ADR Enforcement - Module 5 of 5

Module 5: ADR Enforcement

ADR Contract Clauses

Alternative Dispute Resolution clauses are included in contracts to specify how the parties will reach a resolution should a dispute arise. While arbitration is the most common type of ADR clause, mediation, settlement conferences and facilitation may also be mandated. The points of these clauses are to facilitate speedy management of conflicts and preserve the contractual relationship without costly and time-consuming litigation. Since it is impossible to foresee all possible disagreements that could develop in a contract, an ADR clause provides a method for proactively managing future problems. 

For ADR clauses to be enforceable, they must be inclusive of the necessary information. Whether the clause mandates some form of self-guided negotiation, mediation or arbitration, it needs to clearly state certain terms. For example, an ADR clause may require notification that a dispute has arisen. It is possible that one party believes there is a conflict, while the other party sees no problem at all, which is why these clauses often require the dissatisfied party to provide timely notification about their concerns and intention to seek ADR. The clause should also identify which method of ADR will be used and may even specify that an ADR association or organization is used for the proceedings. This may, for example, be applicable to contracts involving complex business issues, where an ADR expert with subject matter expertise is appropriate.

Clauses also commonly establish whether participants will be bound by the outcome of the ADR proceeding. Arbitration clauses typically include an agreement to be bound in to avoid litigation down the line. While mediation clauses cannot force participants to reach an agreement, they can mandate that the parties participate in good faith and be bound by any consensual resolution reached through mediation.

ADR clauses may be single-layered or multi-layered. A single-layered clause only involves one type of ADR. For example, it may state that the parties must use arbitration to resolve any dispute and be bound by the resolution. There is no other option or alternative type of ADR available to the parties under a single-layered clause. A multi-layered clause includes at least two types of ADR, starting with the most informal method and elevating the dispute to more formal options as necessary. For example, a multi-level ADR clause may mandate that the parties participate in a self-guided settlement conference first. If no resolution is met within 14 days, the parties may be required to move to a mediation. If mediation is unsuccessful, the parties may be mandated to participate in facilitation and then take part in a second mediation. If the second mediation is still unsuccessful within a specified time frame, the parties may have to submit to arbitration, with a mandate to be bound by the arbitration resolution. This type of ADR clause is useful because it promotes resolution at every step of the process but puts a speedy alternative in place just in case.

A sample Mediation-Arbitration multi-layer clause as provided by the Alternative Dispute Resolution Committee of the New York City Bar Association reads:[1]

If a dispute arises from or relates to this contract or the alleged breach thereof, and if the dispute cannot be settled through negotiations within 30 days, the parties agree to endeavor first to settle the dispute by mediation administered by [a mediation organization] under its Commercial Mediation Procedures before resorting to arbitration.

Any dispute arising from or relating to this contract or alleged breach thereof shall be resolved by arbitration administered by [an arbitration organization] in accordance with its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. If all parties to the dispute agree, a mediator involved in the parties’ mediation may be asked to serve as the arbitrator.

ADR Clause Disputes

Even when a contract contains an ADR clause, conflicts often arise over its enforceability ot interpretation of its terms. For example, the parties may disagree about which types of conflicts must be handled through ADR. This typically arises when the clause is crafted to address only specified types of disputes. Disagreements may also center on the type of ADR required under a multi-layered clause.  One party may assert that mediation is an option, while another party may believe that immediate arbitration is required.

When conflicts over ADR clauses arise, one party may ask a court to compel participation by filing a motion for ADR enforcement. This motion must include a statement of facts, explaining the details of an agreement between parties, as well as the details of the ADR clause. It may also discuss the details of a dispute and the assertions of each party. The legal argument includes the legal reasons why the ADR clause should be binding and enforceable. It may include arguments that show that the clause is clear, unambiguous and narrowly tailored, and can reference the Federal Arbitration Act, asking the court to compel arbitration. Upon considering the motion, the court may decide to uphold the ADR clause or find it unenforceable, clearing the way for litigation.  

