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What is Alternative Dispute Resolution ADR?

Sometimes it is better for all disputing parties to settle out of court.

Alternative dispute resolution (ADR) methods offer advantages to disputing parties, relative to using courts and lawsuits to settle disputes. ADR methods can provide the disputing parties—and those feeling the impact of the conflict—faster resolution and lower legal fees. Under these methods, for instance, disputing parties typically settle more quickly and, if any party dislikes the results, there is much less chance to prolong the legal process through appeals.

Define Alternative Dispute Resolution

The term Alternative Dispute Resolution (ADR) refers to legal methods for resolving disputes outside of the court systems. Mediation and Arbitration are the two primary ADR methods in business.

ADR methods may also offer the advantage of allowing parties to specify a mediator or arbitrator with expertise in the area of dispute, in contrast with a legal trial in which the judge may not have special knowledge in the subject.

The most familiar Alternative Dispute Resolution ADR methods are:

  • Arbitration is an adversarial process, resulting in a legally binding arbitrator's decision.
  • Mediation is a cooperative process, guided by a mediator, with an outcome that is binding only if all parties accept the outcome.

Sections Below further define and illustrate the roles and purposes of arbitration and mediation.



What is Arbitration?
Explaining the Role of Arbitration and Arbitrator

When Do Businesspeople Choose Arbitration?

Parties to a conflict typically choose arbitration as the legal method for dispute resolution under two conditions. They normally choose arbitration when

  • One or all parties to an agreement believe the other is not performing as the agreement specifies,
  • When parties cannot agree on terms for a new contract.

The Arbitration Process

Contracting parties may specify arbitration as the method of dispute resolution when they agree and sign the original contract between them.

Under arbitration

  • The disputing parties submit their cases to a third-party arbitrator, or panel of arbitrators.
  • Arbitrators review the evidence, the applicable law, and the original contract or agreement.
  • After this review, arbitrators then render a decision for the parties.

Under most forms of arbitration, the arbitrator's decision can rule in favor of one party and against the other. Arbitrators, that is, may not try to satisfy all sides and their decisions are legally binding.

Arbitration, therefore, is fundamentally an adversarial process, in contrast with mediation (below) which can be a more cooperative process.

  • Arbitration decisions are binding because parties to the dispute agree (contract) to abide by the decision before starting arbitration.
  • Parties to an arbitrator's decision can appeal or seek to reverse it only under rare and extreme circumstances, as when there is compelling evidence of arbitrator bias.

Who Uses Arbitration?

Businesses often resort to arbitration for consumer disputes or labor-management disputes. And, customer contracts with investment and brokerage firms, for instance, typically specify that arbitration will settle any disputes.

  • In the United States, collective bargaining agreements between labor and management typically require that the parties submit to arbitration to settle disputes.
  • For addressing disputes that are not international, most countries have their own arbitration bodies and associations (sometimes including both arbitration and mediation).

Arbitration for International Business Disputes

Firms with international business disputes frequently submit them for adjudication to bodies such as the International Court of Arbitration (part of the International Chamber of Commerce). For international conflicts, the use of an international arbitrator helps avoid problematic jurisdictional issues (questions over which party's laws or procedures should prevail).

For international agreements, the original contract typically specifies:

  • The requirement that disputing parties use arbitration.
  • Steps in the arbitration procedure.
  • The international arbitration body to use.

What is Mediation?
Explaining the Role of Mediation and Mediator

When do People Choose Mediation?

Parties to a dispute typically choose mediation as the legal method for resolving the conflict under two conditions. They normally choose mediation when …

  • Negotiations between the parties reach an impasse or break down completely.
  • Governments decide that a continuing dispute is harming the public, and then step in and impose mediation on the disputing parties.

Disputing parties normally choose mediation for ADR in a wide range of dispute categories involving commercial business contracts, but also

  • Labor contracts (e.g., between professional athletes and their employers).
  • Family disputes (e.g., divorce).
  • Disputes between communities or other government organizations.

The Mediation Process

Businesspeople define mediation as a cooperative form of alternative dispute resolution. Under mediation, disputing parties present their cases to an impartial mediator, who then tries to open communication between them and guide them to a mutually acceptable resolution.

The mediator cannot impose a binding solution, however. All disputing parties must voluntarily agree to the mediator's resolution agreement. Otherwise, the mediation process fails.

Using IRR: The Four Commandments

The IRR outcomes and problems above suggest four rules, or "commandments" for IRR usage:

  1. IRR is not appropriate when the net cash flow stream differs substantially from the profile with early-arriving net cash outflows and later net cash inflows.
  2. Do not use IRR to compare competing cash flow streams whose profiles differ substantially from each other.
  3. The analyst should not over-interpret IRR magnitude and return rates when IRR differs substantially from the real cost of capital and real earnings rates for returns.
  4. Do not expect to find an IRR when the net cash flow stream is entirely positive or entirely negative because there is no IRR for such situations.