What You Need to Know About Alternative Dispute Resolution (ADR)

Our country’s founders knew that a fair, accessible system for resolving disputes was critical to the dream of freedom, equality and prosperity for all. They devised our federal court system and then our state governments did the same to adjudicate claims arising within an individual state. As a result, people and organizations that believe they have been wronged may bring their case before a court of law. The facts are presented and reviewed, arguments are made by each party and a decision is rendered.

To be sure, our court systems have served us well, but they’re far from perfect. Court rules and procedures, designed to be fair, result in long delays, substantial cost, unexpected rulings and lack of finality (i.e., nearly endless rights of appeal). In addition, our court system is public, adversarial and requires representation (i.e., hiring a lawyer, which is expensive). Given this long list of undesirables, many people are:

• Taking proactive steps to avoid, minimize and/or settle disputes before they result in litigation.
• Choosing arbitration as an alternative (to the court system) way to adjudicate disputes that cannot be settled cooperatively by the disputing parties.

A recent study conducted by the American Arbitration Association (AAA) interviewed the chief in-house counsel of 254 large public and private U.S. companies. Based on the way that each company handles disputes, AAA sorted them into three groups: “Dispute-Wise,” “Moderate Dispute-Wise” and “Least Dispute-Wise”². It then analyzed the profitability and value of each business and found that the “Dispute-Wise” companies were much more profitable and valuable than the others – 28% more than the “Moderate Dispute-Wise” companies and 64% more than the “Least Dispute-Wise.”

Dispute Avoidance: Studies show that company culture has a substantial impact on dispute frequency and cost. Cultures that are competitive, aggressive, vindictive and prideful tend to have the most disputes and highest cost per dispute. Recognize this, and then develop a culture that strives to avoid disputes and, when grievances arise, minimize the expense. Also, by tracking how and where disputes arise, root causes may be identified. Are disputes arising regularly with a particular product or service? A particular contract? Employee? Division? When a pattern is discovered, action may be taken to eradicate the problem at its roots.

Early Dispute Detection and Resolution: A key to reducing dispute- and litigation-related expense is to develop and maintain a company-wide culture in which all employees seek to identify “hot spots” and deal with them before they’re ablaze. The first step is for everyone to understand that early detection is important. Next, develop a culture that supports and rewards the voicing of problems at an early stage and, when disputes arise, promotes open expression and dialogue. Conflicts can best be resolved by demonstrating a genuine interest in understanding and addressing the issue while resolving the problem in a manner that maintains healthy relationships and minimizes relationship damage.

Alternatives to the Court System: Disputes – even hardened disputes in which the parties are unable to reach a resolution – don’t have to be settled in court. There is an alternative, generally referred to as alternative dispute resolution (ADR). Here is a definition:

The use of any form of mediation or arbitration as a substitute for the public judicial or administrative process available to resolve a dispute (i.e., the judicial system).

Mediation: Mediation, also called facilitated dispute resolution, is a dispute resolution strategy or mechanism in which a neutral person attempts to assist the disputants in reaching a resolution. There are virtually no rules, so the parties and the mediator are free to conduct the mediation wherever and however they see fit, and include whatever information they decide is merited, fair, necessary or appropriate. The disputing parties are not required to have legal representation, and most do not. Whether an agreement results or not, and the terms of the agreement, if any, are solely determined by the parties themselves. In other words, settlement is completely voluntary. The mediator cannot force a settlement on the parties. The mediator simply assists the parties in their attempt to settle their dispute.

The disputing parties may be individuals, businesses or virtually any type of entity or organization.

Use of mediation is widespread: An extensive survey of 1,000 large companies in the United States¹ found that 87% had used mediation in the past three years. Even more compelling is that more than 80% said that they were likely to use mediation now and in the future. Obviously, they wouldn’t do so if they did not see the benefit.

Selecting a Mediator: Essential to any mediation is for the disputing parties to view the mediator as both qualified and impartial. For this reason, the parties must agree on selection of the mediator. There are a variety of accepted means for doing so. To avoid a dispute about the manner in which a mediator is selected, it makes sense to stipulate such in any mediation clause used in a document (or, as an alternative, stipulate that a mediator will be selected in accordance with the American Arbitration Association).

