White Paper - Alternative Dispute Resolution methods (1)

Alternative Dispute Resolution (or "ADR") has become very popular of late for resolving or heading off disputes, but it has to be said that many just use the term to mean mediation. In fact, there are many varieties of ADR and this White Paper sets out the main types and lists their characteristics.

Background

Disputes are a fact of life in all industries, and the IT industry has had its fair share of problems. The recent BSkyB litigation resulted in a record settlement of ?318m by EDS following a trial where BSkyB was successful on some of its claims including fraudulent misrepresentation. Reports continually show that IT projects are more likely to fail than succeed, and so there has to be a professional way of resolving disputes.

ADR methods can be divided into two basic categories - on the one hand, those which are designed to result in some sort of binding determination of a dispute, and on the other hand those which are non-binding and designed to result in some sort of agreement between the parties settling the dispute. You can also add third hybrid category for methods which do not easily fit in the first two categories.

The other point to bear in mind is that the various methods are not always mutually exclusive. Of course, if you try to have two binding ADR processes applying to the same dispute then you have a recipe for disaster, as it may take a costly trip to the courts to find out which is the method you have to use: for example, you cannot have both arbitration and expert determination applying to the self-same dispute. On the other hand, you could have an arbitration clause, while the contract specified other non-binding methods of ADR to be attempted before starting arbitration - in other words requiring the parties to try to mediate the dispute before launching arbitration proceedings.

More complex hybrid dispute resolution clauses split up disputes into different types, so that "technical" disputes are contractually to be decided by and expert, while "commercial" disputes have to be go to the courts.

Non-binding ADR

Negotiation between the parties

This is always available - at any stage during a dispute, or before a dispute has formally arisen. By its very nature it is flexible and informal. If successful, it will obviously save costs compared with any other method because it does not involve a third party. It can come about because one or other of the parties requests it or because some contract provides that disputes should go through a process of negotiation prior to any other form of dispute resolution being commenced.

Bear in mind in particular:

• Negotiations should always be conducted "without prejudice", so that everyone agrees that whatever is said will not be revealed to the judge or other person who ultimately has to determine the dispute
• When coming to a deal, make sure that you are not accidentally committed before you are ready by making it clear on all communications that matters are "subject to contract" - in fact, rather than just using a standard phrase like "subject to contract", set out in ordinary English words that your communication is not intended to be capable of acceptance (or whatever in the circumstances you mean to say)
• Make clear in any settlement agreement exactly what disputes are being settled in full and final settlement - remember that unless something is specifically settled, a court might well say later that it was not part of the actual settlement and is still capable of being litigated

Mediation

When people say ADR, they often just mean mediation. As this White Paper shows, it is one of many processes that can together be considered to be "ADR".

What distinguishes mediation from simple negotiation is the presence of a third party. Like negotiation, mediation is private and voluntary, and will be conducted without prejudice, so that a court or other tribunal will not be a party to the detail of the discussions. Unlike negotiation, there is some level of formality in that the parties will (normally) meet at a neutral location with the mediator and the parties with the mediator will agree some sort of processes to be followed during the mediation.

Since a mediation allows considerable flexibility in agreeing processes, there is no set formula, but the following are typically the steps which are followed:

• The agreement to mediate may be contained in the contract in dispute, which requires some form of dispute resolution to be followed or one or other the parties can propose it at any stage of a dispute
• The parties will agree the identity of a mediator, or if the parties cannot do this, then a third party ADR service provider can nominate one
• The effort to prepare for a mediation should not be underestimated: not only must a case summary be prepared, but consideration should also be given to preparing confidential briefings for the mediator's eyes only, and having discussions with the mediator prior to the mediation
• As a mediation can result in a new commercial agreement and can take account of all aspects of the past and future relationship between the parties, it is not restricted to just the sort of judgment a court could deliver, and so preparation should also be directed to considering the entire relationship between the parties
• This also means that preparation should also include having all necessary personnel either present at the mediation or available at the end of a telephone to provide any necessary advice or authorisations as the deal starts to take shape
• The mediation will normally start with a joint session where the parties meet together with the mediator and each presents a short presentation of its case, although the presentation does not just have to be restricted to the legalities and can indicate possible areas for negotiation and compromise
• After the joint meeting, the mediator will normally conduct some sort of shuttle diplomacy, but further joint meetings are possible as are meetings between individuals from the parties to try and make progress in particular areas
• The aim of a mediation is to come to some sort of negotiated settlement - not just in the form of a judgment, but as a commercial agreement which may provide for revised terms for a continuing relationship between the parties

