Alternative Dispute Resolution (ADR) is what you can do instead of (or before) going to court to settle disputes. ADR has gained widespread acceptance in the U.S. Some courts now require a form of “compulsory” mediation (settlement conference) before allowing the case to proceed. ADR can be used to avoid having to go to court altogether. Here I will talk about what business owners need to know about ADR: (1) its benefits, (2) disadvantages, and (3) what types of ADR are out there.
Why use ADR instead of litigation?
To save time. With ADR you can resolve disputes in a few months or quicker. In fact, your ADR contract clause can state that the arbitrator must agree to resolve the case within 60-90 days before accepting the case. A court case, on the other hand, can take a year or more.
To save money. ADR is usually cheaper.
To have more control over the process. Parties to an ADR can: a) pick the process to be used – mediation, neutral evaluation, arbitration, etc.; b) pick the neutral with specific expertise in the subject matter of the controversy; c) come up with creative solutions that would not have been available at trial.
Confidentiality. ADR proceedings can be made confidential. Court case is public record and anyone can go to the hearing.
States’ policies favor it. States are interested in reducing the court caseloads, so there are policies designed to make ADR easier.
Less stressful. ADR is less formal, less adversarial and hostile.
Limited discovery. You can’t find out as much about the other party’s evidence.
Limited court protections. ADR neutrals do not have the authority to issue subpoenas without the court’s approval. ADR decision can be binding and final, with no opportunity for appellate review.
Additional time and money. With non-binding forms of ADR, you will still have to go to court if you don’t agree with the outcome of the non-binding ADR (such as mediation, neutral evaluation, or non-binding arbitration).
Statues of limitation (SoL) running out. To get a court to accept the case, it must be filed within a certain time period after the incident occurred. For example, in California, you have four years to bring a lawsuit for a breach of a written contract. If you initiate a non-binding ADR, make sure the SoL does not run out during the proceedings.
There are many different varieties and flavors of ADR these days. You don’t need to know all of them. You’ll be able to figure them out if you know the basic differences between the following classic ADR procedures: Arbitration, Mediation and Neutral Evaluation.
It’s where the sides want another person to resolve their dispute without too many formalities or too much time. Arbitration can be either binding or non-binding. A binding arbitration is when the arbitrator’s decision is final and cannot be appealed or taken to court. Arbitration can also be non-appearance-based, which is very convenient if the parties are located in different states or countries. In a non-appearance-based arbitration the parties can resolve disputes remotely by submitting evidence via email, having a hearing over telephone, Skype. The parties do not have to actually go to the hearing.
The American Arbitration Association (AAA) is one of the most established non-profit organizations that administers arbitration proceedings for those who wish to resolve conflicts out of court. They have a great ADR clause generator which can quickly provide smth like this for your contracts:
“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
The place of arbitration shall be San Diego, CA. The arbitration shall be governed by the laws of the State of California. The arbitration will be based on the submission of documents and there shall be no in-person or oral hearing. The award shall be made within 3 months of the filing of the notice of intention to arbitrate (demand), and the arbitrator(s) shall agree to comply with this schedule before accepting appointment. However, this time limit may be extended by the arbitrator for good cause shown, or by mutual agreement of the parties. The arbitrator(s) shall not award consequential damages in any arbitration initiated under this section. The prevailing party shall be entitled to an award of reasonable attorney fees. The award of the arbitrators shall be accompanied by a reasoned opinion. Except as may be required by law, neither a party nor an arbitrator may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties. The parties agree that failure or refusal of a party to pay its required share of the deposits for arbitrator compensation or administrative charges shall constitute a waiver by that party to present evidence or cross-examine witness. In such event, the other party shall be required to present evidence and legal argument as the arbitrator(s) may require for the making of an award. Such waiver shall not allow for a default judgment against the non-paying party in the absence of evidence presented as provided for above.”
Be careful inserting arbitration clauses into employment agreements and consumer contracts. Those need to be specifically tailored.
Mediation can be effective where the parties want to preserve their relationship (e.g. partners in a business) and are willing to compromise. In a mediation, a third party neutral helps parties achieve a mutual agreement to settle their dispute. The parties, however, are not bound by anything the mediator tells them. If parties cannot come to an agreement, the mediation fails, and the case has to be taken to court (unless parties agree to another form of ADR).
This is useful for cases that hinge on very technical issues that require an expert opinion. In a neutral evaluation the parties submit their evidence to an expert evaluator who then writes a professional opinion. That opinion is not binding but the expert findings and arguments can, nevertheless be persuasive “reality check” for parties.