Finding a Qualified Mediator: The disputing parties have the freedom to choose the mediator, so long as they agree on the selection. The mediator can be literally anybody, and does not have to have training in mediation. It could be a respected person in your industry, for example. Most, however, choose a person trained and experienced in mediation. Often, the person is also an attorney. Thousands of people from all sorts of disciplines – attorneys, accountants, engineers, architects, construction professionals and union leaders – are trained in mediation and actively conduct mediations in the United States. A recent study¹ found that 95% of corporations that have used mediation found their mediator to be “qualified.” Only 1% said that they felt their mediator was “not qualified.”

Mediation is highly effective: Studies and surveys regularly peg the success rate at more than 70%, with some as high as 90%. That is, disputing parties have at least a 70% chance of settling if they try mediation. These same surveys report extremely high rates of satisfaction.

If mediation is attempted but fails, either party can pursue justice in the state or federal legal system (unless the parties have waived their right to do so, such as by agreeing to arbitration as the means for settling disputes).

Arbitration: Arbitration is a settlement means that is more like a traditional court with a “judge” (in this case called an arbitrator) who reviews the facts, hears the arguments and then renders a judgment, but this alternative to the court system:

• is private (i.e., what is said, submitted and decided is not filed publicly as with the court system).
• is not bound by complex rules of evidence (which cause expense and delays in the court system), so the arbitrator has great freedom over what information to consider and how it may be submitted.
• does not require that the disputants be represented by legal counsel (lowers costs considerably).
• allows for the disputing parties to have a say in who is the “judge” (i.e., arbitrator), which virtually ensures that the judge will be able to understand the subject matter and be qualified to decide the case.
• tends to move much more swiftly (the court system is overloaded, but there are plenty of trained, experienced and qualified arbitrators).
• guarantees that the matter will be settled with finality in a matter of months (there are very limited conditions under which the losing party may appeal).

Again, arbitration – often referred to as binding arbitration – is truly a substitute for the court system. It offers many of the same benefits of mediation (listed above), but the parties DO cede control of the settlement to the arbitrator. Why cede control of the settlement terms? Because if the dispute goes to court, the parties will lose control of the settlement terms as well as suffer all of the other undesirables of the court system.

For an arbitration ruling to be binding, the parties must have agreed in advance to put resolution in the hands of an arbitrator. When this occurs, the arbitrator’s ruling is final. If either party tries to go to court with the same case, the opposition can produce the arbitrator’s ruling and the court will in most cases consider it the final resolution of the case. Also, if a party fails to adhere to the terms of the arbitrator’s ruling, the other may present this failure in a court of law and obtain judicial enforcement.

To be clear, either party to an arbitration may appeal the arbitrator’s decision in a court of law, but the court will rarely review the arbitrator’s findings of fact, rather simply review whether the arbitrator was guilty of malfeasance, exceeded the limits of his or her authority, or whether the award conflicts with prevailing law.

In conclusion, our court system is one of the best and fairest in the world, but it has many undesirables. Given that disputes are simply a part of business and can be very expensive and disruptive, smart business people and business owners are taking proactive measures to protect themselves. The first step is education. What you will find is that the state of the art of alternative dispute resolution (ADR) has developed considerably over the past 50 years. It is now well vetted, well organized, well established, and most who are using it give it rave reviews and plan to continue using it.

All indications are that ADR is here to stay and will continue to gain acceptance in the business and legal community.

We think you, the owner of a small private company, should adopt ADR for yourself and your organization. It’s not hard to do. For disputes not already governed by a mediation and/or arbitration clause, try getting your opponent to agree to try mediation and then, if a settlement cannot be reached, binding arbitration. For all future legal agreements that you execute or ask others to execute, place a clause that binds the parties to mediation and/or arbitration as an alternative to the courts. Get the language that’s right for you at www.adr.org and/or from your attorney.

¹ The Appropriate Resolution of Corporate Disputes: A Report on the Growing Use of ADR by U.S. Corporations. David B. Lopsky and Ronald L. Seeber

² Dispute-Wise Business Management: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts. An American Arbitration Association- Sponsored Research Study.