Alternative dispute resolution in the world of commercial disputes

Abstract

Nowadays, many commercial contracts contain, or should contain, an alternative dispute resolution (ADR) provision. Resorting to mediation or arbitration as a precondition to engaging the courts has the potential of saving the parties’ resources. Further, ADR methods provide the parties with important benefits that court-instituted proceedings cannot offer. One of them is full substantive and procedural control over the resolution-seeking process, including the convenience of arranging the meeting or hearing per the parties’ schedules, needs, and preferences. In their article, the authors compare the advantages and drawbacks of ADR processes versus litigation. They also touch upon the technicalities that need to be followed to ensure the enforceability of ADR clauses. By exploring the World Commerce and Contracting (World CC) Principles, the authors’ goal is to bring the practical aspects of ADR methods closer to those who may not be familiar with them and/or who may be skeptical about their efficiency.

Introduction

In recent years, “alternative dispute resolution” or “ADR” has been a focal point of many articles and analyses. However, while the definition is well-known, some misconceptions still persist. For instance, many believe that ADR methods are only adequate for resolving family law disputes and that they have no place in the world of complex commercial disputes. But this notion ignores reality. In fact, as the authors will show, ADR methods and World Commerce and Contracting (“World CC”) Principles are so efficient in resolving commercial disputes that many, if not most, modern commercial contracts should reflect them. The questions regarding which language should such a contractual provision contain and what are its benefits when compared with litigation will be the key focuses of this article.

ADR and its methods

The term “alternative dispute resolution” and its abbreviation “ADR” are not obscure. While each country has its own “official” definition in its national legislation or in the legislation of its territorial units, the definition offered by the Black's Law Dictionary is that an ADR process is “a procedure for settling a dispute by means other than litigation, such as arbitration or mediation (Black’s Law Dictionary, 2012: 91).” ¹ While the linchpin of ADR and World CC Principles are arbitration and mediation, as the most prevalent and widely used ADR methods, it is important to note that they are not the only alternatives to litigation. Indeed, there are several other ADR forms that may be useful in resolving commercial disputes.

As a matter of background, disputes in commercial business are nearly inevitable. On one hand, regardless of how thoroughly written a contract may be, those disputes may arise due to the parties’ disagreement or misunderstanding as to their respective rights and duties (in different stages of a business transaction). On the other hand, issues may also be caused by a force majeure, an unforeseeable factor that the parties did not consider when drafting their contract. Notwithstanding the nature of the underlying dispute, its consequences may be substantial. Some of those consequences include failure to meet product quantity or quality; an unexpected product destruction or damage; delayed or untimely shipment; faulty or incomplete paperwork; and employee protests. In the business world, which is driven by consumer satisfaction and high profits, the minimization of costs and preservation of established relationships are imperative. This is an area where various ADR methods become particularly helpful. And besides arbitration and mediation, among the most (if not the most) prevalent ADR method is negotiation. That is why World CC Principles specifically state that negotiation should be “the first attempt to resolve a dispute (World CC Principles, 2020: 6).” Only if the negotiation fails should the parties, upon a mutual agreement, pursue mediation or arbitration (6).

But there are many other ADR methods as well, such as:

Early neutral evaluation (“ENE”): a nonbinding process that takes place shortly after a case is filed in a court. The case is then referred to a neutral third person called an “evaluator,” who is usually an expert on the relevant subject matter. Each party is afforded an opportunity to present its case to the evaluator who, upon close examination of the evidence, assesses the strengths and weaknesses of the parties’ arguments, thereby encouraging them to settle (Dispute Resolution Reference Guide);

Neutral fact-finding: a process where a neutral third party, selected either by the court or by the parties, investigates and/or determines a legal or factual issue that is usually part of a larger dispute. Depending on the parties’ preference, the process can be binding or nonbinding;

Settlement conference: a meeting with a judge (where the judge is not the trier of fact) or a third-party neutral to discuss settlement prospects. Similar to mediation, settlement conferences are usually shorter, more informal, and focus on legal issues such as liability and/or damages; and

Ombud or ombudsman: a neutral and independent investigator typically selected by an institution, such as a corporation, to investigate, issue recommendations, and/or resolve a dispute with an employee, a client, or a constituent (Ombuds).

