UPDATED Commercial Managers Guide – Alternative Dispute Resolution methods

8 April 2016

Alternative Dispute Resolution (or “ADR”) has become very popular of late for resolving or heading off disputes, but it has to be said that many just use the term to mean mediation. In fact, there are many varieties of ADR and this White Paper sets out the main types and lists their characteristics.

Background

Disputes are a fact of life in all industry sectors – not least in the IT sector, where the statistics show a staggering number of delayed or failed projects. There has to be a way of resolving these disputes without resorting to court – and that is where ADR comes in.

ADR methods can be divided into two basic categories – on the one hand, those methods which are designed to result in some sort of binding determination of a dispute, and on the other hand those which are non-binding and designed to result in some sort of agreement between the parties settling the dispute. You can also add third hybrid category for methods which do not easily fit in the first two categories.

The other point to bear in mind is that the various methods are not always mutually exclusive. Of course, if you try to have two binding ADR processes applying to the same dispute then you have a recipe for disaster, as it may take a costly trip to the courts to find out which is the method you have to use: for example, you cannot have both arbitration and expert determination applying to the self-same dispute. On the other hand, you could have an arbitration clause, while the contract specified other non-binding methods of ADR to be attempted before starting arbitration – in other words requiring the parties to try to mediate the dispute before launching arbitration proceedings.

More complex hybrid dispute resolution clauses split up disputes into different types, so that “technical” disputes are contractually to be decided by an expert, while “commercial” disputes have to be go to the courts.

Non-binding ADR

Negotiation between the parties

This is always available – at any stage during a dispute, or before a dispute has formally commenced by e.g. service of legal proceedings. By its very nature it is flexible and informal. If successful, it will obviously save costs compared with any other method because it does not involve a third party. It can come about because one or other of the parties requests it or because the underlying contract provides that disputes should go through a process of negotiation prior to any other form of dispute resolution being commenced.

Bear in mind in particular:

  • Negotiations should always be conducted “without prejudice”, so that everyone agrees that whatever is said will not be revealed to the judge or other person who ultimatelyh has to determine the dispute
  • When coming to a deal, make sure that you are not accidentally committted before you are ready by making it clear on all communications that matters are “subject to contract” – in fact, as well as just using a standard phrase like “subject to contract”, set out in ordinary English words that your communication is not intended to be binding. Make sure your actions match your words!
  • Make clear in any settlement agreement exactly what disputes are being settled in full and final settlment – remember that unless something is specifically settled, a court might well say later that it was not part of the actual settlement and is still capable of being litigated

Mediation

When people say ADR, they often just mean mediation. As this Guide shows, mediation is only one of many processes that can together be considered to be “ADR”.

What distinguishes mediation from simple negotiation is the presence of a third party. Like negotiation, mediation is private and voluntary, and will be conducted without prejudice, so that a court or other tribunal will not be a party to the detail of the discussions. Unlike negotiation, there is some level of formality in that the parties will (normally) meet at a neutral location with the mediator and the parties with the mediator will agree some sort of processes to be followed during the mediation.

Since a mediation allows considerable flexibility in agreeing processes, there is no set formula, but the following are typically the steps which are followed:

  • The agreement to mediate may be contained in the underlying contract in dispute, which requires some form of dispute escalation including mediation to be followed
  • Of course, one or other the parties can propose mediation at any stage of a dispute
  • The parties will agree the identity of a mediator, or if the parties cannot do this, then a third party ADR service provider can nominate one
  • The effort to prepare for a mediation should not be underestimated: not only must a case summary be prepared, but consideration should also be given to preparing confidential briefings for the mediator’s eyes only, and having discussions with the mediator prior to the mediation
  • As a mediation can result in a new commercial agreement and can take account of all aspects of the past and future relationship between the parties, it is not restricted to just the sort of judgment a court could deliver, and so preparation should also be directed to considering the entire relationship between the parties
  • This also means that preparation should also include having all necessary personnel either present at the mediation or available at the end of a telephone to provide any necessary advice or authorisations as the deal starts to take shape

 

The typical format of a mediation is as follows, but remember that the process is inherently flexible and should allow for a variety of different formats

