Alternative Dispute Resolution (ADR)

What is Alternative Dispute Resolution, or ADR?

The term "alternative dispute resolution," or "ADR," is a generic phrase that can refer to any number of dispute resolution procedures outside of litigation in state or federal court. The most common among these are arbitration and mediation, though there are multiple different forms of even those two procedures. These procedures rose in popularity as a way of lessening the time and cost involved in resolving disputes, both personal and commercial. They can be a better option than litigation but the truth is that "alternative" does not always mean "better," and it is important to understand the pros and cons of each before you sign a contract agreeing to use arbitration or mediation or both.

Arbitration

Arbitration is a common form of alternative dispute resolution, and is essentially a smaller version of a trial, but it is conducted by an arbitrator or panel of arbitrators that the parties select. Discovery is usually limited in arbitration, which means that it is often possible to get to a decision in a shorter amount of time, which usually means less money spent on lawyers in getting to a resolution. There are some arbitration forums that are created by law, but for the most part the only way you can be compelled to arbitrate a dispute is if you have signed a contract with an arbitration provision, or a clause that states that the parties agree to resolve all disputes by binding arbitration.Here is what you need to know to decide if an arbitration provision is the right choice for your business:

The arbitrators are paid hourly by the parties, which means an additional out-of-pocket expense (generally ranging from $300 to $800 an hour for all time the arbitrator spends reviewing the parties' submissions, resolving discovery disputes, and actually adjudicating the dispute).
The filing fee for arbitration is more expensive than the filing fee in state or federal court.
The decision of the arbitrator is much more difficult to challenge on appeal, and an arbitrator's decisions on procedural, pretrial, or discovery matters is virtually unreviewable.
That decision is generally as enforceable as a judgment or a verdict in court, and the prevailing party can take advantage of all of the available collections procedures to enforce it once it is final and confirmed (property liens, attachments, garnishment, etc.).

What all of this means is that, in general, arbitration provisions favor the larger, better financed parties. It also means that if your claim or defense depends on getting information from the other side in discovery, you may find yourself limited in arbitration, where the desire to streamline dispute resolution often leads to limited discovery rights. In contrast, if you are in a lawsuit in state or federal court, the discovery rules allow the parties substantial latitude in finding out the information they need to know to put on their evidence and tell their side of the story.

Mediation

Mediation is another common form of alternative dispute resolution. Unlike arbitration, mediation does not involve anyone making a determination about who is right or who is wrong. Instead, the point of this exercise is to use a neutral (a mediator) to sit with the parties and attempt to facilitate an agreed resolution or settlement. Like arbitration, the mediator is paid hourly by the parties, but in general mediation takes less of the neutral's time than arbitration, therefore the costs are contained to an extent. Usually by agreement of the parties to mediation, and always by Massachusetts law, what is said in mediation is confidential and cannot be used by either party in a subsequent trial or arbitration if the parties do not reach a settlement in mediation. This is important because it allows the parties to speak candidly in furtherance of settlement; it also makes mediation a lower risk.

Here is what you need to know to decide if a mediation provision is the right choice for your business:

Even if you agree to participate in mediation, that does not mean you need to agree to a settlement at mediation- the process is intended to be non-binding.
The obligation to participate in mediation can delay your right to go to court, which can be a problem if you have an immediate or pressing need, like a need to seek a preliminary injunction from the court.
There may be situations where it is to your benefit not to have a full and frank discussion with the other side before seeking relief in court, which can be hard to predict when deciding whether to agree to a mediation provision.
Like arbitration, there is a higher out of pocket cost to submit to mediation than the regular filing fee in state or federal court, which means this, too, can tend to favor the better-financed party.
Some disputes are hard to settle before the parties have had a chance to take discovery and understand each other's view of the facts, which means in many cases you will spend the time and the money to go to mediation but still have to engage in active litigation, at least for some amount of time, before being able to meaningfully discuss settlement.

It is important to remember that, with our without an alternative dispute resolution provision in a contract, if you get into a dispute and both parties want to try to resolve it, you can always agree to go to mediation. If someone has already filed a lawsuit, many courts have free or low-cost mediators available to the parties, or you can jointly hire a private mediator at any time. If you have agreed to it in the contract, however, you are obligated to make a good faith effort to mediate, no matter what the circumstances.

Beware of Boilerplate ADR Provisions in Contracts

Most business contracts you can download from the internet contain some kind of alternative dispute resolution provision, usually arbitration or mediation or both. These are often incomplete, inconsistent and/or ambiguous, and are never tailored to the unique needs of your business and specifics of the agreement you are trying to document. These may look like meaningless legalese to you, but those provisions can affect your substantive rights in the event of a dispute, sometimes catastrophically so. Best practice is to have a business lawyer draft an agreement that is tailored to your needs. If that is not feasible for whatever reason, you should at least have a lawyer review the provisions and discuss the pros and cons with you.

How slnlaw Can Help

Getting a business lawyer involved with your contracts does not mean that you need to spend a fortune. We understand that your decisions about a business relationship are only in part legal decisions, and that you need to make an assessment of what risk you can tolerate in your business. Our first priority is to help you make informed decisions, and we can do as much or as little as you need us to with respect to your business contracts.

Schedule a Free Consultation