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Alternative Dispute Resolution Basics for Those in Business

In an attempt to control litigation costs, many companies are looking to employ alternative dispute resolution mechanisms – commonly referred to as ADR -- to avoid the courthouse. Two of the most commonly used ADR mechanisms are mediation and arbitration. Mediation is a voluntary process through which the parties meet and try to negotiate a resolution to their dispute by using an objective third-party facilitator. Arbitration is a process that results in a binding decision that the parties can seek to enforce through the courts. Outlined below are the basics that can be expected in the typical mediation or arbitration.


Mediation is intended to provide the parties an opportunity to fully discuss and explore the possibility of resolving their dispute by agreement. Indeed, it is not uncommon to see a mediation requirement written into contracts as a prerequisite to the filing of a lawsuit or arbitration proceeding. There is no required format, and it is largely at the parties' discretion as to how they want the mediation to be structured. Mediations usually last only a day, but typically a very long day. If the parties agree, and the intricacies of the case demand it, the parties can make the mediation a multiple day event.

Generally, most mediators will require a short statement or brief prior to the mediation from each party that sets forth the respective positions, and depending on the agreement of the parties, these position papers may or may not be shared with the other side. The mediation commences usually with the plaintiff making a presentation which is followed by the defendant's presentation. After the presentations, there may be a short question and answer session in which the parties can quiz each other or the mediator asks questions to clarify the facts of the case or positions. After the Q & A session, the parties go to their respective private rooms, and the mediator then employs shuttle diplomacy by going back and forth between the separate rooms to discuss privately the strengths and weaknesses of everyone's respective positions. However, there is a school of thought that is causing some mediators to prolong this Q & A session through questioning by the mediator. The goal of this prolonged discussion is to encourage the parties to more fully discuss the case between themselves so that each party has a better understanding of everyone's position prior to each party retreating to its private room.

Once the parties are in their respective rooms, the mediation then grinds on with the mediator attempting to drive the parties into a range that the mediator believes would be a fair and reasonable settlement of the case given the facts and law of the matter. This perceived range is largely based on the mediator's experience and familiarity with the subject matter of the dispute and, in business disputes, knowledge of the industry involved. Consequently, the key to a successful mediation is an experienced and knowledgeable mediator and, particular in the mediation of business disputes, a mediator that can think outside of the box and help the parties develop settlements that do not always require cash payments. Settlements that involve the trading, buying or selling services, goods, equipment, facilities and so forth at the right price may permit a plaintiff to get an asset that is strategic to its business while allowing the defendant to divest itself of an asset that it may have been planning to sell and to obtain a fair price or trade-off for it. Fortunately, for any dispute in the Houston area, there are many good mediators from which the business community can draw upon.


For arbitration proceedings in Texas, either the Federal Arbitration Act ("FAA") or the Texas Arbitration Act ("TAA") will be the governing law. The FAA can only be applicable if the dispute relates to a maritime transaction or a contract which involves interstate or foreign commerce. Under the Supremacy Clause of the United States Constitution, the FAA preempts all other applicable state laws, including the TAA. When the FAA does not apply to a dispute, the TAA or the Texas Common Law (for actions in Texas) will govern the matter, unless some other states law is applicable.

Under both the FAA and the TAA, arbitration is strictly a matter of contract between the parties, and the parties to the arbitration agreement are at liberty to choose the terms under which they will arbitrate. A party seeking to compel arbitration must establish the existence of an arbitration agreement and show that the dispute falls within the scope of the arbitration agreement. Because public policy favors arbitration, a court will resolve any doubts regarding the applicability of an arbitration provision in favor of arbitration. Further, the denial of a motion to compel arbitration is reviewable by an appellate court either by means of an interlocutory appeal or a writ of mandamus, depending upon the specific case.

Even tort claims may be the subject of a contractual arbitration provision. Whether a tort claim is within the scope of an arbitration provision is a matter of contract interpretation and usually a question of law for the court. A court will consider whether the facts alleged regarding the tort are "factually intertwined" with the contract containing the arbitration clause. If the facts underlying the tort are sufficiently intertwined with the contract, then the matter may be subject to arbitration. However, the fact that a tort claim would not have risen "but for" the contract does not necessarily guarantee whether the claim is subject to arbitration. The test is whether the particular tort claim is so interwoven with the contract that it could not stand alone or, on the other hand, is a tort completely independent of the contract and could be maintained without reference to the contract.

