We have put together this article so that you can find out more about the pros and cons of the different methods of alternative dispute resolution for resolving your business dispute in the form of a broad overview, and so that you can learn about how each type of ADR works in practice.
Here we’ll be covering the following topics:
Why should you choose ADR over litigation?
It come as no surprise to hear that going to court is a very expensive process. In addition to court fees, you will also have to pay the fees of your solicitors, barristers and (very often) technical experts as well. If you lose in court, you can expect to be liable for your opponent’s professional fees and other costs. Even if you end up winning, you will have funded the costs up until that point and will only recover a proportion of those costs, even if your opponent can afford to pay them. In other words, litigation can be expensive whether you win or lose.
In light of this, it will almost always be more cost-effective to use ADR to resolve your business dispute. As well as involving lower costs and being confidential, it’s also more likely to be sensitive to – and therefore preserve – your business relationship with your opponent. Because ADR is quicker than litigation it also means that the day-to-day your business is minimally disrupted, so you don’t lose profits from the distraction that will arise.
Different methods of ADR: adjudication, mediation, early neutral evaluation, expert determination
There are many different forms of ADR; including adjudication, mediation, early neutral evaluation (ENE) and expert determination. To equip you with a basic understanding we discuss each of the different types below, however it is advisable to speak with an ADR solicitor to ensure you follow an efficient and pragmatic strategy to resolve your dispute.
Adjudication
Adjudication is a compulsory form of dispute resolution used in the construction industry. The process for adjudication was introduced by a piece of legislation entitled the Housing Grants, Construction and Regeneration Act 1996. Adjudication is also available for non-construction disputes where the parties have included it in their contract, or have agreed to it after a dispute has arisen.
How does the adjudication process work?
Adjudication generally requires you to serve the other party with a Notice of Adjudication. This should include a description of the dispute, identify the parties involved (i.e., you and your opponent), the details of where and when the dispute arose, the nature of the remedy being sought, and the names and addresses of the parties to the contract (including an address for where documents can be 'served' (sent to)). You will then need to appoint an adjudicator by agreement, or refer the dispute to the Adjudicator Nominating Body, who will appoint an adjudicator on your behalf for a fee.
What happens when an adjudicator is appointed?
Once an adjudicator is appointed, a referral notice is generally served. This notice will set out the details of the case and be accompanied by supporting documentation. A response to the referral notice is typically required within seven days (although this can be extended on request). The adjudicator will then reach a decision – in construction adjudications, this will generally take place within 28 days of the referral notice being served.
What about the costs of adjudication?
The costs of adjudication are typically a fraction of the costs of litigation. The parties may decide either to divide the costs between them, or agree to give power to the adjudicator to decide which party should pay the costs.
Conclusion on adjudication
Adjudication decisions are binding unless and until they are revised by an arbitration award or a court judgment. Adjudication is therefore a particularly effective tool to resolve issues which may affect (or are already affecting) the smooth running of a project. It provides for swift, enforceable decisions; allowing the parties to concentrate on the essential project deliverables without the distraction of ongoing issues and disputes. It’s worth highlighting here that these (interim) adjudication decisions can be challenged later, perhaps after the completion of the project. However, in reality, many such decisions aren’t challenged or are lumped together with other outstanding issues and resolved at the end of the project.
Mediation
Mediation is a voluntary process in which the parties discuss their issues and try to negotiate a resolution with the assistance of an independent third party – the mediator.
How does the mediation process work?
There is no set procedure for a mediation, but typically, it will start with the parties exchanging case summaries and important documents a few days before the mediation itself. The mediation starts with the mediator explaining the ground rules and allowing all parties to present their positions. Thereafter, the mediator ‘shuttles’ between the parties with a view to finding (and with prior authorisation, sharing) common ground and possible solutions. If a settlement is achieved, the parties sign legally binding terms (with legal assistance if required).
Whilst mediation is voluntary, the courts in England and Wales strongly encourage disputing parties to submit to mediation (or some other form of ADR). Cost sanctions are imposed for an unreasonable refusal to commit to ADR.
What are the benefits of mediation?
Mediation is a private and without prejudice process, meaning that the parties are free to have wide-ranging and ‘warts-and-all’ discussions which will never be shared with the court or tribunal if litigation later arises. Because it is private and less confrontational than litigation, it tends to ‘lower the temperature’ and creates a more conducive atmosphere for constructive settlement discussions. It’s also more likely to preserve business relationships. Additionally, there is greater flexibility for parties to be creative in relation to settlement outcomes – for example, beneficial consequences can include ongoing or future trading arrangements.
What about the costs of mediation?
Mediation costs are a fraction of the costs of litigation and are generally shared 50:50 by the parties, although it’s open for you and your opponent to agree that if the mediation is unsuccessful and the dispute proceeds to court, the mediation costs are paid by the losing party.
Are there any disadvantages to mediation?
There are very few disadvantages to agreeing to mediate. However, it’s worth keeping a watchful eye out for any attempt by your opponent to use the process cynically to acquire knowledge or information which may subsequently be used to improve their bargaining position (in the event that a settlement is not achieved via mediation).
Early Neutral Evaluation
Early neutral evaluation (ENE) is a dispute resolution method which consists of an independent and impartial evaluator (usually a retired High Court judge) giving an assessment/evaluation of the merits of each side’s case. The evaluation is confidential, without prejudice and non-binding – importantly, this means that it is not shared with the trial judge. Instead, you and your opponent would be free to use the assessment/evaluation provided in your subsequent settlement negotiations.
Is ENE expensive?