Conciliation

Conciliation is very similar to mediation, the only appreciable difference being that the conciliator will tend to take a more proactive role in trying to find the possible terms of a settlement. It is the term more commonly used in the employment arena where labour disputes are settled.

Executive tribunal or mini-trial

This is similar to mediation again, but in this case, the parties make a formal presentation to an executive tribunal of the best aspects of its case. The executive tribunal itself is made up of senior executives of each of the parties with an independent third person to act as chair. After the presentations, the executive tribunal withdraws and negotiates settlement of the dispute. The independent third party chairs proceedings but does not come up with a binding decision, and like a mediator seeks to find with the parties areas of agreement and possible compromise.

This sort of ADR requires senior people to be present and well briefed for the duration of the process, and for that reason it tends only to be used in major commercial disputes where very senior input is required. It is again like mediation in that the process is consensual and can come up with a result which is commercial rather than strictly like a judgment.

Early neutral evaluation

ENE uses an independent third person to come up with a non-binding opinion on the merits of the dispute. The idea behind the method is that the parties can use the opinion as a pointer to the likely outcome of the dispute and thus come to a negotiated settlement.

ENE for that reason will only really be useful if the independent third party is someone whom the parties will trust to come up with a valuable opinion. The difficulty then is that an opinion favouring one side or the other may upset the balance of negotiations by leading one party to think that its case is stronger.

A disadvantage is that the parties will incline to put in a good deal of preparation for ENE to ensure that the opinion is in their favour. This can mean it can be more expensive if it used as a means of obtaining an opinion about a whole case. Sometimes, ENE can be used in relation to an aspect of a larger case, so that perhaps a logjam can be broken in that one area, allowing the parties to make progress overall.

In England, it tends not to be widely used, although provision is made to permit it in some courts.

Binding ADR

Arbitration

Arbitration is most like litigation in the courts with the big difference that the parties have the chance to appoint their own judge or judges, who will hear and decide the dispute by coming up with a binding award.

The process is highly regulated with various bodies providing services to administer arbitrations and appoint arbitrators and these bodies also provide rules for the conduct of arbitrations. There is a detailed Arbitration Act and a large body of case-law setting out what can and cannot be done.

The normal stages of an arbitration are as follows:

• While it is possible for the parties to an existing dispute to agree that it should go to arbitration rather than the courts, the normal start for an arbitration is to be found in an agreement to arbitrate in the contract in dispute
• The parties will need to choose their arbitrator(s), failing which the contract or the Arbitration Act will step in and provide a procedure for appointment
• The parties will need to agree terms with the arbitrator(s), since they are independent people and will charge money for all the work they do, unlike a judge in court
• The arbitrator(s) when appointed will normally hold an initial meeting with the parties in order to seek to agree the detailed procedure which will apply to the arbitration, failing which the arbitrator(s) will issue an order setting out those matters
• Thereafter, that procedure will be followed leading to a hearing and an award, much like proceedings in court except of course that the arbitration process is private and there is much room for flexibility in an arbitration to change the procedure to suit the dispute in question and potentially save costs

Arbitration is often used in international contexts, where its apparent neutrality can soothe one party's anxiety about the other party's national courts being asked to determine disputes. The downside is that arbitrators are not cheap compared to the more or less nominal fees charged by the courts, which is a service provided by the state.

