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Understanding the Pros and Cons of Alternative Dispute Resolution for Businesses

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  • Posted on: Feb 2 2018

Alternative dispute resolution (“ADR”) has been gaining momentum as an alternative to litigation over the past decade. Most major corporations insist on it, in one form or another, in every contract they execute. ADR can take on many forms, including negotiation, mediation and arbitration. All ADR methods have pros and cons that should be considered before making them a part of a company’s legal process.

Independent Negotiation

This is the least formal ADR tactic available and the most common. Most disputes begin with negotiations, in an attempt by the parties to avoid ill-will and court costs.

Pros:

●      Inexpensive

●      Faster than any other means of resolution

●      More private than court

●      Flexible

●      Risk-Free – parties can always escalate

●      Potential for continued working relationship

Cons:

●      Can be a stalling tactic

●      No guarantee of a resolution

●      Power imbalances may go unchecked

●      No guarantee of good faith

●      Lack of neutral 3rd party reduces chance of agreement of complex, multi-party disputes

Mediation

Mediation is sometimes required by contract and is occasionally a mandatory pre-litigation step in some jurisdictions. Mediation is an informal process wherein the parties meet in front of one or more mediators, also known as “neutrals,” in an attempt to sort out the needs and desires of the parties and reach a resolution. Mediation may be either binding, or nonbinding. In binding mediation, the recommendation of the mediator or agreement of the parties is binding on all parties. In non-binding mediation, if the parties do not reach a resolution or do not agree with a mediator’s recommendation, they may escalate the matter to the courts or to arbitration.

Pros:

●      Confidential

●      Generally less expensive than trial

●      Faster resolution, compared to going to court

●      Parties may choose a mediator with substantive knowledge of the dispute

●      3rd party neutral can help overcome impasses and alleviate emotional situations

Cons:

●      If claim could be settled in small claims court, mediation may be prohibitively expensive

●      Incompetent mediators may hinder resolution

●      All parties’ rights may not be adequately protected

●      Legal precedents not created

Arbitration

Arbitration is typically binding in nature, though not always. This is set in contractual negotiations. However, given the expense of arbitration proceedings, it is generally futile to agree to non-binding arbitration when either party may decide to litigate anyway after going through the time and expense of arbitration.

Pros:

●      Private

●      Faster than litigation

●      Parties can design the process

●      Sometimes less expensive than trial

●      Confidential Process

●      More formal process than mediation – compels decorum

●      Parties can choose substantive expert(s) to serve as arbitrator(s)

Cons:

●      Successful outcome may be dependent on quality of mediator

●      Unsatisfactory outcomes may not be addressed by a judge

●      Lack of cooperation by a party may extend time and expense

●      Lack of legal precedents in matters that should be addressed once and for all

Takeaway

For decades, there has been significant interest in finding ways to resolve business and commercial disputes through methods other than litigation. Some ADR techniques that individuals and businesses have turned to are somewhat new, while others have been used for many years. All methods, however, have a common objective: the resolution of disputes in less time, at less cost and with less emotional turmoil and hostility than typically results from litigation. Independent negotiation, mediation and arbitration offer efficient and effective alternatives to litigation. All three methods may significantly reduce the cost of achieving a resolution of a dispute, and may be conducted at any time, at any location and at the convenience of the parties.

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