Alternate Dispute Resolution Clauses in Commercial Contracts
What is alternate dispute resolution or “ADR”? Basically, ADR is the use of mediation, arbitration, or a combination of the two to resolve commercial disputes. In mediation, a neutral third party serves as an intermediary who strives to bring opposing sides to a mutually acceptable resolution. A mediator is not a judge. A mediator has no authority to dictate terms, to make rulings or otherwise decide in any judicial sense that one party is right and the other wrong. Instead, a mediator listens to each side, both together as a group and privately, to define the problem, to identify common ground and to create win/win scenarios to resolve the conflict. Most importantly, the parties remain in control of the process and are free to explore a broader array of settlement options than arbitration or traditional litigation would otherwise offer. Mediation works, although not in every circumstance. Even when it does not work, it nonetheless leaves both sides with a better understanding of the issues and the people involved. At mediation, the parties have an opportunity of addressing the opposing side face to face.
In arbitration, the parties hire a private judge, who hears evidence in an informal hearing and renders a decision, which, depending on the ADR clause of the contract may or may not be binding. If the arbitration is binding, the arbitrator’s award is final, except in very limited circumstances, such as an obvious mathematical error in calculating the damages award. In non-binding arbitration, the decision of the arbitrator is used by the parties to better evaluate the merits of their respective positions, but otherwise has no precedential value; if the dispute is still not resolved, traditional litigation in state or federal court is usually the next step. Binding arbitration is usually recommended. Arbitration gives you more control over how disputes, which affect your business, are to be resolved. Overall, arbitration, especially binding arbitration, is more efficient, less time consuming and therefore, less expensive than traditional litigation. For example, many of the tactics available to attorneys in the courtroom, what laymen often describe as legal maneuvering or procedural bickering, aren’t nearly as effective in an arbitration forum. Thus, resolution of the dispute should be quicker and eliminate the uncertain risk associated with a jury trial.
If you want to resolve your dispute through ADR, there are several different ways to elect ADR. The best way to ensure that ADR is used to resolve disputes is to include an ADR clause in your contracts. ADR clauses are not limited to only sales agreements. ADR clauses can be included in all contracts, including employment agreements, partnership and LLC agreements, and agreements with your vendors. In some instances, even if the dispute is already active, if the opposing party agrees, you could choose to mediate or arbitrate the dispute. However, once the dispute is ongoing, it is usually very difficult to get the opposing party to agree to a form of ADR. If a lawsuit has already been filed, then most courts mandate mediation between the parties prior to proceeding to trial.
Once a dispute arises, the ADR procedure to be followed is the one set forth in the ADR clause of your contract. Several ADR organizations, such as the American Arbitration Association, have rules that govern the ADR process as well as lists of arbitrators and mediators. Several states also have ADR rules. These rules establish the procedures that must be followed in choosing your mediator or arbitrator. Usually, the parties jointly choose the mediator or arbitrator from a list provided by the ADR organization. However, if the parties cannot mutually agree on a mediator or arbitrator, then the ADR organization, or some other neutral third party, will select the mediator or arbitrator.
Generally, both state and federal courts are inclined to uphold and enforce ADR clauses. For example, in a recent California Supreme Court decision, arbitration clauses in employment agreements were upheld, although the Court laid out some rules to protect the rights of employees. Courts are more reluctant to enforce them in employment settings because certain fundamental rights of employees are affected by such clauses. This is especially true in situations where, for all practical purposes, the employee has limited bargaining power.
An ADR clause does work well in disputes involving the sale of produce. The PACA Branch of the U.S. Department of Agriculture (PACA) and the California Bureau of Market Enforcement (BME) have upheld such clauses. However, if your sales contracts have an ADR clause, both PACA and BME are removed from investigating and hearing the dispute and it must be resolved by the ADR provision set forth in the contract.
ADR is also an effective way to resolve international sales disputes and will be used by members of the Dispute Resolution Corporation to resolve disputes between members.
Overall, an ADR clause is enforceable and effective in resolving disputes, provided you include it in your contracts. Meuers Law Firm is available to discuss the particulars of your contracts and to provide you with recommendations on how to structure an ADR clause to fit your needs.