A New Jersey appeals court recently rejected a litigant’s attempt to overturn a binding arbitration award based on the fact that the homeowners’ association mistakenly believed it was engaged in mediation. The decision highlights the important differences between mediation and arbitration.

Differences Between Arbitration and Mediation

While mediation and arbitration can resolve a business disagreement short of litigation, the dispute resolution mechanisms are vastly different. During mediation, a neutral third party is called on to help negotiate a settlement. The job of the mediator is to help the parties find common ground rather than make any binding decision regarding the dispute.

During arbitration, a neutral third party is also appointed to resolve the business dispute. However, much like a judge, the arbitrator’s decision is generally final. The process is much more formal than mediation, but still offers many advantages over litigation, including a faster and less-costly resolution.

NJ Court Upholds Arbitration Award

The Appellate Division’s recent decision in Marano v. The Hills Highlands Master Association highlights that the substance of the dispute resolution mechanism is more important than the label. The case involves liability for a flood in the backyard of plaintiffs Richard and Eileen Marano. In March 2014, the plaintiffs’ attorney demanded that the Hills Highlands Master Association (Association) arbitrate their disputes related to the flooding in accordance with the Association’s bylaws.

The parties eventually agreed to retain the services of a retired judge to resolve the claims. The uncertainty arose when the retired New Jersey judge forwarded a form agreement to the parties that called for mediation. Although the parties executed the document, which was entitled "civil mediation agreement," plaintiffs' counsel wrote to the retired judge to point out that although the document "refer[red] to this proceeding as a `mediation,'" plaintiffs "believe[d] that it is properly an arbitration proceeding for which you will be asked to render an award." The Association's counsel never responded or questioned plaintiffs' assertion as to the nature of the retired judge's undertaking.

After the proceedings concluded, the retired judge rendered an arbitration award, which directed that the Association hire a contractor to make certain repairs and advance the funds for the work subject to reimbursement from numerous other affected lot owners who were not parties to any of the prior proceedings. In confirming the award, the motion judge concluded that although at times the parties' use of the words "arbitration" and "mediation" in the record had been inconsistent, there was no question but that the parties engaged in binding arbitration before the retired judge. The Association appealed, contending that the parties did not arbitrate but instead merely mediated their disputes.

The Appellate Division rejected the Association’s argument. “With the exception of the retired judge’s mistake in having the parties execute a document memorializing the terms of a ‘civil mediation,’ there is no doubt that the parties agreed to and in fact participated in binding arbitration,” the appeals court held. In reaching its decision, the panel highlighted that there was “no evidence in the record on appeal to suggest that the Association ever asserted that the parties were merely mediating and were not arbitrating their disputes.”

Given that many business contracts call for either mediation or arbitration, or both at different times, often sequentially, it is important for businesses to understand how they differ. Since the terms can sometimes be used interchangeably, it is also imperative to verify that the dispute mechanism you enter matches the one called for in the agreement.

If you have any questions or if you would like to discuss the matter further, please contact me, Joel Kreizman, at 201-806-3364.