be well worth the less expensive alternative of arbitration.
Therefore, our general advice to clients is that Buyers should demand arbitration clauses in contracts; Sellers should refuse.
The arbitration clause must be initialled by each party or it does not apply. If you want arbitration to apply, you must add the following clause to the contract, or it is optional with the other party:
“This contract is expressly contingent on all parties initialling the Arbitration clause.”
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