05/23/2014 02:42 pm ET Updated Jul 21, 2014

Your Mediation Settlement Agreement Does Not Have As Much Legal Force As an Arbitration Decision

In this article I will explain why your mediation settlement agreement, or any other contract for that matter, does not have as much legal force as an arbitration decision. First I will give a short explanation of what "arbitration" is and then I will explain why an "arbitration award" has greater legal force than a signed settlement agreement - which might result from a mediation - or any other contract.

"Arbitration" is a legally binding way of resolving disputes outside the court system - it is an alternative to litigation and one form of "alternative dispute resolution" (ADR). Arbitration is used regularly by large companies. Small companies and individuals are not as familiar with it yet in North America; Europeans are more familiar with it because of the government mandate for businesses selling online to provide online dispute resolution.

In arbitration, parties to a dispute refer their case to a mutually acceptable, neutral, third-party arbitrator, such as a Judge on eQuibbly, who reviews the evidence presented by the parties and hands down a decision that is legally binding and enforceable in a court of law. The arbitrator's decision is in the form of a written document called an "arbitration award", or simply an "award". Private entities are permitted by various laws in the US, Canada, UK, Australia, South Africa and many other countries to arbitrate disputes and hand down awards which stipulate what the arbitrator's decision is on the matter at issue and what the resolution will be.

It is this unique aspect of an award of being "enforceable in a court of law" that sets it apart from a settlement agreement or any other signed contract. The courts and the legislators in many countries realize the importance of being able to resolve disputes in private and in a less formal and less costly way than a public trial. They also realize the importance of being able to enforce the resulting award using the power of the courts - as one would have to do with any court judgment resulting from a trial - should the losing party fail to carry out the resolution imposed by the arbitrator. And, of course, the importance of being able to do this without necessitating a 're-litigation' of the matter, since that would defeat the purpose of opting for arbitration over litigation in the first place.

To authorize this, legislators in many countries have passed similar arbitration Acts (laws) that attach special force to a valid award. These laws are slightly different depending on what province or state or country has jurisdiction. However, most arbitration laws essentially declare that if an award was given by one or more arbitrators whose decision was not procured by corruption or fraud, where there is no evidence of a material bias or an undisclosed material conflict of interest, and the award meets certain technical requirements, such as naming the arbitrator and stating the place of arbitration, the courts will consider the award valid, final (cannot be appealed), and binding, and they will confirm it and convert it into a court judgment without anything further needed. This can be done on a simple summary motion to the court; no litigation or trial necessary. At that point it is just like any other court judgment handed down by a judge. Since there are codified arbitration laws and the courts are generally very much in favor of allowing arbitration, and often encourage it, it is almost impossible to over-turn or appeal a valid award.

This cannot be done with a settlement agreement or other signed contract. One cannot bring a summary motion in court to convert an agreement or contract into a court judgment. To obtain a judgment that would allow one of the parties to the contract to use the power of the court to enforce it, the issue would have to be litigated in front of a judge in the same manner as any other lawsuit. The purpose of arbitration is to bypass litigation, which is typically very costly, complicated, time-coming and inconvenient...not to mention a huge pain in the butt.

One of the other legal benefits of arbitration is that most countries either have a clause in their Arbitration Act stating that where there is a valid award originating in one legal "jurisdiction" (a state, or province, or country) being presented to a court for enforcement purposes in another jurisdiction, the court will accept it as if it were made in its own jurisdiction. Or the country (148 countries at last count, including the U.S., Canada, the U.K., Australia and South Africa) will likely be a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") which states that foreign arbitration awards can be confirmed and enforced in any other country that is a signatory to the New York Convention. This is something quite extraordinary since it is much more difficult, and sometimes impossible, to do this with a foreign court judgment. This is one reason large companies, often multi-national in nature, typically prefer arbitration over litigation.

* Any information provided is intended for information purposes only and is not, and should not be construed as, legal advice.