Of course, depending on the parties and the dispute in question, one of these forms may be more suitable than the other. In jurisdictions such as the United States or Italy, for instance, a court may order the parties to engage in one of these ADR methods once the litigation is initiated (Welsh, 2011: 110–111; Erdoğmuş). But the parties can avoid the litigation altogether by incorporating an ADR clause in their contracts. On this note, while the World CC Principles include negotiation, mediation, and arbitration as the most commonly used ADR methods (World CC Principles, 2020: 6–7), the authors suggest that they be expanded to mirror actual practice and provide parties with a larger variety of options.

Importance of an ADR clause

Why include an ADR clause in a commercial contract?

The importance of incorporating an ADR clause into a commercial contract is twofold. First, it memorializes the parties’ agreement to (try to) resolve their potential disputes outside of the courtroom. And second, it ties the court's hands if a prematurely filed lawsuit lands on its docket. To illustrate, commercial contracts are typically lengthy and intricate. Thus, it is not unusual that when a dispute arises, a party will file a lawsuit disregarding or overlooking the ADR provision embedded in the contract. If that happens, the adverse party's invocation of the ADR provision is all that is needed to freeze the litigation. By filing an exception of prematurity, a motion to compel arbitration, a motion to stay pending arbitration, or even a motion to dismiss (without prejudice), ² the adverse party can easily obtain a ruling mandating the enforcement of the ADR provision. And the reason makes perfect sense: Courts worldwide are reluctant to thwart—or prematurely repudiate—the parties’ agreement to keep their dispute outside of the courtroom.

Further, though mostly pertinent to arbitration of commercial disputes, two more points are worth noting. First, the doctrine of separability (Born, 2009: 313–314; Ets Raymond Gosset v. Carapelli) ³ established in the landmark case Prima Paint Corp. v. Flood & Conklin Mfg. Co. may additionally restrict a court's adjudicatory role. Under the doctrine of separability, the arbitration provision incorporated into a contract is separable from the rest of the contract (Prima Paint, 1967: 409). Therefore, any attack on the validity of the contract generally, as opposed to the arbitration provision particularly, is to be decided by the arbitrator and not by the court (409). Stated simply, even if the underlying contract is found to be void ab initio, or otherwise invalid, that in and of itself would have no impact on the validity of the arbitration clause contained therein. As a sidenote, because of its separable nature, the arbitration clause does not have to be governed by the same law as the container agreement. This is an additional incentive for the parties to include an ADR provision, as they can handpick the law that treats ADR favorably (Born, 2009: 318).

And second, this favor arbitrandum principle is reflected in yet another doctrine called competence-competence. As the name suggests, the doctrine empowers an arbitral tribunal to decide its own jurisdiction by circumventing the court's decision on the issue (Graves and Davydan, 2011: 157). ⁴ That is, the competence-competence principle equips arbitrators with the authority to rule on the existence of an arbitration provision, as well as its scope and validity, without first seeking a court's ruling on the subject. And perhaps most importantly, a party's challenge to the arbitration clause alone does not preclude the arbitrators’ power to proceed with the arbitration proceeding (Paliwal, 2011: 45–46).

These two points demonstrate how a contract that has an ADR provision may limit, or altogether preclude, a court's involvement in a dispute. But, for that to happen, it is not enough to simply copy-and-paste an ADR clause into an agreement. Rather, as World CC Principles suggest, the ADR clause should be carefully drafted to be in compliance with relevant jurisdictional requirements and to ensure that it is valid, enforceable, and tailored to the parties’ preferences.

What must an ADR clause contain to be enforceable?

As a threshold matter, the language of an ADR provision should be drafted in accordance with jurisdiction-specific requirements which may vary to a certain extent. ⁵ Generally speaking, however, an enforceable ADR provision must meet certain basic requirements. Otherwise, the provision may be deemed inherently flawed and may open the door to unnecessary litigation. Regardless of which ADR method the parties choose, they should pay close attention to the following technicalities, some of which are also reflected in the World CC Principles.

