LawStudy 7 | - Student
Sep 21, 2019 | #1
Contracts have been used for thousands of years to make formal agreements between two or more parties. Increasing, parties have been including Alternative Dispute Resolution (ADR) clauses in contracts in case any kind of dispute should arise between them. Alternative Dispute Resolution is any informal method of addressing and resolving disputes other than by litigation. Contract disputes between parties can eat up valuable time, energy and money for everyone involved. Including an ADR clause in a contract can help disputing parties work through their issues without involving the courts, usually for less money and in a shorter period of time. It also allows the disputing parties more direct participation, rather than being run by lawyers and judges. While ADR is oftentimes quite useful and a welcome alternative to litigation, it is not appropriate for every dispute. There are also several different types of ADR, so the parties need to ensure they include the type that is the best fit for their specific contract and situation. Different types of ADR typically include neutral evaluation, negotiation, mediation, conciliation and arbitration. The two most commonly used types of ADR are mediation and arbitration (Farlex).
Mediation is an informal alternative that involves the help of a go-between third party, called a mediator, whose job is to help the parties reach some sort of mutual agreement. They cannot force the parties to agree and are not permitted to decide the outcome of a dispute. Therefore, during mediation, both parties are able to retain a significant amount of control over the course of mediation and construct their own agreement. It is the mediator's job to determine the parties' interests and to help them explore practical, legal solutions that they can both agree on, though either party can end the negotiations at any time. Mediation is completely confidential and most parties will be asked to sign a confidentiality agreement so that the mediator cannot be called to testify about what was discussed during the mediation process. Agreements are usually non-binding, so the parties may still pursue litigation following the mediation process. When mediation is successful, it reduces the likelihood of additional court involvement and usually leaves both parties better satisfied than when they began. Mediation can be especially useful when the parties have a relationship that they would like to preserve, such as family members or business partners. It is not particularly helpful if one of the parties is not willing to compromise or if one of the parties has a significant advantage of power over the other party (California, 2017).
Arbitration has many similar aspects to mediation, but is more like a mini trial than anything else. Both parties agree on an arbitrator, who is often a professional in the parties' subject of dispute. If the parties cannot agree on a single arbitrator, each may choose one themselves and the two arbitrators would then select a third to complete the panel. An arbitrator acts similar to a mediator, though they are not a go-between facilitator. The parties are also be able to choose the applicable state law and venue themselves to ensure neutrality. Once the parties have agreed on and selected the above factors, the "trial" can begin. Both parties' arguments will be heard, with limited discovery and simplified rules of evidence. Arbitration hearings are quite longer than mediation hearings, usually lasting between a few days to a week long. The arbitrator(s) will deliberate and issue a written decision, or arbitral award. Unlike in mediation, neither party can withdraw from arbitration once it begins and, if the arbitration is binding, the decision is the final resolution and enforceable under both state and federal law. The decision is not public record, making it more private than going to court. Arbitration is mostly used to settle disputes in labor, construction and securities regulation (Staff, 2007). It is best for cases where the parties would like another person to decide the outcome of the dispute without the time or expense that litigation brings.
Conciliation is another type of ADR and has similar qualities to both arbitration and mediation with several distinct differences. In conciliation, both parties select an independent third party who will hear both sides of the dispute either privately or together. The conciliator then prepares a compromise that is fair to all of the parties. The decision is not binding or enforceable unless both parties agree to it. The main difference between conciliation and mediation is that the conciliator is the authority figure who is responsible for determining the best course of action and solution for the parties. They often propose the terms of settlement, not the parties. Conciliation is sometimes used preventively, as soon as a dispute emerges, to help prevent a serious conflict from developing. Mediation or arbitration is usually the next step if conciliation fails.
Whether assisted or unassisted, negotiation is the most basic means of settling differences and is commonly used by most people in everyday life. When an issue between two or more parties arises, negotiation is usually the first method of problem solving attempted. Negotiation is generally characterized as resolving the dispute by cooperation instead of competition. Parties may hire someone, such as an attorney, to help them negotiate for them, or the parties could deal directly with each other. There are no specific procedures to follow and can be done anywhere from a board room to a living room. Negotiations are not binding unless both parties agree and draw up a contract (Canada & Communications).
