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Alternative dispute resolution (ADR) is a term that refers to several different methods of resolving disputes outside traditional legal and administrative forums. These philosophically similar methodologies, which include various types of arbitration and mediation, have surged in popularity in recent years because companies and courts became extremely frustrated over the expense, time, and emotional toll involved in resolving disputes through the usual legal avenues. "The adversarial system is expensive, disruptive, and protracted. More significantly, by its very nature, it tends to drive the parties further apart, weakening their relationship, often irreparably" pointed out Whayne Hoagland in Business Insurance. ADR programs emerged as an alternative, litigation-free method of resolving business disputes.
Analysts also trace the rise of ADR methods to changing attitudes within the American judicial system. Business Horizons contributor Stephen L. Hayford observed that until the 1980s, "attempts by business firms to avoid litigation … were frustrated by a longstanding hostility on the part of the courts toward any devices that infringed on their jurisdiction." But during the 1980s, Hayford noted that a new body of case law emerged that sanctioned the use of binding arbitration provisions in commercial contracts between companies, business partners, employees and employers, etc. This body of law continued to evolve in the late 1990s. For example, the Alternative Dispute Resolution Act of 1998 extended ADR mechanisms throughout the federal district court system. As Simeon Baum stated in CPA Journal, "the act recognizes that ADR, when properly accepted, practiced, and administered, can not only save time and money and reduce court burdens, but also 'provide a variety of benefits, including greater satisfaction of the parties, innovative methods of resolving disputes, and greater efficiency in achieving settlements.'"
Today, legal and corporate acceptance of alternative dispute resolution as a legitimate remedy for addressing business disagreements is reflected in the language of business contracts. ADR contingencies have become a standard element in many contracts between companies and their employees, partners, customers, and suppliers. As U.S. News & World Report noted, "virtually every state has experimented with some form of ADR." With the growth of ADR has come a growing number of organizations and associations designed to assist commercial entities in the use of these alternative dispute resolution methods.
There are several U.S. organizations and agencies that are directly involved in arbitration and arbitration issues. These include the National Academy of Arbitrators (NAA), the American Arbitration Association (AAA), and the Federal Mediation Conciliation Service (FMCS). The NAA was founded in 1947 as a non-profit organization to foster high standards for arbitration and arbitrators and to promote the process. The NAA works to attain these objectives through seminars, annual conferences, and educational programs. The non-profit AAA offers its services for voluntary arbitration as part of its mandate to promote the use of arbitration in all fields. The FMCS, meanwhile, maintains a roster from which arbitrators can be selected and champions procedures and guidelines designed to enhance the arbitration process.
Arbitration is the procedure by which parties agree to submit their disputes to an independent neutral third party, known as an arbitrator, who considers arguments and evidence from both sides, then hands down a final and binding decision. This alternative, which can be used to adjudicate business-to-business, business-to-employee, or business-to-customer disputes, can utilize a permanent arbitrator, an independent arbitrator selected by the two parties to resolve a particular grievance, or an arbitrator selected through the procedures of the AAA or FMCS. A board of arbitrators can also be used in a hearing.
After the arbitrator is selected, both sides are given the opportunity to present their perspectives on the issue or issues in dispute. These presentations include testimony and evidence that are provided in much the same way as a court proceeding, although formal rules of evidence do not apply. Upon completion of the arbitration hearing, the arbitrator reviews the evidence, testimony, and the collective bargaining agreement, considers principles of arbitration, and makes a decision. The arbitrator's decision is generally rendered within 60 days. Hayford noted that "[binding arbitration] minimizes pre-hearing machinations with regard to discovery, motion practice, and the other preliminary skirmishes that extend the time, expense, and consternation of court litigation. In exchange, the parties to a contractual binding arbitration provision agree to accept the risk of being stuck with an unacceptable decision."
