The Advantages and Disadvantages of Alternative Dispute Resolution Clauses

Posted by William J. Piercy on

Although no one plans on a dispute with a business partner, those who plan for that possibility at the inception of a relationship can benefit greatly. A business agreement that provides for alternative dispute resolution – specifically, arbitration and mediation – can minimize arguments about where and how a dispute is contested and can provide a few other distinct advantages in comparison to litigation.

Arbitration

Parties may include in their partnership or other business agreement an arbitration clause stating that, if a dispute arises, it will be resolved by a private arbitrator rather than a public court. Though the experience of litigation of course varies from court to court, arbitration can allow for disputes to be resolved more quickly. In general, arbitration features a streamlined discovery process and proceeds according to the schedule of the parties, rather than that of an overburdened court. If the parties to the dispute work in a business that involves specialized technical knowledge, an arbitrator can be selected who has a better knowledge of this field than a judge might be expected to have. Privacy is also an advantage over litigation.

One significant disadvantage to arbitration, however, is that, once the arbitrator has decided which side wins and which loses, that decision may not be appealed as it could be in a court. This streamlines the resolution process by cutting out the added time dedicated to an appeal but leaves the losing party without recourse. This should certainly be taken into consideration by parties weighing arbitration as an option.

Mediation

In a mediation, the parties select a neutral third party to broker a deal between the two sides. Therefore, there is no “winner” or “loser” in a mediation – the goal is to reach a compromise. As with arbitration, this allows resolution to take place at a faster pace than litigation typically does and allows the parties to choose an expert with specialized knowledge of a given field. In contrast, however, choosing mediation encourages each side to come to the table prepared to give a little. It may be difficult for parties to reconcile themselves with such an arrangement in the heat of a dispute.

The pros and cons of each method of alternative dispute resolution should be considered carefully but also considered at the outset of a partnership or other business to ensure that any dispute can be resolved as efficiently as possible.