Neutral evaluation is the least formal type of ADR after negotiation. Each party presents their case to a neutral person called an evaluator, who is often an expert on the topic. The evaluator gives the parties his or her opinion on each party's strengths and weaknesses and about how the dispute could be resolved. The opinion is not binding, but simply suggests to the parties how a resolution could be reached. This type of ADR is most appropriate in cases where an expert opinion is needed to advise on technical issues (California).
As with most things, there are advantages and disadvantages to using an ADR clause in a contract. When an ADR clause is included in a contract, the parties are agreeing to surrender their rights to have their disputes heard by the courts. Many states have found that ADR clauses that waive a party's right to bring the suit to court are enforceable, though this is not the case in all situations. Because of this, both parties should always think about the pros and cons of including an ADR clause in the contract.
The biggest pro of including an ADR clause is the time and money that should be saved by both parties. Court costs, attorney fees and years of fighting in a courtroom is very daunting to most people, but can be negated with an ADR clause. This is especially helpful for clients who may not be able to afford the costs associated with full-blown litigation. Another pro is that if a dispute does arise, the parties are able to work with an impartial third party to help them through their dispute without putting any additional stress on the parties' relationship. ADR allows both parties to work together on a compromise, which generally leads to less escalation and ill will between the parties, which oftentimes prevents hostility towards each other. Both parties should be satisfied with the decision, since the compromise prevents there from being a winner and a loser. They may even be able to work together in the future.
ADR is especially helpful when the contract deals with complex or unfamiliar subject matter. The parties are able to choose a third party expert that has the expertise that is needed to help everyone understand the issues at hand and how to best handle them. Because of their knowledge about the topic, they are often able to make a better informed decision than if it was left up to the courts. The parties are also able to select all of the conditions of the ADR clause themselves. They can determine time limits, rules about evidence, and if any appeal rights are available, in addition to other procedures. Finally, the outcome of the dispute is kept confidential. This allows both parties to keep their contract and business private, a luxury that litigation does not allow (Simpson, 2012).
Of course, as with any alternative solution, there are drawbacks in addition to the positives. The first drawback is the cost of the ADR. While ADR can save both parties a tremendous amount of money by avoiding litigation, the process is not free. The parties must hire a third party representative, which can sometimes cost upwards of tens of thousands of dollars, if not more. Secondly, the outcome may not be what is expected. During ADR, many parties waive their rights to object to evidence that might not be admissible in a court of law. Questionable evidence and things such as hearsay may be included in ADR programs, however. When a decision is made by the courts, there are very strict rules and laws that have to be followed. This makes the court's ruling more uniform and predictable than the decision of the mediator/arbitrator. The lack of transparency may also make the proceedings more biased because it is not held in an open courtroom for all to see. More influential and/or wealthy clients may have the upper hand.
Another issue is that when a contract is drawn up, the parties may not know what type of ADR should be included if a problem does arise. Because of this, the wrong type of ADR might have been selected and the rules may not be the best fit for the parties. Both parties should research the different types of ADR so they can be better informed about which type to choose. If one of the parties does not agree with the outcome, they usually have a limited amount of recourse. ADR often prevents a new rehearing of the issues, even if one party feels they were treated unfairly. If one of the parties feels that they would be sacrificing too many rights and protections that they would receive via litigation then ADR would not be the appropriate method to use. Finally, if mediation or non-binding arbitration fail, the parties will ultimately have to go to court anyway. They will have then increased the amount of time and money they have spent on the issue (Simpson).
When two (or more) parties choose to enter into a contract together, an ADR clause is something that everyone should consider. No one ever thinks that they are actually going to use the ADR clause in a contract. Unfortunately, this is not always the case. Disputes and disagreements between parties happen more than people think they do. An ADR clause might help the parties avoid costly and time consuming litigation. However, the parties do need to consider what type of ADR should be used in their contract, if they determine that one is necessary. The type of ADR chosen should work well with the terms and structure of the contract. In addition to the types of ADR mentioned above, there are also countless other methods, many of which modify or combine other types of ADR. Despite the number of ADR types, all methods have the same goal in mind: for the parties to find the most effective way of resolving their dispute without resorting to litigation. While ADR does not always solve the problem, it should definitely be attempted before the parties take their dispute to court.
