Negotiation, Mediation & Arbitration- Which is the most effective for Alternative Dispute Resolution?
Contracts are the backbone of any successful enterprise. Without them, it would be impossible for businesses to expand internationally, grow financially and thrive. Key agreements, such as joint ventures, mergers and acquisitions and strategic alliances are all based on an agreement between two parties. However, just like any marriage, disputes are bound to happen. While most people would assume that disputes are settled by the courts, many firms try to engage in various methods to avoid costly court procedures. These are categorised under Alternative Dispute Resolutions (ADR). This article will explore the three main ADR used by corporations worldwide – negotiations, mediation, and arbitration.
An Introduction To Alternative Dispute Resolutions (ADR)
ADR has been acknowledged as the “cheaper and quicker route” for dispute resolutions, as compared to legal court proceedings. [1] ADR is “less formal, less expensive and less time-consuming than a trial”[2], firms prefer using ADR for contract or commercial remedies. Under the Singapore Convention on Mediation (SCM) formed in 2018, ADR is also used for “international settlement agreements resulting from mediation”.[3] Legal court procedures could be lengthy and disruptive to the companies’ operations.[4] In addition, engaging in a court driven process may negatively affect the parties’ relationship which would be detrimental for their business. [5] The sole purpose of ADR is to allow parties to exhaust all possible means to reach a compromise before engaging in a legal court procedure.
The Three Main Types Of ADR
Firstly, negotiation has been considered the simplest, most cost-effective, and most flexible method of ADR.[6] In most cases, solicitors from their respective companies will attempt to reach a settlement “without prejudice” (WP). [7] The WP rule “prevents statements made during the negotiation to be used in court as evidence of admission against the interests of the party which made them”[8]. This rule ensures that if parties ever go to court, they can conduct a seamless negotiation without the fear of it being used against them. Professor Goldberg mentions that negotiation is positioned between pure deliberation, where both parties collectively acknowledge the conflict and work together to find a practical solution.[9] Negotiation focuses on the “mutual interests” and possible risks stemmed from the issue, and strives to find a compromise.[10] However, it is not uncommon to see companies using negotiation as a stalling tactic. This is a key drawback of negotiation as it prevents the other party from asserting its rights and hinders the resolution process.[11]
Next, the processes of mediation are similar to that of negotiation but differs where the former requires a neutral third party. [12] A mediator is present to “identify the issues in dispute, explore the options for resolution and attempt to reach an agreement”. [13] There are two types of mediation – facilitative and evaluative. Facilitative mediation remains as the most popular option for companies as it still allows both conflicted parties to maintain a professional and cordial relationship. It is mainly used where parties have any ongoing business ties and strive to maintain the “professional good will or reputation”.[14] In facilitative mediation, the mediator will offer a structured process for parties to reach a decision, best suited for their own demands. [15] On the other hand, evaluative mediation is best carried out when “there is no ongoing relationship between the parties”.[16] Its primary focus is monetary settlement, which may result in the possibility of both companies severing ties with each other. Evaluative mediators usually have an “expertise in a particular area of law relevant to the conflict”.[17] They would “evaluate a claim or issue or identify the strengths and weaknesses of a case”. [18] In certain cases, reality testing is utilised to help the mediators understand the objectives and thinking of the parties involved.[19] Thus, mediators play an active role in providing legal advice for the problem at hand.[20] However, a major disadvantage of mediation lies in the inability of mediators to “compel the production of evidence or documents to ascertain the full facts”.[21] Additionally, if both parties have a strained relationship, mediation will be highly unlikely.
