Drafting ADR clauses
Draft an ADR Clause That Is Specific to the Client’s Needs
by Joe McMahon
For the lawyer practicing in the field of alternative dispute resolution, a common request is for assistance in drafting an ADR clause in a business agreement. Often, such a request is very brief; such as, “Give me a copy of a good ADR clause.” Or, “Give me a good but very short arbitration clause.”
As with other contract provisions, however, the mechanical use of a form or sample clause invites problems. Therefore, one of the lawyer’s goals in counseling a client about an ADR contract provision is to ensure he or she has enough information to make a thoughtful recommendation about the type of ADR clause that is best suited for the agreement.
In determining what ADR provision to include in an agreement, a lawyer may consider, among other things, the following four issues:
First, identify the types and frequency of disputes that might arise among the parties to the agreement.
Second, determine whether the disputes be categorized or characterized. Among other things, consider whether there might be some minor but frequent disputes which can be resolved quickly on a factual rather than legal basis; disputes which require special expertise or data collection for resolution; and potentially severe disputes which go to the very core of the contractual relationship.
These issues may suggest whether the client will be better served in arbitration for the fast resolution of small and frequent disputes or disputes that need a special expertise. On the other hand, if it is possible that a potentially severe dispute may threaten the entire business relationship, the client may be better served in litigation, which offers full due-process protection and the right of appeal in the event of an adverse trial outcome.
Third, consider what information is needed to resolve the dispute; who will have the information and documents; and whether the information will be available when a dispute arises. Also consider what will be necessary to gather and evaluate the information; who can evaluate it; how long it will take to gather and evaluate the information; and whether the dispute is primarily factual or legal.
The resolution of these issues may serve as a guide in drafting provisions in the ADR clause, which is designed to ensure the client has the information needed to resolve the dispute. For example, if arbitration is elected, the lawyer may wish to draft into the agreement provisions that provide for adequate discovery and other exchanges of information. Fourth, if a neutral is to be used in the process, consider what qualifications and skills he or she should possess. The success of some ADR procedures depends greatly upon the neutral’s skills. In drafting an ADR clause, consider how to select a neutral and how to inform the neutral of the resolution goals. Perhaps the lawyer can designate the person who or entity that will serve as mediator in the initial agreement. If arbitration is elected as the final and binding step for resolution, determine whether the client wants a single arbitrator or a panel of arbitrators. Also consider specifying the expertise that is required for any arbitrator.
Last, having consider the foregoing issues, consider whether the client has any special interests that should be addressed in the ADR clause. What are the special sensitivities that should be considered in drafting the ADR clause from the client’s perspective? Perhaps the client wishes to settle disputes promptly, reduce costs, avoid litigation in the other party’s home state, minimize the management time used to resolve conflicts, preserve a business relationship, avoid negative publicity, preserve confidential business information, minimize risk by limiting damages, use creative settlement techniques not available in court, avoid equitable remedies or minimize the time spent in discovery. Each of these issues can be addressed in the ADR clause – be both thoughtful and creative.
With the foregoing issues in hand, determine which ADR option or combination of dispute resolution options best suits the client’s situation. Consider among others, the options listed below:
▪ Litigation. If resolving the dispute requires preserving all procedural rights, including a right to appeal from an adverse judgment perhaps litigation is the client’s best dispute-resolution option. Nevertheless, if litigation is determined to be the binding step in any ADR process, consider whether the client wants to streamline service of process, discovery or other elements of the litigation process, create cooling-off periods before commencing litigation, select a forum for litigation or open documents for review prior to litigation.
▪ Arbitration. Arbitration is essentially private litigation in which the arbitrators make final and binding decisions, typically with a very limited right of appeal. As part of an agreement providing for arbitration, the lawyer should draft the terms to meet the client’s needs as described above. To do so, the lawyer can draft an arbitration clause that establishes the necessary procedural and substantive rules. For example, the arbitration provision may provide for limited or no discovery, specify precisely how discovery will be conducted, streamline or expedite certain parts of the dispute, ensure privacy concerning the dispute, limit the arbitrator’s powers or create financial incentives and disincentives for certain kinds of conduct.
▪ Mediation. Unlike arbitration, the parties, not the mediator, make the decisions in mediation. Therefore, mediation can be designed to resolve disputes with less focus on substantive content or the parties’ legal rights; it can focus more on the evaluation of a broad range of resolution options. In drafting a multistep-ADR process (i.e., a process with one or more nonbinding steps prior to final and binding resolution), the lawyer may wish to specify the parties will participate in mediation prior to the initiating arbitration or litigation.
▪ Neutral convening. In using a neutral convening, the parties agree to jointly engage the services of an ADR expert to advise them as to whether there are ADR options that could assist them in finding a resolution. Unlike mediation, the neutral engaged in a neutral convening does not necessarily try to resolve the dispute. Rather, the neutral agrees to meet with the parties and discuss with them how various ADR options may help resolve the dispute. The advantage of this approach is that the parties receive the advice of an ADR professional whose goal is to direct them to the ADR options best suited to their specific dispute.
When accomplished early in the dispute, this option can be very effective and efficient. For example, after hearing from the parties, the neutral may suggest that mediation would not be productive for a given dispute and then work with the parties to craft an efficient arbitration submission agreement.
▪ Advisory opinion. In drafting a multistep ADR clause, the lawyer may also wish to consider whether the parties would be well-served by using this nonbinding process, sometimes referred to a “nonbinding arbitration.” This process uses a qualified advisor (who is familiar with the subject matter or law related to the dispute) who can issue a nonbinding (advisory) opinion concerning the dispute. After meeting with party representatives and witnesses, and reviewing statements submitted by the disputants, the advisor can assess the strength and weaknesses of the parties’ positions and issue a written opinion that is provided to all disputants. The goal of the process is to provide the disputing parties with the nonbinding but reasoned opinion of an expert respected by all participants. Although nonbinding, the neutral’s opinion may cause the parties to reconsider settlement. If the disputants wish, they may restart settlement negotiations facilitated by the neutral advisor or another mediator.
A common practice is to use a multi-step process in which the parties agree to pursue a sequence of ADR options. The combinations that may make sense could call for negotiation between designated executives, followed by a neutral convening and, if unsuccessful, followed by arbitration.
The ADR clause the lawyer puts in his or her client’s business agreement is important. When thoughtfully considered and negotiated among the parties, an ADR clause may save the client time and expenses, provide for an efficient dispute resolution and, perhaps, preserve the client’s business relationship. Lawyers should refrain from automatically using the arbitration clause with which he or she is most familiar. Be creative and draft a clause that is specifically tailored to the client’s business interests.
Originally published in the Colorado Journal, May 19. 1999