However, one big advantage compared to the courts is that the process is a private one, and to a large extent it is possible to exclude the role of the courts: if there is any dirty washing to be laundered, arbitration does offer the chance to do so in private rather than under the glare of the law reporters.

Expert determination

Expert determination should not be confused with arbitration: they are very different processes. Arbitration is a much more formal affair, governed by statute, much case-law, rules and international conventions to aid various aspects of arbitration, not least enforcing an award against a foreign defendant. While there is much case-law concerning expert determination, it lacks that element of formality, in particular relating to enforcement against foreign defendants.

Contracts sometimes make provision for disputes to be determined by an expert, although it is possible at any time for the parties to agree that a dispute or part of a dispute can be submitted to expert determination.

The expert is an independent third party who will decide the dispute. The idea is that the parties can choose a trusted expert who can provide a final and binding decision. This sort of ADR is well suited to a discrete dispute to do with e.g. technical matters, where a third party expert can look at the particular matter in dispute and give a quick, binding decision. However, depending on how the agreement is drafted, expert determination is less well suited to determining major commercial disputes encompassing technical and commercial elements. There can be problems if there is a major dispute, with some aspects of the dispute being submitted to an expert and other aspects going down another route.

Furthermore, unlike the courts and to a large extent arbitration, there is no set procedure, with much being left to the expert to lay down. For this reason, the parties may feel that they are not in control of the process.

This is not to say that expert determination cannot provide a quick, private and cheap way of getting a binding decision on a dispute.

Adjudication

This is not the same as either arbitration or expert determination. It is a process that has been widely used in the construction industry (and is now compulsory). The idea is that an adjudicator can give a quick decision on problems that arise in the context of a project. The decision is interim, in the sense that the parties can later challenge that decision in subsequent arbitration or litigation, but for the purposes of the project, it is an interim binding decision.

Adjudication allows a project to proceed without the immediate threat of major arbitration or litigation, as the parties will have to comply in the short term with the adjudicator's interim decision.

While adjudication in the construction industry is regulated by statute, there are no such laws applying to other industries, and so the parties are free to set up their own scheme of adjudication with its own rules and procedures.

Hybrid methods

Dispute Review Board

A DRB normally consists of a panel of three independent people, appointed at the start of a major project. The panel will follow the progress of the project and will meet with the parties at set times during the project.

The panel will act in the way provided for in the agreement appointing it. This can be binding or non-binding. If the agreement requires the panel to be non-binding, then it will act something like a mediator with the difference that its involvement in the project will mean that it gets to disputes or potential disputes much sooner. It if it is binding, then it will issue interim (but binding) decisions on disputes as they arise, which allows the parties to get on with the project. However, there is normally provision for subsequent arbitration or litigation to challenge the interim decisions of the panel and in that sense it is very similar to the system of adjudication used in the construction industry.

As the panel will be kept involved in the project to a greater of lesser degree (depending on what is agreed about its role), there is of course added expense. For that reason, DRB is used on large infrastructure projects which are time-critical, such as the building of the Hong Kong airport or the Olympic Stadium.

Med-arb

As its name suggests, this process envisages that a mediator will conduct the mediation and, if that mediation fails to resolve the dispute, the mediator will resolve the dispute as arbitrator.

The obvious objection to this is that the mediator will find it hard to earn the trust of the parties, who each know that he will become the arbitrator if things are not settled.

Of course, there is nothing to stop the parties seeking to mediate and appoint an arbitrator/expert/adjudicator to determine complex aspects of the dispute which cannot be settled in the context of a mediation.

Med-arb, in the original sense of the same person being both mediator and arbitrator is little used in the UK, and there are probably good reasons why that person would not want to do so, for risk of impugning his independence.

Notes

(1) Copyright Richard Stephens 2010. The law is stated as at 17 August 2010.

This note is intended to provide general information about legal developments in England & Wales and you should not apply any of the advice or information contained in it to specific situations without seeking professional advice first.