Lastly, arbitration is the most formal type of ADR. It requires the decision to be made in the presence of a tribunal. Arbitration could stem from a commercial transaction between private parties or state or state-owned entities. [22] Arbitration seeks to settle the conflict by referring them to a neutral third party for a decision based solely on evidence and arguments presented to the arbitration tribunal. In the UK, the requirements for arbitration are listed in Section 1 of the Arbitration Act 1996. The four significant elements of arbitration are:
i) Agreement to arbitrate;
ii) Choice of arbitrators;
iii) Decision of the arbitral tribunal;
iv) Enforcement of the award. [23]
Arbitration also strives to focus on impartiality, the freedom of the parties’ decision, and the limitations of the court’s interference. [24] Moreover, arbitration has been a prominent method of resolving international commercial disputes. It may be conducted in various countries and “against different legal and cultural backgrounds”. [25] However, while arbitration may seem structured, many small to medium-sized companies are reluctant to utilise arbitration due to its complications and high-cost value.[26]
The Most Effective Type Of ADR
Thus far, the three key forms of ADR have been greatly discussed. This article leans towards mediation being the most effective option for ADR in the commercial setting. While it solely depends on the objectives of each company, the majority of businesses would not risk burning bridges with their partners. [27] It is crucial for companies to maintain a positive brand image for their growth and expansion. [28] Hence, mediation offers a balance between an efficient process as compared to negotiation, and a more cost-effective method than arbitration. If companies are concerned of costs, they could engage in negotiations for a limited time before moving on to mediation. This would prevent parties from stalling the issue at hand which may result in bigger problems. Furthermore, the effectiveness of mediation is reflected across the globe.[29] International firms from differing jurisdictions appreciate the efficiency of mediation and often use it for disputes resolutions to reach a compromise. One such example is in China’s Belt and Road Initiative (BRI) where mediation was used to “maximise the many opportunities present”. [30] This ensures that all of the parties’ interests are recognised before a decision is made. Additionally, with the presence of a neutral third party, both parties are relieved of the responsibility to make the decisions. They can decide on which type of mediation is best suited to resolve their conflict.
Source: Unsplash
Should ADR replace legal court proceedings?
Court proceedings may be viable for large companies with complex legal issues. However, for companies categorised as small and medium sized enterprises (SMEs), may be unable to afford the hefty costs that court proceedings brings about. This raises many questions relating to the access of justice and the affordability of it..[31] There are still many unresolved issues in how legal aid is readily available for SMEs. Hence, this article raises a question – since SMEs could greatly benefit from ADR, should the law rule out court proceedings for cases involving SMEs? Would this further complicate issues or would it ensure a more just commercial environment for companies to grow?
Conclusion
This article has explored the key elements of ADR and its relevance to the commercial world. It allows the courts to focus on more prominent issues and not be overwhelmed with unnecessary commercial disputes. Without ADR, many contracts and disputes would be unresolved. Furthermore, ADR provides an alternative to companies that cannot afford legal aid. It will be interesting to monitor the rising use of ADR in commercial transactions.
[1] Conway L [2022] Consumer disputes: Alternative Dispute Resolution (ADR)
[2]Judicial Council of California, ‘ADR Types & Benefits’ (California Courts) <www.courts.ca.gov/3074> accessed 24 February 2024
[3] United Nations Convention on International Settlement Resulting from Mediation, 2018
[4] Department for Business, Innovation and Skills, Alternative Dispute Resolution Regulations 2015 (The Chartered Trading Standards Institute 2016)
[5] Carver TB, ‘Alternative Dispute Resolution: Why It Doesn’t Work and Why It Does’ (Harvard Business Review, 1 August 2014) <https://hbr.org/1994/05/alternative-dispute-resolution-why-it-doesnt-work-and-why-it-does#:~:text=The%20good%20news%20is%20that,and%20sometimes%20even%20improve%20relationships> accessed 24 February 2024