References
Simpson, B. (2012, July 25). Alternative dispute resolution clauses in contracts: Not just boilerplate.
Staff. (2007, August 6). Alternative dispute resolution.
California, J. C. of. (2017). ADR types & benefits.
Farlex (2003). The Free Dictionary.
Canada, G. of, & Communications, E.
Mediation is an informal alternative that involves the help of a go-between third party, called a mediator, whose job is to help the parties reach some sort of mutual agreement. They cannot force the parties to agree and are not permitted to decide the outcome of a dispute. Therefore, during mediation, both parties are able to retain a significant amount of control over the course of mediation and construct their own agreement. It is the mediator's job to determine the parties' interests and to help them explore practical, legal solutions that they can both agree on, though either party can end the negotiations at any time. Mediation is completely confidential and most parties will be asked to sign a confidentiality agreement so that the mediator cannot be called to testify about what was discussed during the mediation process. Agreements are usually non-binding, so the parties may still pursue litigation following the mediation process. When mediation is successful, it reduces the likelihood of additional court involvement and usually leaves both parties better satisfied than when they began. Mediation can be especially useful when the parties have a relationship that they would like to preserve, such as family members or business partners. It is not particularly helpful if one of the parties is not willing to compromise or if one of the parties has a significant advantage of power over the other party (California, 2017).Arbitration has many similar aspects to mediation, but is more like a mini trial than anything else. Both parties agree on an arbitrator, who is often a professional in the parties' subject of dispute. If the parties cannot agree on a single arbitrator, each may choose one themselves and the two arbitrators would then select a third to complete the panel. An arbitrator acts similar to a mediator, though they are not a go-between facilitator. The parties are also be able to choose the applicable state law and venue themselves to ensure neutrality. Once the parties have agreed on and selected the above factors, the "trial" can begin. Both parties' arguments will be heard, with limited discovery and simplified rules of evidence. Arbitration hearings are quite longer than mediation hearings, usually lasting between a few days to a week long. The arbitrator(s) will deliberate and issue a written decision, or arbitral award. Unlike in mediation, neither party can withdraw from arbitration once it begins and, if the arbitration is binding, the decision is the final resolution and enforceable under both state and federal law. The decision is not public record, making it more private than going to court. Arbitration is mostly used to settle disputes in labor, construction and securities regulation (Staff, 2007). It is best for cases where the parties would like another person to decide the outcome of the dispute without the time or expense that litigation brings.
Conciliation is another type of ADR and has similar qualities to both arbitration and mediation with several distinct differences. In conciliation, both parties select an independent third party who will hear both sides of the dispute either privately or together. The conciliator then prepares a compromise that is fair to all of the parties. The decision is not binding or enforceable unless both parties agree to it. The main difference between conciliation and mediation is that the conciliator is the authority figure who is responsible for determining the best course of action and solution for the parties. They often propose the terms of settlement, not the parties. Conciliation is sometimes used preventively, as soon as a dispute emerges, to help prevent a serious conflict from developing. Mediation or arbitration is usually the next step if conciliation fails.
Whether assisted or unassisted, negotiation is the most basic means of settling differences and is commonly used by most people in everyday life. When an issue between two or more parties arises, negotiation is usually the first method of problem solving attempted. Negotiation is generally characterized as resolving the dispute by cooperation instead of competition. Parties may hire someone, such as an attorney, to help them negotiate for them, or the parties could deal directly with each other. There are no specific procedures to follow and can be done anywhere from a board room to a living room. Negotiations are not binding unless both parties agree and draw up a contract (Canada & Communications).
Neutral evaluation is the least formal type of ADR after negotiation. Each party presents their case to a neutral person called an evaluator, who is often an expert on the topic. The evaluator gives the parties his or her opinion on each party's strengths and weaknesses and about how the dispute could be resolved. The opinion is not binding, but simply suggests to the parties how a resolution could be reached. This type of ADR is most appropriate in cases where an expert opinion is needed to advise on technical issues (California).