If run properly, the ENE process should be a good deal cheaper than court action and many other forms of ADR. The cost position is of course different if ENE is carried out through the courts.
In what circumstances is ENE useful?
ENE is useful where a legal or technical evaluation on a particular aspect may result in a more realistic assessment of the likelihood of success or failure of court proceedings. Such evaluations can be instrumental in repositioning the parties and increasing the likelihood of pre-trial settlements. Of course, there is a risk that an evaluation can have the opposite effect and cause the party receiving what they perceive as good news’ to ‘dig their heels in’; thereby making the possibility of achieving a settlement infinitely more difficult.
Expert Determination
Expert determination is when an independent technical expert makes a binding decision on a technical issue in a dispute (unless the parties agree in advance that the expert’s decision isn’t binding).
Where it is possible to agree to an expert determination process after a dispute has arisen, it will generally be included as a clause in the agreement between the parties as part of the ADR arrangements. The expert determination procedure may be set out in the agreement or dictated by the expert appointed.
What does the Expert Determination procedure involve?
Typically, the procedure will involve the parties lodging their submissions in relation to the technical issue as supported by relevant documentation. The expert may then request additional information and/or documents. Thereafter, the expert will issue the final binding decision, with or without reasons, dependent upon the agreed procedure.
What are the upsides to Expert Determination?
Expert determination is generally a swift process, and the whole process may only take just a few weeks. Even in the most complex cases, the process should take no more than a few months as a maximum. As such, expert determination is quick and cheap compared to litigation or arbitration. Of course, it does not necessarily resolve the entire dispute. Rather, it focuses on key (technical) issues. Having said that, at the heart of many disputes is a technical issue; the determination of which can facilitate the resolution of the entire disagreement.
Is arbitration a form of ADR?
Arbitration is the judicial determination of a dispute by an independent third party called an arbitrator. Put simply, it is not technically a form of ADR. The way arbitration works is that the parties to the dispute will participate in a procedure leading to a hearing and a third party will make a binding judgment, known as an arbitration award. The third party may be a single arbitrator, or a panel of arbitrators.
Unlike other forms of ADR, you can’t take legal action in court after receiving a final and binding decision via arbitration, save in exceptional circumstances.
Is arbitration a compulsory process?
Arbitration can be voluntary or compulsory. Although parties are not obliged to participate in arbitration, it’s common for commercial contracts to specify arbitration as the dispute resolution mechanism in the event of a dispute between the parties. In such cases, arbitration is of course mandatory.
What are the benefits of arbitration?
The main benefits of using arbitration are that it can be quicker and more flexible than litigation. Typically, disclosure obligations are less onerous and an appropriately qualified arbitrator can be chosen to act as an arbitrator; for example, a chartered engineer in a dispute concerning defective engine parts. The arbitration process is also confidential – unlike litigation through the courts, which is potentially subject to public scrutiny.
What about arbitration in the context of international disputes?
Very importantly, an international arbitration award is recognised and can be enforced in countries which are party to the New York Convention 1958. Currently most countries in the world are a party – 180 countries at the last count. It is a relatively swift and easy process to register your award in your target country and then use the courts in that country to ‘force’ your opponent to pay up or otherwise comply with the award. Cross-border enforcement of court judgments is, perhaps surprisingly, less streamlined; and it is impossible where there are no reciprocal enforcement arrangements between the two countries concerned.
Can arbitration awards be challenged?
If you do choose arbitration as a method of resolving your dispute, you should be aware that there are very limited rights to challenge and/or appeal an arbitration award.
Watch our business dispute solicitors explaining the benefits of arbitration below:
Do you have to use ADR?
Engaging with ADR is not obligatory, unless you and your opponent have entered into a contract which makes any of the procedures outlined above mandatory.
Having said this, the pre-action protocols related to the court process in England and Wales require you to consider ADR before you initiate legal proceedings. This means that failing to comply with the requirements of the relevant pre-action protocol governing the nature of your dispute – including the requirement to properly consider engaging with ADR – could result in cost sanctions being imposed by the court, irrespective of the outcome of the case. This is not a consideration that ought to be dismissed lightly.
Which ADR method is best for you?
The most suitable type of ADR for your business will depend on your objectives. Consider these questions to help you decide which is best for your circumstances:
- Have you and the party to the dispute entered an agreement which makes any form of ADR compulsory?
If so, engaging in the prescribed method of ADR is definitely compulsory. If you’re not sure, it’s crucial to review the written agreement to identify whether the agreement details the procedure in instances of a dispute arising.
- Is your main priority to preserve your relationship with the other party?
If so, mediation may be the most suitable ADR option. The mediator will ensure each party is able to put forward their views at all stages. This can help the parties reach a settlement diplomatically. Since the settlement is recorded in a contract, it can be enforced at home (via court proceedings) and abroad (by using a mediation settlement enforcement order).
- Is your main priority to obtain a final and certain determination to end a dispute without recourse to court?
If so, arbitration is the most suitable forum. This will allow you to receive an award from an arbitrator which can be enforced in England and Wales, as well as a huge number of other countries party to the New York Convention. Since this award will be final, there are limited grounds of appeal and you won’t face the uncertainty of a legal claim being brought in court for the same dispute.
- Could your dispute be resolved by receiving an opinion on a particular technical or legal issue?
If so, you should consider expert determination or ENE. Such forms of ADR are very helpful if you have a dispute that hinges on a few points which a suitably qualified third party can shed light on. They are also helpful if you’re negotiating a settlement and require clarity on how a technical matter might be decided by a judge or arbitrator.