Other forms of arbitration include the following:
In contrast to arbitration, mediation is a process whereby the parties involved utilize an outside party to help them reach a mutually agreeable settlement. Rather than dictate a solution to the dispute between labor and management, the mediator—who maintains scrupulous neutrality throughout—suggests various proposals to help the two parties reach a mutually agreeable solution. In mediation, the various needs of the conflicting sides of an issue are identified, and ideas and concepts are exchanged until a viable solution is proposed by either of the parties or the mediator. Rarely does the mediator exert pressure on either party to accept a solution. Instead, the mediator's role is to encourage clear communication and compromise in order to resolve the dispute. The terms "arbitration" and "mediation" are sometimes used interchangeably, but this mixing of terminology is careless and inaccurate. While the mediator suggests possible solutions to the disputing parties, the arbitrator makes a final decision on the labor dispute which is binding on the parties.
Mediation can be a tremendously effective tool in resolving disputes without destroying business relationships. It allows parties to work toward a resolution out of the public eye (the courts) without spending large sums on legal expenses. Its precepts also ensure that a company will not become trapped in a settlement that it finds unacceptable (unlike an arbitration decision that goes against the company). But Hayford commented that "mediation only works when the parties employing it are willing to go all out in the attempt to achieve settlement," and he warned that "the mediator must be selected carefully, with an eye toward the critical attributes of neutrality, subject matter and process expertise, and previous track record." Finally, he noted that with mediation, there is a "lack of finality inherent in a voluntary, conciliation-based procedure."
Other forms of mediation often employed in labor disputes include "grievance mediation" and "preventive mediation." Grievance mediation is an attempt to ward off arbitration through a course of fact-finding that is ultimately aimed at promoting dialogue between the two parties. Preventive mediation dates to the Taft-Hartley Act (1947) and is an FMCS program intended to avoid deeper divisions between labor and management over labor issues. Also termed technical assistance, the program encompasses training, education, consultation, and analysis of union-management disputes.
An ombudsman is a high-ranking company manager or executive whose reputation throughout the company enables him/her to facilitate internal dispute resolutions between the company and employees. Hayford points to several benefits of ombud-based ADR: "It provides a confidential, typically low-key approach to dispute resolution that keeps conflicts 'in the family.'…. Properly effected, the ombuds mechanism can do much to enhance the perception that the company is concerned and eager to address the problems of its employees by providing them with an accessible, nonthreatening avenue for seeking redress when they believe they have been wronged." The primary drawback of ADR by the ombud process, however, is that many companies—whether large or small—do not have an individual equipped with the reputation, skills, or training to take on such a task.
In neutral evaluations, a neutral individual, with a background in ADR, listens to each party lay out its version of events. After their perspectives have been considered, the neutral evaluator offers his/her opinion on the disagreement. This opinion is not binding in any way, but if the neutral party is respected and trusted by both sides, it can help the parties reassess their negotiating positions with an eye toward finding common ground.
The popularity of alternative dispute resolution has increased dramatically in recent years. Small- and medium-sized businesses have contributed to this surge in use, drawn by the promise of cost and time savings. But ADR provisions need to be weighed carefully before they are incorporated into any business agreement with partners, employees, vendors, or clients. The questions to ask are: when is an ADR resolution method preferable to litigation; when is it to be avoided; and, if ADR is preferred, what form of ADR should be pursued? Legal assistance is particularly vital for small business owners who wish to fully answer these questions and incorporate ADR provisions into their contracts and agreements.
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Elkouri, Frank. How Arbitration Works. BNA Books, January 2003.
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Hayford, Stephen L. "Alternative Dispute Resolution." Business Horizons. January 2000.
Hoagland, Wayne. "Keep Employment Disputes Out of Court." Business Insurance. 29 August 2005.
Jacobs-Meadway, Roberta. "Alternatives to Litigating IP Disputes." New Jersey Law Journal. 18 July 2005.
Jasper, Margaret C. The Law of Alternative Dispute Resolution. Oceana Publications, 2000.
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Wall, Michael. "Settlements Rise as Way to Avoid Court Wrangling." Atlanta Business Chronicle. 9 June 2000.
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Hillstrom, Northern Lights
updated by Magee, ECDI