In some of my recent blogs I have talked about the finer points to contracts which are often overlooked like choice of law and venue. Today I want to discuss another critical point which is also overlooked: “alternative dispute resolution” or “ADR.”
“What’s that?,” you say.
ADR is a fancy term for mediation and/or arbitration.
Let me explain the issue. Every court system offers alternatives to simply filing a lawsuit and going through the rigors of litigation which can be stressful, time consuming, and costly. The two alternatives are typically mediation and arbitration (binding and non-binding). These techniques are designed to get parties to resolve their differences in a quicker and less expensive fashion than going to trial.
However, there are some serious considerations you need to think about particularly when you see an “ADR” clause in your contract.
But before we discuss that, let’s talk about the difference between the two processes.
Mediation is not binding, and the idea is for a neutral mediator to get both sides to resolve a dispute and discuss settlement. No finding or decision of sorts is made, and instead of right or wrong, it’s about solutions. Arbitration on the other hand involves a neutral party (many times a retired judge) actually making a decision about the case after listening to both sides just like a court would. The decision can be either binding or non-binding.
Now to the considerations for ADR.
First, unless both parties agree ADR cannot be forced on another party.
However, that makes it even more important that you find out if your contract has an ADR clause before you sign it.
Second, is it cheaper than going to court?
Not necessarily and here’s why: In ADR the parties pay for the arbitrator or mediator. That’s not the case in a court proceeding. The cost of an arbitrator or mediator can be expensive and many times it’s an hourly rate in the hundreds of dollars. Additionally, the filing fees in an arbitration matter may exceed the filing fees charged by a court since they are sometimes based on the amount of the claim.
Third, although ADR is supposed to be quicker than litigation in some instances that’s not always the case. Sometimes the process can actually take longer.
Finally, in some instances you don’t want ADR as the place to present a particular claim. With some claims they need to be before a jury like, for example, a fraud claim. In a case like that either party may want a jury to assess credibility and make factual findings — not an arbitrator.
Try to avoid the “litigant’s surprise” (as I call it), which is when people go to see their lawyer. They then find out that their contract restricts their rights and that they can’t file in a court of law, but instead must go through ADR.
In certain cases this can be a major disadvantage and I have seen that even in small matters. In a smaller case, for example, ADR may be overkill; and likewise in a very large case it might fall short. Don’t get me wrong; there is a clear need for ADR and many cases are in fact appropriate for it, however, not all are. That’s the point.
There’s one more reason why you need to be aware of an ADR clause in your contract. It is more common than you would think that two parties will engage in intense litigation…and then one party will suddenly seek to invoke the seemingly forgotten ADR clause. I have seen cases where after years of litigation one party decides to suddenly invoke the ADR clause, and in some states the law will compel the court to honor that choice despite all the litigation. In some instances a waiver of ADR may be found but for the most part, courts encourage ADR so be careful.
In the end, don’t overlook this very important provision. In the event of a dispute an ADR clause may—or may not be—an unwanted restriction.
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