The importance of ADR for companies


Imagine you manage a large company and run into a disagreement with your main supplier.

Would you rather:

Question 1:

A. File a lawsuit that could damage the business relationship beyond repair

B. Attempt to renegotiate or mediate the dispute with the possibility of reaching a mutually beneficial agreement

Question 2:

A. Litigate knowing it may take years to achieve a final judgement after appeals

B. Opt for a quicker dispute resolution mechanism with limited grounds for appeal

Question 3:

A. Litigate in open court where the media and the public may be able to access the case file and show up to hearings

B. Settle your dispute under the auspices of a private institution that can ensure confidentiality

The commonality with all of the “B” options is that they are available, in one way or another, through alternative dispute resolution (“ADR”) mechanisms. (1) Arbitration, (2) mediation, (3) expert determination, among others, are considered an “alternative” with regards to the traditional method of dispute resolution, which is litigation before a State court. If you chose at least one of the “B” options, it means that you already understand why ADR can be the default choice for many business disputes.

Three of the main ADR mechanisms

(1) Arbitration: the parties appoint an independent and impartial arbitral tribunal to render a binding award that will settle the dispute. The jurisdiction of the tribunal arises from the consent of the parties, which is typically manifested through an “arbitration agreement”. Usually the award cannot be overturned and there are narrow grounds for an annulment. This is the most regulated type of ADR (e.g. Arbitration Act 1996).

(2) Mediation: the parties appoint an independent and impartial mediator/conciliator to help them reach a settlement. The mediator eases communication and makes proposals in order to facilitate a settlement between the parties, but cannot issue a binding award. Mediation also tends to be regulated on a statutory level (e.g. Civil Procedure Rules Parts 78.23 to 78.28).

(3) Expert determination: the parties appoint an independent and impartial technical expert to either (i) settle the dispute by rendering a decision (similar to what an arbitral tribunal would do); or, (ii) provide a non-binding technical insight that is helpful for the parties. Expert determination is largely unregulated. Arbitration or civil procedure laws are generally not applicable, even if the expert plays the role of an adjudicator. Therefore, it is up to the parties to agree on whether the expert will act in an advisory or decision-making capacity through their contract, and in the latter case, provide for the legal consequences of not complying with the decision rendered by the expert.

Importance for companies

ADR is generally preferred by companies over litigation, in particular for international deals. Speed, finality, confidentiality, expertise, flexibility, reduced adversariality and ease of enforcement are some of the benefits associated with ADR. Arbitration in particular can ensure neutrality, where a company fears that its foreign counter-party will benefit from a “home-court” advantage in case of litigating before a State court from its country.

The main downside of ADR is high costs. Unlike in litigation - where the judge’s wages and the courthouse costs will be covered by the State -, in ADR parties must pay for the services provided by arbitrators, mediators, experts, and for the institution administering the proceedings. Critics argue in particular that arbitration has become a “private judicial system that looks and costs like the litigation it’s supposed to prevent”. Against this background, arbitration institutions have created rules for fast-track and accelerated arbitration for cases in which the claims are small or where the parties opt for this mechanism. Furthermore, the global COVID-19 pandemic has fostered online ADR, which could also reduce some costs.

Importance for lawyers

Commercial lawyers should at least know about ADR and be able to advise clients facing a dispute on all available options. This is a valuable contract management and dispute prevention skill. Drafting efficient and enforceable dispute resolution clauses - although sometimes overlooked in practice - can save time, money, and provide certainty for companies facing a dispute. An ongoing conflict can hinder a company’s business objectives and represent a contingent liability on its financial statements.

ADR is an important source of business for many law firms such as Freshfields, Skadden and Herbert Smith Freehills. As a major business and financial centre, London is a popular seat for arbitration proceedings. Brexit, COVID-19, and the recent termination of intra-EU investment treaties will play important roles in the future of this field.

Jorge Arturo González

Jorge is a Law student from Universidad de Costa Rica. During his studies, he completed an exchange program in Utrecht University (Netherlands), participated in international moot competitions, and interned in corporate law firms, a startup incubator and the Costa Rican Congress. He is interested in tech law, international business law and dispute resolution.

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