[6] ‘Alternative Dispute Resolution’ (Freemans Solicitors, 12 September 2020) <https://freemanssolicitors.net/for-you/litigation-dispute-resolution/negotiation-alternative-dispute-resolution/#i-do-not-believe-that-adr-will-be-successful-do-i-really-have-to-use-it> accessed 25 February 2024
[7] Conway L [2022] Consumer disputes: Alternative Dispute Resolution (ADR)
[8] (Without prejudice | practical law) <https://uk.practicallaw.thomsonreuters.com/2-107-7511?transitionType=Default&contextData=(sc.Default)&firstPage=true> accessed 25 February 2024
[9] Goldberg SB and others, Dispute Resolution: Negotiation, Mediation, Arbitration, and Other Processes (Wolters Kluwer 2020)
[10] Todorović I and Harges B, ‘Alternative Dispute Resolution in the World of Commercial Disputes’ (2021) 5 Journal of Strategic Contracting and Negotiation 214
[11] Dispute Resolution Reference Guide 2006
[12] Department for Transport, Alternative Dispute Resolution Guidance Cs 1835 (High Speed Two Limited 2022)
[13] Conway L [2022] Consumer disputes: Alternative Dispute Resolution (ADR)
[14] Epoch Mediation (Evaluative and facilitative mediation || epoch mediation) <https://www.epochmediation.com/what-is-mediation/evaluative-and-facilitative-mediation/#:~:text=It%20is%20a%20good%20process,reality%20testing%20and%20settlement%20recommendations> accessed 25 February 2024
[15] Feehily R, International Commercial Mediation: Law and Regulation in Comparative Context (Cambridge University Press 2022)
[16] Epoch Mediation (Evaluative and facilitative mediation || epoch mediation) <https://www.epochmediation.com/what-is-mediation/evaluative-and-facilitative-mediation/#:~:text=It%20is%20a%20good%20process,reality%20testing%20and%20settlement%20recommendations> accessed 25 February 2024
[17]‘Models of Mediation - Facilitative & Evaluative’ (Steve Hindmarsh, 19 March 2019) <https://www.stevehindmarsh.co.uk/help-and-advice/models-of-mediation/#:~:text=EVALUATIVE%20MEDIATION,respect%20to%20their%20legal%20positions> accessed 25 February 2024.
[18] Conway L [2022] Consumer disputes: Alternative Dispute Resolution (ADR)
[19] Curtis J and Curtis J, ‘Using Reality Testing in Mediation’ (Curtis Law, 2 June 2015) <https://www.curtislaw.ca/mediation/using-reality-testing-in-mediation/#:~:text=What%20does%20reality%20testing%2C%20look,and%20discovering%20this%20is%20useful> accessed 28 February 2024
[20] Epoch Mediation (Evaluative and facilitative mediation || epoch mediation) <https://www.epochmediation.com/what-is-mediation/evaluative-and-facilitative-mediation/#:~:text=It%20is%20a%20good%20process,reality%20testing%20and%20settlement%20recommendations> accessed 25 February 2024
[21] Conway L [2022] Consumer disputes: Alternative Dispute Resolution (ADR)
[22] ‘Commercial Arbitration Definition: Legal Glossary’ (LexisNexis) <https://www.lexisnexis.co.uk/legal/glossary/commercial-arbitration> accessed 28 February 2024
[23] Redfern A and Hunter M, Law and Practice of International Commercial Arbitration (Sweet & Maxwell 2009)
[24] Arbitration Act 1996
[25] Redfern A and Hunter M, Law and Practice of International Commercial Arbitration (Sweet & Maxwell 2009)
[26] Farmer C, ‘Advantages and Disadvantages of Using Arbitration’ (LegalVision UK, 26 February 2024) <https://legalvision.co.uk/disputes-litigation/advantages-disadvantages-arbitration/#:~:text=We%20consider%20some%20of%20the,and%20the%20disagreement%20is%20complicated> accessed 28 February 2024
[27] ‘A Guide to Commercial Mediation for Businesses’ (JMW Solicitors, 2 January 2024) <https://www.jmw.co.uk/articles/commercial-litigation-dispute-resolution/guide-commercial-mediation-businesses> accessed 28 February 2024
[28] Gray JG, Managing the Corporate Image: The Key to Public Trust (Quorum 1986)
[29] Bühring-Uhle C, Kirchhof L and Scherer G, Arbitration and Mediation in International Business (Kluwer Law International 2006)
[30] ‘The Role of Mediation in the Resolution of Belt and Road Initiative Disputes’ (Herbert Smith Freehills | Global law firm, 22 October 2023) <https://www.herbertsmithfreehills.com/insights/2017-10/the-role-of-mediation-in-the-resolution-of-belt-and-road-initiative-disputes> accessed 5 March 2024
[31] Francioni F, Access to Justice as a Human Right (Oxford University Press 2007)
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