Location and identification are common areas for ADR clause disputes. If the clause does not specify a forum in which ADR will take place or how mediators and arbitrators are to be chosen, parties may disagree about these terms. An example of this type of dispute arose in A-1 Premium Acceptance, Inc. v. Hunter, where the Supreme Court of Missouri affirmed a decision to deny a defendant’s motion to compel arbitration.[2] The arbitration agreement had stated that “any claim or dispute related to this agreement…shall be resolved by binding arbitration by the National Arbitration Forum under the Code of Procedure then in effect.” However, the NAF had stopped administering consumer arbitration in 2009, years before the dispute arose. Although many courts have enforced recent arbitration agreements that specified the use of NAF, the Missouri court chose to find the clause unenforceable. The justices ruled that the ADR clause demonstrated a mutual intention to arbitrate the dispute solely before the NAF.

Other courts have declined to enforce ADR clauses that failed to specify a forum. This was the case in Flanzman v. Jenny Craig, which stemmed from a termination of employment.[3] The plaintiff filed an age discrimination action and the defendant countered with a motion to compel arbitration.  The New Jersey Appellate Court ruled in favor of the plaintiff, asserting that since the arbitration clause did not specify a forum for arbitration, such as the American Arbitration Association, the clause lacked a meeting of the minds, and so no valid agreement to arbitrate existed. The judge stated that parties to an arbitration clause “must be able to understand– from clear and unambiguous language– both the rights that have been waived and the rights that have taken their place… Selecting an arbitral institution informs the parties, at a minimum, about that institution’s rules and procedures.  Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication.”

Lack of Mutual Consent

Disagreements about mutual consent are common among ADR clause disputes. Mutual consent means that all parties agree to all terms and conditions of the contract. Furthermore, the parties had a “meeting of the minds” so that they all have a mutual understanding about the sense and meaning of those terms.[4] The court in Bellman v. i3Carbon examined whether a meeting of the minds occurred when the arbitration agreement was part of an unsigned operating agreement. The defendants argued that the plaintiff’s receipt of the operating agreement amounted to acceptance and agreement of the arbitration agreement. However, the Court found no proof that a “meeting of the minds” occurred because the plaintiffs had never signed the operating agreement or given any indication that they understood the arbitration agreement to be a material term of the business relationship.[5]

Most ADR clauses allow either party to compel the alternative method rather than requiring the consent of both parties. The Supreme Court of Alabama ruled this to be the default assumption of ADR clauses in Hanover Insurance Co. v. Kiva Lodge Condominiums.[6] The parties had signed an agreement that included a standard arbitration clause. However, the standard language of the clause was altered to replace all occurrences of the word “shall” with “may at the election of either party.” When a dispute arose under the contract, one party opted to file a lawsuit, prompting the other party to file a motion to compel arbitration. The other party’s opposition to the motion asserted that removal of the word “shall” changed the arbitration requirement from mandatory to one that required mutual consent of both parties. The court granted the motion to compel based on a determination that the arbitration clause “indicates that either party has the option to pursue resolution of a dispute in arbitration. The paragraphs that constitute the arbitration provision say nothing about mutual consent being required to invoke arbitration.” This court decision reflects the general understanding that an ADR clause does not require mutual consent unless it is specifically stated within the clause.

Capacity to Consent to ADR Provisions

In addition to the language and terms, ADR clause disputes can also center on the circumstances of the agreement. As with any legally binding contract, the parties to an ADR agreement must have the legal capacity to contract, meaning the parties have the mental ability to understand the terms of the agreement and what actions they are agreeing to perform. Case law and state statutes generally mandate that minors, people with mental illnesses and those under the influence of drugs or alcohol may lack the necessary capacity to enter into a contractual agreement.

In Oak Crest Manor Nursing Home, LLC v. Barba, the Texas court examined the mental capacity of a party to enter into an ADR clause agreement. The case stemmed from a dispute between a nursing home and a patient with mental disorders.[7]  The nursing home filed a motion to compel arbitration based on its admission agreement. The plaintiff countered with the contention that he lacked capacity to enter into an enforceable contract due to his psychological and mental disorders. The Texas appeals court ultimately ruled in favor of the plaintiff, stating that the record contained enough evidence to show that the plaintiff did not have the capacity to contract when he signed the admissions agreement, making the included arbitration clause void.

