Alternative dispute resolution (“ADR”) is any method through which parties resolve a dispute without litigation. Nowadays, many contracts between parties will contain a boilerplate ADR provision–the two most common being an arbitration clause or a mediation clause. While it is important for parties to have mechanisms in place for dispute resolution, these clauses–and all clauses within a contract–should be discussed and considered in detail.
Parties to a contract will often implement ADR clauses with the belief that it will be a cheaper alternative to litigation. However, ADR, especially arbitration, can be burdensome and expensive. For the reasons discussed below, tiered dispute resolution (“TDR”) should be favored over standard arbitration clauses in most contracts.
Arbitration is the process by which a neutral decision maker (the “arbitrator”), settles a dispute between two parties. The arbitrator is a neutral decision-maker who listens to both sides of the dispute and makes a final decision that is generally binding upon the parties.
Critics point to several flaws when discussing the effectiveness of arbitration clauses. First and foremost, the core purpose of arbitration is to pick a winner. An arbitrator will hear both sides of a dispute and choose which side has made the better argument. The result, in many cases, is that the issue being arbitrated is put to rest in the short term. However, the factors that caused the issue are not often solved, which can lead to more issues down the line, especially if the parties continue to have a working relationship following arbitration.
The language of the TDR clause should indicate that parties will engage in the relevant dispute resolutions in the order which they are discussed below. First, executives from each side to the dispute should meet and attempt to negotiate a resolution to the dispute.
The relevant executive for each side, be it a controlling partner, or the manager of an LLC, will be included by title in the contract. The clause will indicate that the sides are to meet a certain number of times, or a certain amount of time, before moving on to the next tier. This will allow both sides to mull over what they discussed and hopefully reach an agreement that avoids the latter tiers.
Assuming the executives are unable to negotiate a resolution, the TDR clause would require the parties to mediate the dispute. The TDR clause will stipulate how many negotiation sessions are required before either side can initiate the next tier, which is arbitration. While the goal of the TDR clause is for parties to resolve the issue early on and avoid arbitration, it is inevitable that some disputes will not be resolved through negotiation and mediation, therefore leading to the third tier being initiated. The third tier is a standard arbitration.
While the downfalls of arbitration are clear, a TDR clause differs from a standard arbitration clause in two ways. First, is in its goal to reach an amicable resolution through negotiation and mediation before reaching arbitration. Second, the arbitration decision is not binding and offers a party a right to appeal as a fourth tier should they find the arbitrator’s decision was wrong or prone to error. The TDR system is not without its own flaws. Given the variety of dispute resolution options, it may take longer for disputes to be resolved than a standard arbitration clause would.
With these issues in mind, it is best for attorneys to discuss all of the potential dispute resolution clauses that could be included in a contract and choose the one that fits their clients’ costs and needs most appropriately. At Pakrooh Law, we take all of our client’s needs into consideration and strive to draft a contract that will meet all of your needs whilst protecting your interests.