One, in line with the principle of animus contrahendi, the parties’ intent to employ one of the ADR methods and waive their right to litigation must be clearly and unambiguously stated in writing (BGE 4A_150/2017). This is the primary factor in determining whether the ADR provision is enforceable. Any uncertainty concerning the parties’ intent or the scope of the ADR clause justifies an attack on adhesionary or other grounds. One way to preclude such a challenge is to use sufficiently broad language devoid of any vague conditions precedent or undefined terms.

Two, the wording of the ADR provision must be conspicuous and not buried in fine print. Specifically, the arbitration language should be of identical size and font as other provisions in the contract ( Duhon v. Activelaf, LLC., 2016 ). ⁶ It should also be placed in a separate paragraph, preferably preceded with a bolded title in all caps indicating its content (e.g. “DISPUTE RESOLUTION PROVISION”) (Aguillard v. Auction Mgmt. Corp., 2004). ⁷

These are the fundamentals for an enforceable ADR provision. Naturally, as with any other contract, the parties are free to tailor the ADR clause to their needs and preferences. Common additions suggested by the World CC Principles include the imposition of certain deadlines, a description of the procedure for selecting an arbitrator or a three-person arbitral panel, an outline of discovery obligations, a choice of law provision, a specification of procedural rules of an ADR institution, the locale where the dispute will be mediated/arbitrated, the method of payment, and so on (World CC Principles, 2020: 6–7). But the parties should be mindful to make these additions reasonable and not overly rigid, leaving room for exceptions within the arbitrator(s)’ discretion (upon a good faith request) and/or upon the parties’ agreement.

Arbitration of commercial disputes and its advantages

As defined by the World CC Principles, arbitration is a private voluntary dispute resolution process whereby “the parties submit their dispute to one or more appointed arbitrators authorized to reach resolution on the dispute by rendering a final and binding decision called an award (7).” The arbitration process is essentially a trial without the courtroom (Harges, 2011).

The procedure entailed in an arbitration proceeding is almost entirely within the parties’ control. It depends, inter alia, on the parties’ agreement and their choice of an ADR institution. For instance, “[p]arties can exercise additional control over the arbitration process by adding specific provisions to their contracts’ arbitration clauses or, when a dispute arises, through the modification of certain aspects of the arbitration rules to suit a particular dispute (A Guide to Commercial Mediation and Arbitration for Business People, 2013: 6).” Moreover, as encouraged by the World CC Principles, the parties may make stipulations “regarding confidentiality of proprietary information used; evidence, locale, number of arbitrators; and issues subject to arbitration, for example (6; World CC Principles 2020: 7).” The parties can also agree on mandatory credentials for an arbitrator or members of the arbitral panel and expedited arbitration procedures, including the time period within which an award must be rendered (6; 7).

In light of the aforementioned, the advantages of choosing arbitration for resolving commercial disputes are somewhat apparent. Five such advantages stand out. First, at the onset, the parties have complete control over the rules and procedures applicable to their arbitration, as well as over the selection of the arbitrator(s) who will ultimately decide their dispute. The same cannot be said for litigation where cases are randomly allotted to different judges. Second, commercial disputes usually involve parties (and witnesses) from varying parts of the globe. By having the ability to specify the governing law and the location of the proceeding, the parties can avoid litigating conflict-of-law, jurisdictional, and venue issues. Not to mention that, considering the ongoing COVID-19 pandemic, the parties may also opt to arbitrate their dispute on an online platform, such as Zoom or Google Meet, thereby saving additional costs and ensuring the safety of all participants. Third, arbitration does not carry the disadvantages of the classical mode of court litigation, such as significant pre-trial discovery, a snail-like pace, a gridlock of courts’ dockets, and lawyers’ trial preparation—which can consume substantial amount of clients’ resources. Thus, arbitration has the potential of being cost-efficient and time-saving. However, the ongoing trend in recent years has been that arbitration costs “have been getting out of hand”—especially in international as opposed to local arbitration proceedings (Ng’etich, 2017: 111–112). Other factors, too, can easily drive up the costs and make arbitration less attractive and accessible—such as the unwillingness to cooperate, the need to sometimes hire special arbitral counsel, special venue provisions requiring significant travel, and amount in dispute. ⁸ Fourth, while litigation demands a winner-take-all approach, arbitration allows the parties to preserve their business relationships and continue their cooperation in the aftermath of the proceeding. And fifth, the parties in an arbitration may use relaxed evidentiary rules, engage in reasonable and simplified discovery, protect confidential information without a court order, and introduce evidence such as hearsay and unauthenticated documents that may otherwise be inadmissible in a court of law. This informal aspect of the arbitral proceedings can often lead to less disputes over the admissibility of evidence which, in turn, could result in notable savings for the parties.

