Alternative Dispute Resolution (Common Clauses)

(This post is part of a series called “Common Clauses,” focused on explaining so-called boilerplate provisions of contracts. Click the link to see other posts in this series).

"Alternative dispute resolution" ("ADR") refers to dispute resolution that takes place outside of the courtroom. Contract drafters often include ADR clauses to avoid (or attempt to avoid) litigation.

Note: This post is a general overview so that you know what you're getting into if you see an ADR clause. I will do a deeper dive into ADR in a later post.

What is ADR?

ADR most commonly refers to mediation and arbitration (though there are other types). These are less formal than litigation, but they are still meant to resolution of a dispute. The two parties come together, make their cases before a third party, and the third party facilitates a resolution.

Both mediation and arbitration are usually conducted on a faster timeline than litigation, which can take years. For example, mediation can take place as soon as the parties agree on a date. Arbitration, if everyone cooperates, can be completed in less than a year (and often is).

What is mediation?

Mediation involves the parties each presenting their case to a neutral third party. The neutral third party will try to get the parties to settle to avoid litigation (or further ADR).

Mediation is less formal than arbitration or litigation. A typical mediation will start with everyone in one room, and the mediator going over his or her policies, expectations, etc. The mediator will then put the parties into different rooms, and go back and forth between them. More often than not, the goal is to meet somewhere in the middle to resolve the dispute.

If the parties settle, the mediator may type up the terms in an informal letter of intent, and then ask the parties to finalize a formal settlement agreement within a few days or weeks.

Mediations are rarely (if ever) binding. That is, if the parties can't agree, they can simply leave if they are unable to agree.

What is arbitration?

Arbitration is more formal. A typical arbitration is more like litigation. You will have status conferences (often via telephone) between the parties and the arbitrator. These will involve determining how much discovery may be done, how much time is needed, and scheduling formal hearings if needed. There are usually procedures for discovery as well. You may have one arbitrator, or a panel of three or more.

The final arbitration hearing is basically a trial. Depending on the arbitrator (or panel), they might consider evidence that would be inadmissible in a trial. And the arbitrators will render a final decision. That decision is binding, meaning that it can be enforced in court.

Why are these clauses included?

Parties, especially businesses that have a lot of customers, want to resolve disputes quickly and quietly. ADR facilitates both (quickly as stated above, but quietly referring to the fact that there are no public filings unless you have to enforce an arbitration).

What are the downsides of ADR?

For mediation, the fact that it is not binding means that the other side can walk away. And although it is usually quicker and cheaper than litigation, mediation is rarely cheap.

Arbitration is binding, but that means you will be bound even by an unfavorable decision. Arbitration is almost substantially more expensive than mediation (as Uber recently learned). And, in some cases, arbitration can be as expensive as litigation.

What if I want my day in court?

If you are contractually obligated to engage in ADR, you should adhere to that term in your contract. There may be consequences for not attempting ADR first. For example, many contracts have attorney fees provisions, but will make their award contingent upon unsuccessful ADR. For arbitration, you can actually be compelled to arbitrate. That is, if you file suit, the other side can file a motion to compel arbitration, and the court may grant it.

If you really want to litigate and not go through ADR, you might be able to get the other side to agree.

Conclusion

ADR refers to methods of resolving disputes outside of litigation. If you have an ADR clause in your contract, make sure that you understand what you're agreeing to before you sign it. And be aware of the consequences, if any, of failing to abide by ADR clauses.