When it comes to dispute resolution, there are many variations on a theme. Processes can be tailored to meet the specific needs and circumstances of the parties. Each process can be unique to the specific agreement between the parties. What happens if the parties do not precisely define the intended process? Can the parties be forced to participate in and pay for a dispute resolution process for which they did not bargain? The answer may depend upon the process involved. We examine the answer to those questions in this month’s column by looking at two recent cases.

Mediation & the Jeld-Wen Case

Courts frequently refer parties to mediation. In mediation, the parties are able to control the process and make the decisions. Mediation has a range of advantages that would make a party prefer it to litigation. But can a court force parties to pay for private mediation? This was the question taken up by California’s Fourth Appellate District Court in the case of Jeld-Wen v. The Superior Court of San Diego County (2006), 146 Cal.App.4th 536.

Jeld-Wen was a small fish amongst a school of piranhas. The underlying case involved more than $500,000 in construction disputes. The amount in dispute for Jeld-Wen was reported as $2,799. The trial court prepared a case management order that, among other things, appointed an individual as the “Mediator and/or Mandatory Settlement Conference Judge.” The mediator was to mediate and conduct settlement conferences for a maximum of 100 hours at a billable rate of $500. All parties were ordered to appear at the mediation and pay a pro rata share of the mediator’s fee.

Jeld-Wen objected to the order, but the trial court overruled the objection. Jeld-Wen then indicated that it would not attend the mediation but would invite further informal settlement discussions. When Jeld- Wen did not show up for the mediation, other parties in the dispute asked the trial court to order sanctions against Jeld-Wen and compel it to attend the next mediation. The trial court granted the request and ordered sanctions. Jeld-Wen then asked the appeals court to issue an order to the trial court to set aside the sanctions order.

The appeals court began by examining the hallmarks of mediation. Mediation is a process where a neutral third party facilitates communication between the parties to assist them in reaching a mutually acceptable agreement. The role of the mediator is to help the parties voluntarily reach their own agreement, not to impose a decision. The very essence of mediation is “the concept that the parties are in control of resolving their own dispute.”

The Court proceeded to review various points of case law and statutory schemes that emphasized the voluntary nature of mediation. In particular, the Court examined the case of Lu v. Superior Court (1997), 55 Cal.App.4th 1264. In Lu, the court appointed a referee to act as a mediator. The court’s order provided that all mediation sessions were deemed to be Mandatory Settlement Conferences and required the parties to pay a pro rata share of the mediation expenses. The appeals court distinguished Lu from the case at hand. There was statutory authority to appoint the referee in Lu, unlike the case at hand. More important, under Lu, the parties were ordered to attend settlement conferences conducted by a referee. Since the provisions for a referee also required the parties to pay a pro-rata share, the court avoided the issue of how the “mediator” would be compensated. But Jeld-Wen was ordered to attend and pay for private mediation.

The appeals court issued an order directing the trial court to set aside the sanctions and the order to compel attendance. The court found that “while trial courts may try to cajole the parties in complex actions into stipulating to private mediation, they cannot be forced or coerced over the threat of sanctions into attending and paying for private mediation as this is antithetical to the entire concept of mediation.”

It is important to remember that this decision was based upon California law and rules. Courts elsewhere could reach a different decision.

How could the parties have “forced” Jeld-Wen into mediation? Pre-planning up front could have headed off this dispute. This case highlights the importance of appropriate contract language. It does not appear from the case that Jeld-Wen had a direct contract with the developer. If the developer had placed language in its contract with the contractor making every subcontractor and supplier subject to the terms of the underlying contract, this case might have been decided differently.

It also appears that Jeld-Wen’s cost to attend mediation was greater than the amount it had at risk in litigation. If you do not want an “empty chair” at the mediation, the process for mediation must be better for all parties than the alternative. Again, proper planning up front is the key.

Arbitration & the Adonix Case

When faced with the question of requiring parties to arbitrate claims, courts have viewed “forced” arbitration a little differently. The U.S. District Court for the Southern District of Ohio recently examined the question of compelling the parties to arbitration even though their contract did not specifically use the word “arbitration.” The case of Health Care Logistics, Inc. v. Adonix Transcomm, Inc, 2007 U.S. Dist. LEXIS 48294, arose out of a dispute over contracts for computer software and software services.

The agreement between the parties contained the following provision:

We agree that in the event of any dispute between Adonix and HCL, there should be a dispute resolution procedure that begins at the operations level and then proceeds to the manager or supervisory level and lastly to the respective presidents of the two companies. In the event they cannot come to a satisfactory conclusion with [*3] respect to any particular dispute, then the issue will be given to a third party for resolution. If the parties cannot agree upon a third party decision-maker, they will each appoint one person and the two people so appointed shall appoint a third person and the majority of the three people will be entitled to decide the dispute. The decision of the third party decision-maker will be binding upon both HCL and Adonix. During this process, the contractual obligations of the parties will be adhered to in every respect and the cost to remedy this dispute relative to the participation of any third party decision-maker will be shared equally.

Adonix thought this agreement was enforceable, but HCL argued that it was not an enforceable arbitration provision for three reasons:

  • The agreement did not use the word “arbitration”;
  • Any dispute resolution is permissive, not mandatory, because the agreement uses the word “should” instead of “shall”; and
  • The dispute resolution process contemplated by the agreement was only for disputes arising during the life of the contract because “the parties agreed that ‘during this process, the contractual obligations of the parties will be adhered to in every respect.’”

To resolve this dispute, the court first turned to the Federal Arbitration Act. “The FAA establishes that, as a matter of federal law, ‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.’” Thus, any interpretation of the contract language must necessarily take into account the strong policy in favor of arbitration.

While federal law supports a strong policy in favor of arbitration, the determination of enforceability, as with other contract provisions, is determined under state law. The parties in this case had agreed to follow Pennsylvania law.

HCL cited the case of Emmaus Municipal Authority v. Eltz, 416 Pa. 123 (1964). The case involved a breach of contract claim for a construction project. The agreement provided, among other terms, that the “contractor shall not cause delay of the construction during any arbitration proceeding.” The agreement also provided that “a demand for arbitration shall be filed in no case later than the time of final payment.” The court in Emmaus found that the combination of the two provisions evidenced that “the arbitration procedure was not intended to survive the life of the contract but only to aid in the administration of the contract during its life.”

The District Court said the case before it was not much like Emmaus. The agreement between HCL and Adonix covered “any dispute” between the parties. The agreement in Emmaus did not contain this broad language. The District Court found the language in the agreement was broad enough to cover “any dispute about breach of the contract, including breach for one party’s alleged failure to continue performance.” Thus, the arbitration provision survived unilateral termination of the contract.

The Court turned next to HCL’s argument that the provision was permissive. The Court again looked to the plain language of the agreement, which provided that a disputed issue “will be given to a third party for resolution.” The use of the word “will” in the provision would be rendered meaningless if the word “should” in the first sentence made the process permissive. The Court further found that, given the detail in which the procedure was set out, the parties could not have intended the process to be permissive.

Finally, the Court turned to examine HCL’s first argument: the agreement never included the word “arbitration.” The Court summarily dismissed this argument: “The failure to specifically call the process ‘arbitration’ is of no moment.”

Both of these cases serve as examples of why, long before any disputes arise, close attention must be paid to what the contract says about the dispute resolution processes. The dispute resolution process should not be an afterthought. It should be addressed and defined as specifically as possible in the agreement so the parties can be confident they will get the dispute resolution process for which they bargained.