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Benjamin Franklin once wrote that an ounce of prevention is worth a pound of cure. He could very well have been talking about alternative dispute resolution ("ADR") clauses. ADR clauses are any pre-dispute clause in your contract that requires the parties to use an alternate form of dispute resolution before filing a lawsuit in court. Using ADR clauses in your contracts can save your business time, money and aggravation. But, to make the most of ADR clauses you need to know how to use them. This article will give you a primer on the three most common types of pre-dispute ADR clauses: Negotiation, Mediation and Arbitration. Once you have learned about these three clauses, you can begin to think about how to use them in your contracts. In today's legal and business climate, no contract negotiation is complete without a discussion about ADR clauses. Put them in your contracts at the beginning, and you can focus on your business, confident that if and when disputes arise, they will be resolved in a controlled and predictable manner. Leave ADR clauses out of your contracts, and you'll be left wondering if every dispute will result in a timely and costly lawsuit.
Negotiation
This is the most basic and commonsensical clause and as such, it's not widely used. Negotiation clauses require the parties to negotiate, in good faith for a set period of time before either party can initiate a lawsuit or an arbitration. While it may seem obvious to have parties begin by trying to negotiate and work things out informally before suing each other, some relationships require the use of a pre-dispute negotiation clause. Even if your business relationship seems beyond a sue-first, ask questions later mentality, having a negotiation clause gives you the added security of knowing that you won't be surprised by a lawsuit. Further, negotiation clauses that specify a waiting period, say 45 days, often allow for cooling off period before a lawsuit is filed. However, there are times when you need to file a suit quickly to protect trade secrets or other business interests. In those cases, you can include a provision in your negotiation clause that permits injunctive or other emergency temporary relief, even during the negotiation period.
Mediation
Pre-dispute mediation clauses are one of the fastest growing parts of contract law. Whereas mediation clauses were fairly rare a decade ago, they are becoming commonplace in today's contracts. The reasons are many. Mediation clauses assume that the parties will try to informally negotiate before taking the time and expense of commencing a mediation. If, however, the parties are unable to fully resolve their conflict after negotiating, the mediation clause offers another step before filing a lawsuit or arbitration. However, this is not mere holding pattern. Mediation is a proven and cost-effective way to resolve a wide-variety of disputes. Mediation clauses have grown in popularity as more and more businesses have successfully resolved their disputes through mediation. As with all ADR clauses, you can include a provision that allows the parties to seek temporary injunctive relief in court, while still proceeding with the mediation.
In mediation, the parties sit down with a trained neutral, the mediator, and attempt to resolve their dispute through an informal and non-binding process called mediation. Though there are different styles of mediation and there are different types of mediators, all mediations have several things in common. The first is that any resolution or settlement achieved in mediation is voluntary. That is, the mediator does impose a verdict or solution on the parties. Instead, it's the parties who retain control of the final settlement throughout the process. This is a major difference from litigation and arbitration, where control is surrendered to a third party, either the judge or arbitrator. In mediation, much like negotiation, the parties themselves retain control over their dispute. However, unlike negotiations, where parties often stall and reach impasse, mediation involves the dispute resolution skills of a trained, neutral third party, the mediator, whose sole job is to help the parties resolve their dispute.
Arbitration
Arbitration is sometimes confused with mediation. Perhaps this is because these are the two most common types of ADR. However, once you understand the differences, it is impossible to mix them up. Arbitration, in fact, has much more in common with litigation than it does with mediation. Arbitration involves a neutral, third-party, the arbitrator, who hears evidence from the parties during a formal procedure called the arbitration hearing. After the hearing, the arbitrator, much like a judge, renders a decision that is final and binding upon the parties. The benefit of arbitration over litigation, is that the process is streamlined, which often results in a decision that is delivered much faster, and usually at a lower cost than a litigated matter. Another benefit is that the parties often mutually select the arbitrator. This increases the parties' chances of having an arbitrator with some subject-matter expertise or some other skills and knowledge specific to the matter at hand. The downside is that you give up certain procedural rights and protections in the arbitration process. Discovery is usually limited, as compared to litigation. And, in most cases, there is no right to appeal an arbitration decision. So, the good news, and the bad, is that the arbitrator's decision is final and binding.
In the end, every company and every contract within that company is unique and deserves its own evaluation of whether to include an ADR clause. ADR clauses need to be a part of every contact negotiation. Otherwise, you risk an uncertain and costly lawsuit down the road. When it comes to conflict resolution, an ounce of prevention truly is worth a pound of cure.