Once a matter is referred to arbitration, the arbitrator or arbitrators will be selected as provided by the contract between the parties. Failure to follow the procedures set forth by the agreement of the parties may result in any award being vacated. The parties may agree to have arbitrators selected pursuant to the provision of the rules of organizations like the American Arbitration Association or the CPR Institute. Parties may agree on the number of arbitrators, which is usually either one or three. In the cases where the parties have agreed to have their matter considered by three arbitrators, all three may be what are termed "neutral arbitrators," which are usually appointed pursuant to a selection process. In some situations, each party may be able to appoint one arbitrator, and then those arbitrators (party arbitrators) select the third arbitrator who is a neutral arbitrator.

The actual conduct of the arbitration proceeding can be a somewhat less formal process than the usual trial process. Discovery in arbitration, and any limits thereof, are provided by the contract of the parties or the arbitration rules the parties have selected to govern the arbitration. Most rules promulgated by the various arbitration organizations provide for some limited discovery, including depositions. In addition, the arbitrators are not required to apply either the Texas or Federal Rules of Evidence, whichever may be applicable, unless the agreement of the parties provides otherwise. An arbitration award will not be set aside due to the arbitrator's refusal to hear evidence, unless the exclusion of the contested evidence prevented the offering party from receiving a fundamentally fair hearing.

After the arbitration, a party has very limited rights to appeal the arbitration award. Both the FAA and TAA specify the basis vacating, modifying or correcting an arbitration award. In addition to what is set out in the FAA, federal courts have fashioned several common law bases for vacating arbitration awards. The Texas Supreme Court has left the issue open as to whether the Texas common law bases for vacating an award are available to a party who has proceeded under the TAA. The statutory bases under the FAA and the TAA for vacating an arbitration award are similar. Both statutes provide that an award may be vacated if it was obtained pursuant to (1) corruption, fraud or undue means, (2) evident partiality or corruption of the arbitrator, (3) arbitrator misconduct (refusing to postpone hearing, hear pertinent material evidence or any other behavior which prejudice is a parties' rights), and (4) the arbitrators exceeded their powers or the award is not final or definitive.

The bases for also modifying or correcting an award are similar under the FAA and TAA. The bases for modifying or correcting and award are, (1) an evidence material miscalculation of numbers or the description of a person, thing or property referred to in the award, (2) the arbitrators have made an award the respectable matter not submitted to them and the award may be corrected without affecting the merits of the decision on the issues that were submitted to the arbitrators, and (3) where the award is imperfect in matter or form not affecting the merits of the controversy.

Under the FAA, a party must serve a notice of a motion to vacate, modify or correct an award on the adverse party or his attorney within three months after the award is filed or delivered. Under the TAA, a party seeking to vacate, modify or correct an arbitration award must make its application no later than the 90th day after delivery of a copy of the award to the applicant.

Whether arbitration presents advantages or disadvantages may largely be dependent on whether you find yourself in the position of the plaintiff or defendant. Arbitration typically minimizes the plaintiff's chances of obtaining large punitive damage verdicts as well as large actual damages based on questionable damage theories or calculations. In addition, the plaintiff loses the in terrom effect that normally goes along with these types of damages in settlement negotiations. However, when a large verdict is awarded, there is usually no appeal, and it is extremely difficult to have the award vacated by a court. While a party may save litigation costs with the limited discovery that characterizes arbitration, that savings can be quickly offset by the cost of the fees and expenses associated with three arbitrators in a protracted arbitration. Further, the cost for initiating a lawsuit can also increase substantially. For example, the filing fee for a lawsuit in the Harris County District Court is only a few hundred dollars (regardless of the dollar amount of any claim or counterclaim), while the cost to initiate an arbitration administered by the American Arbitration Association for a claim valued at between $500,000 to $1,000,000 requires, subject to a limited refund right, a $6,000 initial case filing fee and an additional $2,500 case service fee if the case proceeds to its first hearing. So when it comes to arbitration, you should be careful for what you wish, because you may just get it.

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