The Pros and Cons of Alternative Dispute Resolution Provisions in Contracts

The traditional path of contract disputes often involves litigation in state or federal court.  This can be prolonged, costly, and uncertain. Savvy business owners should explore alternatives to the traditional court system, notably through the incorporation of Alternative Dispute Resolution (ADR) provisions in their contracts.

Understanding the pros and cons of ADR provisions helps you make informed decisions about their benefits and drawbacks in the context of contractual agreements.

What is Alternative Dispute Resolution (ADR)?

Before we dive into the specifics, let’s clarify what ADR entails. Alternative Dispute Resolution refers to processes that resolve disputes without resorting to litigation in court. The most common forms of ADR include:

• Mediation: A neutral third party facilitates a discussion between the disputing parties to help them reach a voluntary agreement.

  
  

• Arbitration: A neutral third party (the arbitrator or board of arbitrators) makes a binding decision based on the evidence and arguments presented by both parties.

  
  

• Negotiation: Direct discussions between parties aimed at reaching an agreement without any third-party intervention.

The Pros of ADR Provisions

1. Cost-Effectiveness:  One of the most significant advantages of ADR is the potential for cost savings. Litigation can be expensive, with attorney fees, court costs, and other related expenses accumulating rapidly. ADR processes can be more streamlined, less prolonged and thus less expensive.  However, for contracts that involve relatively small claims, ADR can be a more expensive remedy, thus putting a “chill” on claims. 

2. Speedier Resolutions:  Litigation can drag on for months or even years due to court schedules and various procedural hurdles. ADR often facilitates quicker resolutions because it allows parties to set their timetable and avoid congested court dockets.

3. Confidentiality:  In contrast to court proceedings, which are generally public, ADR processes can be kept confidential. This is particularly advantageous for businesses that wish to protect sensitive information and maintain their reputation.

4. Flexibility:  ADR methods offer more flexibility than traditional litigation. The parties can choose the venue, the rules governing the process, and even the third-party arbitrator or mediator, tailoring the process to their specific needs.

5. Preservation of Relationships:  ADR encourages collaboration rather than adversarial confrontation, which can help preserve ongoing business relationships. This is particularly important in disputes between parties who wish to continue working together after resolution.

6. Avoidance of Class Actions:  Larger companies that might otherwise be susceptible to class action claims often mandate ADR.  Class action claims are very costly for companies to fight and give remedies to consumers who, if they wanted to bring a claim individually, would have no remedy because the cost of litigation would far outweigh the potential benefits.  Class actions claims are not possible in ADR.    

The Cons of ADR Provisions

1. Limited Discovery:  In traditional litigation, parties have access to extensive discovery processes, allowing them to gather evidence from one another and from third parties and build their case. ADR, especially mediation, may have limited discovery, which can hinder a party’s ability to prepare adequately.  For example, there is no legal requirement that someone comply with a subpoena issued in an ADR proceeding whereas a court-issued subpoena is legally binding and failure to comply has real consequences.

2. Limited Appeal Options:  Decisions rendered in arbitration are generally final and binding with very few opportunities for appeal. This can be a drawback for parties who believe they have valid grounds to challenge an arbitrator's decision.

3. Waste of Time:  Some contracts require mediation prior to filing an ADR proceeding.  This is commonly found in residential and commercial real estate agreements.  Mediation can be perceived to be a waste of time if one or both parties are not willing to compromise their respective positions.

4. Duplicate Proceedings:  Some disputes involve persons who are not parties to an arbitration agreement.  It is difficult to compel someone to participate in an arbitration proceeding who did not sign the arbitration agreement.  If a full remedy necessitates the involvement of all parties, this can necessitate duplicate legal proceedings in ADR and court.  It makes obtaining a full remedy very costly and time-consuming to achieve.  

5. Perceived Informality:  Some parties might perceive ADR as less formal or authoritative than litigation, potentially leading to a lack of seriousness in the proceedings. This perception can affect how parties prepare and participate in the process.

Incorporating ADR provisions into contracts can offer numerous benefits, including cost savings, expedited processes, and the preservation of relationships. However, it’s crucial to weigh these advantages against the potential drawbacks, such as limited discovery, appeal options, and the experience level of the ADR facilitators.

As with any legal matter, the decision to include ADR provisions in contracts should be made after careful consideration and, ideally, with the advice of one of the experienced business attorneys at Fiffik Law Group.  Understanding both the pros and cons of ADR will empower you to create contracts that best suit your needs and offer an efficient path to dispute resolution.

If you have more questions about ADR or need assistance drafting contractual provisions, feel free to reach out. Your peace of mind is just an appointment away!