  • The mediation will normally start with a joint session where the parties meet together with the mediator and each party presents a short presentation of its case
  • The opening presentation does not just have to be restricted to the legalities and can and normally should indicate possible areas for negotiation and compromise
  • After the joint meeting, the mediator will normally conduct some sort of shuttle diplomacy, but further joint meetings are possible as are meetings between individuals from the parties to try and make progress in particular areas
  • The aim of a mediation is to come to some sort of negotiated settlement: the aim is not to come the sort of decision that could be a court judgment, but the parties should see the mediation as a business meeting
  • Like any business meeting, the aim is to come to a commercial agreement, which may provide for revised terms for a continuing relationship between the parties

The main advantages of mediation include:

  • The mediator will spend a large part of the time with each of the parties doing what could be called “shuttle diplomacy”, which is a good chance for the parties to take a rational stock-taking of their respective cases
  • Moving on from that, it is a good chance for the parties to test whether they can come to a deal which will regulate their relationship moving forward, regardless of the legal rights or wrongs
  • The mediation itself is protected by legal privilege (“without prejudice”), which means that the judge (or other person who has to decide the dispute e.g. arbitrator) will not hear the detail of went on during the mediation, which encourages the parties to be completely frank
  • The historical figures show that mediation can achieve a very high success rate of settlements on the day and, even if settlement is not achieved on the day, then the same figures also show that negotiations can continue and be successful within a few days or weeks of the mediation itself – the fact of mediation means that the parties have concentrated on the issues and actually talked about them

It is hard to find any downsides to mediation – there are relatively few cases which are inherently unsuitable to mediation. Even cases where there is an allegation of serious wrongdoing or even fraud can be successfully mediated.

Variants of mediation

Some attempt has been made to combine mediation with arbitration, coming up with hybrid processes known as “med-arb” and “arb-med”. Med-arb is where a neutral third party first conducts a mediation and, if that is not successful, becomes the arbitrator in the same dispute. Arb-med is the other way around – the parties go through a process of arbitration and then, before the award is issued, the arbitrator seeks to mediate a settlement.

To be honest, neither of these techniques has gained much traction in the UK. Some people doubt whether one and the same person could act in the dual capacity of both mediator and arbitrator without becoming seriously compromised.

Executive tribunal or mini-trial

This is similar to mediation again, but in this case, the parties make a formal presentation to an executive tribunal of the best aspects of its case. The executive tribunal itself is made up of senior executives of each of the parties with an independent third person to act as chair. After the presentations, the executive tribunal withdraws and negotiates settlement of the dispute. The independent third party chairs proceedings but does not come up with a binding decision, and like a mediator seeks to find with the parties areas of agreement and possible compromise.

This sort of ADR requires senior people to be present and well briefed for the duration of the process, and for that reason it tends only to be used in major commercial disputes where very senior input is required. It is again like mediation in that the process is consensual and can come up with a result which is commercial rather than strictly like a judgment.

While there is a good track record of its use in the USA, it has not become popular in the UK.

Early neutral evaluation

ENE uses an independent third person to come up with a non-binding opinion on the merits of the dispute. The idea behind the method is that the parties can use the opinion as a pointer to the likely outcome of the dispute and thus come to a negotiated settlement.

ENE for that reason will only really be useful if the independent third party is someone whom the parties will trust to come up with a valuable opinion. The difficulty then is that an opinion favouring one side or the other may upset the balance of negotiations by leading one party to think that its case is so strong that it no longer needs to compromise.

A disadvantage is that the parties will be inclines to put in a good deal of preparation for ENE to ensure that the opinion is in their favour. This can mean it can become quite expensive if it used as a means of obtaining an opinion about a whole case. Sometimes, ENE can be used in relation to an aspect of a larger case, so that perhaps a logjam can be broken in that one area, allowing the parties to make progress with the other aspects of a case.

It is not something which has become too popular in the UK.

Binding ADR

Arbitration

Arbitration is most like litigation in the courts with the big difference that the parties have the chance to appoint their own judge or judges, who will hear and decide the dispute by coming up with a binding award.

The process is highly regulated with various bodies providing services to administer arbitrations and appoint arbitrators and these bodies also provide rules for the conduct of arbitrations. There is a detailed Arbitration Act and a large body of case-law setting out what can and cannot be done.

