- Understand alternative dispute resolution (ADR) methods.
- Learn the benefits and drawbacks of different methods of dispute resolution.
Imagine that someone has a legal claim against a supplier, employer, or a business where he or she is a customer. What will happen? They probably don’t want to immediately initiate litigation because litigation is very expensive and time consuming. Besides, they may want to continue doing business with the supplier, employer, or business. Perhaps the matter is of a private nature, and they do not want to engage in a public process to determine the outcome. They would like the dispute to be resolved, but do not want to engage in a public, time-consuming, expensive process like litigation to do it.
A common method of dispute resolution that avoids many of the challenges associated with litigation is alternative dispute resolution. Alternative dispute resolution (ADR) encompasses many different methods of resolving disputes outside of the judicial process. Some ADR methods vest power to resolve the dispute in a neutral third party, while other strategies vest that power in the parties themselves.
Figure 4.1 Alternative Dispute Resolution Continuum
The most common methods of ADR are negotiation, mediation, and arbitration. ADR is often used to resolve disputes among businesses, employers and employees, and businesses and consumers.
ADR methods are used outside of the courtroom, but participation in ADR has important legal consequences. For instance, parties that have agreed by contract to be subject to binding arbitration give up their constitutional right to go to court. The Federal Arbitration Act (FAA) is a federal statute that requires parties to participate in arbitration when they have agreed by contract to do so, even in state court matters. The FAA preempts state power to create a judicial forum for disputes arising under contracts with mandatory arbitration clauses. The FAA encompasses transactions within the broadest permissible exercise of congressional power under the Commerce Clause in the US Constitution. This means that the FAA requires mandatory arbitration clauses to be enforceable for virtually any transaction involving interstate commerce, which is very broadly construed. This is an example of federal preemption exercised through the Supremacy Clause in the US Constitution.
Imagine that Han is a tent manufacturer. Han’s supplier of tent fabric routinely supplies him with appropriate water-resistant fabric to construct tents, so that he can make and sell them. After many years of a good working relationship, Han’s fabric supplier delivered nonconforming goods. Specifically, the fabric delivered was not water-resistant, despite the need for water-resistant fabric to make tents. However, when Han notified the supplier of the problem, the supplier denied that the fabric was nonconforming to his order. Han refused to pay for the goods. The fabric supplier insisted on payment before future delivery of any additional fabric. Without water-resistant fabric, Han cannot continue to make tents.
This is an example of a business to business dispute. Despite the problem, Han wants to continue working with this supplier, since they have a good, long-standing relationship. This problem seems to be a “hiccup” in the regular business relationship so they want to resolve this dispute quickly and without hard feelings. It is very unlikely that Han will immediately hire an attorney to file a formal complaint against his supplier. However, that does not change the fact that there is a dispute that needs to be resolved.
One of the first strategies that Han and his supplier are likely to use is negotiation. Negotiation is a method of alternative dispute resolution in which the parties retain power to resolve their dispute. No outside party is vested with decision-making power. Negotiation requires the parties to define the conflict and agree to an outcome. Often, this can take the form of a compromise. Note that a compromise does not mean that anyone “loses.” If both parties are satisfied with the result of the negotiation and the business relationship can continue moving forward, then both parties will likely consider the settlement a “win.”
Benefits to negotiation as a method of ADR include its potential for a speedy resolution, the inexpensive nature of participation, and the fact that parties participate voluntarily. Drawbacks include the fact that there are no set rules, and either party may bargain badly or even unethically. In a negotiation, there is no neutral third party to ensure that rules are followed, that the negotiation strategy is fair, or that the overall outcome is sound. Moreover, any party can walk away whenever it wishes. There is no guarantee of resolution through this method. The result may not be “win-win” or “win-lose,” but no resolution at all.
In addition, the parties may not have equal bargaining power. If Han’s business and the supplier are both dependent on each other for roughly equal portions of their businesses, then they are most likely relatively equal with respect to bargaining power. However, if Han has a small business but his supplier has a large business, then negotiation is potentially unbalanced, since one party has a much more powerful bargaining position than the other. For example, if Han needs that particular type of fabric, which is only available from one supplier. But the supplier does not need Han’s business because he do not provide a significant amount of its profit. This would be an example of unequal bargaining power.
Mediation is a method of ADR in which parties work to form a mutually acceptable agreement to resolve their dispute with the help of a neutral third party. Like negotiation, parties in mediation do not vest authority in a third party to decide the dispute. Instead, this authority remains with the parties themselves, who are free to end mediation if it is not working. Often, when parties end mediation, they pursue another form of ADR, such as arbitration, or they choose to litigate their claims in court. Like negotiation, mediation seeks a “win-win” outcome for the parties involved. Additionally, mediation is confidential, which may be attractive to people who wish to avoid the public nature of litigation. Discussions during a mediation are not admissible as evidence if the parties proceed to litigation. This encourages parties to be open with each other when trying to resolve their dispute. Finally, the mediation process is usually much faster than litigation, and the associated costs can be substantially less.
Unlike negotiation, a third party is involved in mediation. Indeed, a neutral mediator is crucial to the mediation process. Mediators act as a go-between for the parties, seeking to facilitate the agreement. Mediators do not provide advice on the subject matter of the dispute. Mediators might not possess any subject-matter expertise concerning the nature of the dispute. The value of mediators, however, is their training and experience in conflict resolution, which they use to facilitate an agreement between the parties.
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