Parties to an ADR clause must also enter into the agreement freely, without duress, for the clause to be enforceable. Black’s Law Dictionary defines duress as "any unlawful threat or coercion used... to induce another to act in a manner he otherwise would not."[8]

In the Connecticut case, Ironson v. Ameriprise Financial Services, the federal district court upheld the arbitration clause of a franchise agreement against claims of economic duress.[9] Under Connecticut law, proving economic duress requires proof that (1) a wrongful act or threat occurred; (2) that such act or threat left the victim with no reasonable alternative; (3) that the victim acceded to this threat; and (4) that the resulting transaction was unfair to the victim. The franchisee alleged that he agreed to the arbitration clause out of fear that if he did not sign the agreement, he would ultimately lose his business. The court ruled that economic need for the agreement cannot be the sole basis for a claim of economic duress and therefore upheld the arbitration clause as valid.

Enforcement of ADR Outcomes  

When a properly conceived ADR process has completed, rendering a decision or settlement, that’s not always the end of the story. One of the parties may refuse to abide by the resolution. This may force the other party to bring an action to enforce the ADR result. Of course, the other party may argue that the agreement is unenforceable due to a defect such as those we’ve discussed. Findings of duress, non-consent or incapacity can cause the court to invalidate the ADR outcome.  Evidence of fraudulent behavior or misconduct by the neutral evaluator may also constitute grounds for vacating a resolution.[10]  

The process of seeking court enforcement of an arbitration award varies by jurisdiction, but typically starts with one party’s initiation of a legal action. The party must first request that the court recognize and approve the award, because most jurisdictions require registration of the award before they will confirm it. The court has several options when considering these requests, including (1) confirmation of the award; (2) vacating the award; (3) modifying the award; or (4) remanding the case back to the arbitrator for a rehearing.  Once a judge confirms the order, it is reduced to writing and signed by the judge. At that point, it “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered.”[11] This means that it has the same weight as a court-ordered judgement, allowing the court to take necessary enforcement measures.  

When a dispute over the execution of an arbitration award arises, a party may file a motion for enforcement or for execution. While states may establish their own time limits for filing these motions in state actions, the Federal Arbitration Act mandates that a motion be filed within one year of the award. [12] Once a motion is filed, the court will consider the motion and the opposing party’s answer. They may require a hearing where both sides present their cases. Upon consideration of the arguments, the court may order various forms of relief, including wage garnishment or asset seizure. For awards requiring specific action by one of the parties, the court may hand down injunctive or declaratory relief, mandating that a party act or not act, and back up the order with threatened sanctions. [13]

For an arbitration hearing, disputes over outcomes may arise when one party does not want to be bound by the decision of the arbitrator. In International Alliance of Theatrical Stage Employees v. Laughon, one party sought vacation of an arbitration award because of the arbitrator’s failure to disclose his previous role as a neutral evaluator in a case involving the opposing party. The court agreed, finding that “the arbitrator's nondisclosure of this required matter was grounds for vacation.”[14]

While an arbitration conclusion does not require the consent of all parties, other types of ADR, like mediation and settlement agreements, do typically require consensus from the parties. Therefore, accusations of duress or non-consent are much more common when parties seek to vacate the outcomes of these types of ADR cases. Olam vs. Congress Mortgage involved a dispute over a settlement contract, which was drafted after a mediation session.[15] During the session, the parties agreed on the details of settlement and reduced the agreement to a memorandum of understanding, which was signed by all parties. The memorandum stated that it was binding until a formal settlement contract could be executed. When the formal settlement contract was completed, the plaintiff refused to sign, claiming that she was subjected to “undue influence” when signing the memorandum. The court, finding no evidence of undue influence placed on the plaintiff by her attorney, opposing counsel, or the mediator, found in favor of the defendants and compelled the plaintiff to abide by the terms of the memorandum of understanding.  

When accusations of duress arise, the court may find it necessary to solicit testimony from the mediator to get a complete view of what occurred during the mediation process. These decisions can prove highly controversial, particularly due to the preference to keep the details of mediation confidential. While some courts have minor exceptions to mediation confidentiality, most jurisdictions have continuously upheld the confidentiality of the mediation process by refusing to allow testimony from the mediator.[16]

Thank you for participating in this LawShelf course on Alternative Dispute Resolution. We hope that this course has given you a firm groundwork in the field of ADR and we hope you’ll take advantage of our other course offerings that build in this fundamental course. Best of luck and please let is know if you have any questions or feedback.