The normal stages of an arbitration are as follows:

  • While it is possible for the parties to an existing dispute to agree that it should go to arbitration rather than the courts, the normal start for an arbitration is to be found in an agreement to arbitrate set out in the contract in dispute
  • The parties will need to choose their arbitrator(s), failing which the contract or the Arbitration Act will step in and provide a procedure for their appointment
  • The parties will need to agree terms with the arbitrator(s), since they are independent people and will charge money for all the work they do, unlike a judge in court
  • The arbitrator(s) when appointed will normally hold an initial meeting with the parties in order to seek to agree the detailed procedure which will apply to the arbitration, failing which the arbitrator(s) will issue an order setting out those matters
  • Thereafter, that procedure will be followed leading to a hearing and an award, much like proceedings in court except of course that the arbitration process is private and there is much room for flexibility in an arbitration to change the procedure to suit the dispute in question and potentially save costs

Arbitration is often used in international contexts, where its apparent neutrality can soothe one party’s anxiety about the other party’s national courts being asked to determine disputes. The downside is that arbitrators are not cheap compared to the the fees charged by the courts, although the increase in court fees recently has taken some of this disadvantage away.

However, one big advantage compared to the courts is that the process is a private one, and to a large extent it is possible to exclude the role of the courts: if there is any dirty washing to be laundered, arbitration does offer the chance to do so in private rather than under the glare of the law reporters.

When it comes to international disputes, another big advantage is the existence of the New York Convention, which can in many cases make enforcement of an arbitral award easier than trying to enforce a decision of a national court.

Expert determination

Expert determination should not be confused with arbitration: they are very different processes. Arbitration is a much more formal affair, governed by statute, much case-law, rules and international conventions to aid various aspects of arbitration, not least enforcing an award against a foreign defendant. While there is much case-law concerning expert determination, it lacks that element of formality, in particular relating to enforcement against foreign defendants.

Contracts sometimes make provision for disputes to be determined by an expert, although it is possible at any time for the parties to agree that a dispute or part of a dispute can be submitted to expert determination.

The expert is an independent third party who will decide the dispute. The idea is that the parties can choose a trusted expert who can provide a final and binding decision. This sort of ADR is well suited to a discrete dispute to do with e.g. technical matters, where a third party expert can look at the particular matter in dispute and give a quick, binding decision. However, depending on how the agreement is drafted, expert determination is less well suited to determining major commercial disputes encompassing technical and commercial elements. There can be problems if there is a major dispute, with some aspects of the dispute being submitted to an expert and other aspects going down another route – the problem is that you then have different tribunals possibly coming to different and inconsistent decisions on different aspects of the dispute.

Furthermore, unlike the courts and to a large extent arbitration, there is no set procedure, with much being left to the expert to lay down. Indeed, it is not a strictly judicial process – the expert is called on to provide a decision, and there are no standard processes or safeguards. Only in rare cases is an appeal even possible. For this reason, the parties may feel that they are not in control of the process.

This is not to say that expert determination cannot provide a quick, private and cheap way of getting a binding decision on a dispute.

Adjudication

This is not the same as either arbitration or expert determination. It is a process that has been widely used in the construction industry (and is now compulsory). The idea is that an adjudicator can give a quick decision on problems that arise in the context of a project. The decision is interim, in the sense that the parties can later challenge that decision in subsequent arbitration or litigation, but for the purposes of the project, it is an interim binding decision.

Adjudication allows a project to proceed without the immediate threat of major arbitration or litigation, as the parties will have to comply in the short term with the adjudicator’s interim decision.

While adjudication in the construction industry is regulated by statute, there are no such laws applying to other industries, and so the parties are free to set up their own scheme of adjudication with its own rules and procedures.

Hybrid methods

Dispute Review Board

A DRB normally consists of a panel of three independent people, appointed at the start of a major project. The panel will follow the progress of the project and will meet with the parties at set times during the project.

The panel will act in the way provided for in the agreement appointing it. This can be binding or non-binding. If the agreement requires the panel to be non-binding, then it will act something like a mediator with the difference that its involvement in the project will mean that it gets to disputes or potential disputes much sooner. It if it is binding, then it will issue interim (but binding) decisions on disputes as they arise, which allows the parties to get on with the project. However, there is normally provision for subsequent arbitration or litigation to challenge the interim decisions of the panel and in that sense it is very similar to the system of adjudication used in the construction industry.

As the panel will be kept involved in the project to a greater or lesser degree (depending on what is agreed about its role), there is of course added expense. For that reason, DRB is used on large infrastructure projects which are time-critical, such as the building of the Hong Kong airport or the Olympic Stadium. It is not really suitable for smaller projects.

Notes

Copyright Richard Stephens 2016. The law is stated as at 20 March 2016.

This note is intended to provide general information about legal developments in England & Wales and you should not apply any of the advice or information contained in it to specific situations without seeking professional advice first.