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Business ADR (Arbitration and Mediation) vs. Court Litigation for Commercial Cases

The American court system has been our forum for settling disagreements. This mostly worked, for a century or so. Early in the 20th century, new alternatives arose in reaction to many of the defects of our judiciary, and others globally. Now, 90 years later, Alternative Dispute Resolution (ADR -- including arbitration and mediation) has a firm and deservedly growing foothold in our business dispute resolution landscape, domestically and globally.

The vast majority of recent United States Supreme Court decisions encourage greater use of ADR in business cases. However, ADR is not yet sufficiently widespread in the opinion of those who see it as a better way to resolve more business conflicts without enduring onerous court procedures before an overworked judiciary.

Let’s define what we are talking about here. Arbitration generally is a more streamlined, faster form of adversarial dispute resolution with greater finality than court litigation. Like court, there is a trial, and arbitration is binding – the Arbitrator issues an award, similar to a court judgment, determining who wins and who loses, and in what manner. Arbitrators hear cases only within their subject area expertise, whereas most judges are generalists, hearing a wide variety of matters. Most arbitration are private, unlike the public-record court system.

Mediation, in contrast, generally is a more consensual, voluntary, negotiation-based process, with no mandatory resolution forced upon the parties. Rather, in mediation, the parties present their thoughts to each other and the Mediator (either with or without counsel), and the participants work together to reach a settlement that benefits all to the greatest extent possible, including by preserving relationships; civility trumps combativeness. The presence of the impartial Mediator changes the settlement dynamic, as (s)he helps the parties explore the issues, their positions, their interests, and the creative options for resolution. The participants enjoy the most open opportunity to be heard (and even “vent"), unrestricted by the rules of evidence. In mediation, the parties themselves ultimately determine the resolution of the dispute, often in a customized, cost-effective, win-win fashion. Mediation can be used instead of, or even during, an arbitration or court litigation. Mediation is highly successful, with more than 85% of mediated business cases resulting in settlement agreements.

One of the principal advantages of ADR is the speed (and accompanying cost savings) of its streamlined processes. A recent statistical review of 100 business cases filed with the American Arbitration Association with claims seeking more than $500,000 shows the median completion time as just 13 months. AAA Commercial Bulletin, Issue 6, Dec. 2010. Those same cases if filed in court likely would have averaged between 3 and 4 years to complete. Longer duration almost always equals more attorney hours expended, which translates to significantly greater expense, even after adding arbitrator compensation.

So what should business owners and their contract-drafting lawyers do if they want to benefit from ADR? With a bit of advance strategic thought, they can include a dispute resolution clause in their business agreements. Unfortunately, all too often, negotiating arbitration clauses is an afterthought, if it’s considered at all. Parties tend to negotiate them minimally after the rest of the contract has been negotiated, although an arbitration clause becomes a key provision when a dispute later arises.

Many different forms of dispute resolution clauses exist, as ADR is a creature of contract and is flexible almost without limit. So it is a shame that most lawyers use an old “standard" (actually sub-standard) form dispute resolution clause, thereby squandering the opportunity to create a truly customized and helpful provision. Many resources exist for obtaining assistance in drafting, including sample clauses on the websites of various ADR providers such as the American Arbitration Association (http://www.adr.org), JAMS, NAM, and others. Perhaps the best course of all is consulting a knowledgeable ADR expert, to learn about what specific components of a clause might be used to the advantage of a client in a particular situation. Some experts even offer free consultations for drafting dispute resolution clauses, because this enhances appropriate use of ADR to resolve business disputes, and that rising tide floats all boats.

Please note that I am licensed to practice law only in NY. This guide is provided for general educational purposes only, and no attorney-client relationship has been formed. It should not be relied upon as legal advice. To the extent unique facts may exist in any give situation, the considerations might possibly change. The response given is not intended to create, nor does it create an ongoing duty to respond to questions. As they say, "Your Mileage May Vary." Best of luck.

Additional resources provided by the author

For additional information, please visit the websites of the major arbitration and alternative dispute resolution providers and forums, such as the American Arbitration Association:
http://www.ADR.org

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