Mediation of commercial disputes and its advantages

As defined by the World CC Principles, mediation is a “process by which a third-party neutral facilitator is engaged to facilitate discussions between the parties and to encourage compromise and settlement of the issues (World CC Principles, 2020: 7).” Mediation differs from arbitration in several respects. To name a few, unlike in arbitration, the parties in mediation do not transfer their decision-making power to the mediator. This essentially implies two things. One, the outcome in arbitration is determined by an objective standard (i.e., the applicable law), whereas the outcome in mediation is determined by a subjective standard (i.e., the will and interests of the parties). This important distinction makes arbitration a rights-based procedure and mediation an interest-based procedure. And two, the parties in arbitration present their arguments before an arbitrator or an arbitral tribunal to obtain a ruling in their favor. Conversely, in mediation, the parties work with the mediator to obtain a result that is mutually agreeable to all parties. The mediator serves as a facilitator and is not a decision-maker.

Further, as logic would have it and as suggested by the World CC Principles, mediation is not binding unless the parties specifically agree otherwise in writing (6). When the mediation results in a settlement, the parties usually formalize the settlement with a written agreement. This point, too, is reflected in the World CC Principles (6). However, at any time before the parties reach an agreement in a mediation, they may abandon the process if they find that continuing it would be futile. Of course, an ADR clause may restrict this privilege by requiring that the parties engage in a certain number of mediation sessions prior to deserting the process. Additionally, parties in mediation cannot be forced to disclose information that they want to keep confidential. But, similar to arbitration, once a party shares confidential information, that information is not subject to disclosure in subsequent litigation. This allows the parties to engage in settlement discussions more freely and productively, without fearing publicity or courtroom prejudice.

In essence, mediation and arbitration—and corresponding World CC Principles—reveal many overlapping advantages. These processes allow the parties to be in ultimate control over the manner in which their disputes are resolved while providing them with a (potentially) cost-friendlier and speedier option for reaching such a resolution. But mediation goes a step further. It shields the parties from a “mini-trial” and the requirement that the parties substantiate their positions with evidence. And, governed by the parties’ interests and the goal of preserving their business relationships, mediation allows for more creative outcomes. That may particularly be true considering recent developments, such as the Singapore Convention on International Commercial Mediation, that make mediation a more sensible choice for transnational dispute resolution (Singapore Convention on Mediation). Signed by 53 countries as of the date of this article, including the world's two largest economies—the United States and China (2018 Singapore Convention on Mediation)—the Singapore Convention is designed to enable disputing parties “to easily enforce and invoke settlement agreements across borders (Background to the Convention: Singapore Convention on Mediation).”

Still, despite its benefits, mediation is not recommended for settling disputes in all cases. If the underlying dispute involves deliberate, bad faith conduct, or a party seeking public vindication, mediation—which requires cooperation from both sides—may not be appropriate.

Conclusion

Commercial disputes will undoubtedly continue to occur. But their resolution should not only be sought before or from the courts. Instead, parties should consider incorporating different ADR provisions and World CC Principles into their commercial contracts, which may help them to easier navigate through the conflict—all the while preserving their invaluable business relationships and fostering future cooperation.