As with most things, there are advantages and disadvantages to using an ADR clause in a contract. When an ADR clause is included in a contract, the parties are agreeing to surrender their rights to have their disputes heard by the courts. Many states have found that ADR clauses that waive a party's right to bring the suit to court are enforceable, though this is not the case in all situations. Because of this, both parties should always think about the pros and cons of including an ADR clause in the contract.
The biggest pro of including an ADR clause is the time and money that should be saved by both parties. Court costs, attorney fees and years of fighting in a courtroom is very daunting to most people, but can be negated with an ADR clause. This is especially helpful for clients who may not be able to afford the costs associated with full-blown litigation. Another pro is that if a dispute does arise, the parties are able to work with an impartial third party to help them through their dispute without putting any additional stress on the parties' relationship. ADR allows both parties to work together on a compromise, which generally leads to less escalation and ill will between the parties, which oftentimes prevents hostility towards each other. Both parties should be satisfied with the decision, since the compromise prevents there from being a winner and a loser. They may even be able to work together in the future.
ADR is especially helpful when the contract deals with complex or unfamiliar subject matter. The parties are able to choose a third party expert that has the expertise that is needed to help everyone understand the issues at hand and how to best handle them. Because of their knowledge about the topic, they are often able to make a better informed decision than if it was left up to the courts. The parties are also able to select all of the conditions of the ADR clause themselves. They can determine time limits, rules about evidence, and if any appeal rights are available, in addition to other procedures. Finally, the outcome of the dispute is kept confidential. This allows both parties to keep their contract and business private, a luxury that litigation does not allow (Simpson, 2012).
Of course, as with any alternative solution, there are drawbacks in addition to the positives. The first drawback is the cost of the ADR. While ADR can save both parties a tremendous amount of money by avoiding litigation, the process is not free. The parties must hire a third party representative, which can sometimes cost upwards of tens of thousands of dollars, if not more. Secondly, the outcome may not be what is expected. During ADR, many parties waive their rights to object to evidence that might not be admissible in a court of law. Questionable evidence and things such as hearsay may be included in ADR programs, however. When a decision is made by the courts, there are very strict rules and laws that have to be followed. This makes the court's ruling more uniform and predictable than the decision of the mediator/arbitrator. The lack of transparency may also make the proceedings more biased because it is not held in an open courtroom for all to see. More influential and/or wealthy clients may have the upper hand.
Another issue is that when a contract is drawn up, the parties may not know what type of ADR should be included if a problem does arise. Because of this, the wrong type of ADR might have been selected and the rules may not be the best fit for the parties. Both parties should research the different types of ADR so they can be better informed about which type to choose. If one of the parties does not agree with the outcome, they usually have a limited amount of recourse. ADR often prevents a new rehearing of the issues, even if one party feels they were treated unfairly. If one of the parties feels that they would be sacrificing too many rights and protections that they would receive via litigation then ADR would not be the appropriate method to use. Finally, if mediation or non-binding arbitration fail, the parties will ultimately have to go to court anyway. They will have then increased the amount of time and money they have spent on the issue (Simpson).
When two (or more) parties choose to enter into a contract together, an ADR clause is something that everyone should consider. No one ever thinks that they are actually going to use the ADR clause in a contract. Unfortunately, this is not always the case. Disputes and disagreements between parties happen more than people think they do. An ADR clause might help the parties avoid costly and time consuming litigation. However, the parties do need to consider what type of ADR should be used in their contract, if they determine that one is necessary. The type of ADR chosen should work well with the terms and structure of the contract. In addition to the types of ADR mentioned above, there are also countless other methods, many of which modify or combine other types of ADR. Despite the number of ADR types, all methods have the same goal in mind: for the parties to find the most effective way of resolving their dispute without resorting to litigation. While ADR does not always solve the problem, it should definitely be attempted before the parties take their dispute to court.
References
Simpson, B. (2012, July 25). Alternative dispute resolution clauses in contracts: Not just boilerplate.
Staff. (2007, August 6). Alternative dispute resolution.
California, J. C. of. (2017). ADR types & benefits.
Farlex (2003). The Free Dictionary.
Canada, G. of, & Communications, E.