Although legal proceedings are still the default method of resolving contract disputes, they are one of many ways of doing so. This article looks at the various ways of resolving disputes and the considerations for deciding which is most appropriate.

Methods of ADR

The other methods of resolving disputes, often called Alternative Dispute Resolution or ADR for short, include:

  • Adjudication: A method of resolving disputes where a third party is appointed to produce a decision which is temporarily binding; that is, it is binding on the parties until the dispute is finally determined by court proceedings, arbitration or settlement properties. Best-known in the construction industry, where the Housing Grants, Construction and Regeneration Act introduced a statutory right for parties to construction contracts to refer a dispute to this process.
  • Arbitration: A non-court alternative method of resolving disputes, where an individual or panel is appointed by the parties to make a binding decision from which there are very limited grounds of challenge. The process may be either ad hoc (where the parties determine whatever they may consider appropriate for the process) or administered (where it is conducted under the auspices of one of several appropriate organisations, such as the International Chamber of Commerce).
  • Early Neutral Evaluation: A non-binding method of resolving disputes. The neutral (third part) considers each party’s submissions and then states their own view on the likely outcome trial. That view is without prejudice and has no binding effect, unless the parties have agreed that it should be binding.
  • Expert Determination: A binding, inquisitorial method of resolving disputes that can offer an effective means of settling a technical issue or dispute between contracting parties. Although it is possible to arrange this on an ad hoc basis, it is more usually provided for in commercial agreements. It is suited, broadly, to two categories of dispute: where a valuation is required and where an expert opinion is needed on a technical matter.
  • Mediation: A flexible, voluntary and confidential method of resolving disputes in which the neutral third party assists the parties to work towards a negotiated settlement of the dispute, with the parties retaining control of the decision whether or not to settle and, if so, on what terms.
  • Negotiation: A flexible, voluntary and confidential method of resolving disputes in which the parties work towards a settlement of the dispute with the parties retaining control of the decision whether or not to settle and, if so, on what terms.

Negotiation and mediation

Negotiation is, of course, almost invariably employed before resorting to any other method of dispute resolution. It is common for long-term contracts to include an escalation clause, which will require the parties to conduct a series of tiered negotiations in order to attempt to resolve any dispute before the parties can refer it to mediation and/or issue legal proceedings.

Negotiation and mediation can be employed at any stage in the dispute. Negotiation will almost inevitably be employed at various stages throughout the dispute until it is resolved or determined by a court or other ADR tribunal (e.g. the arbitrator).

Factors to consider when choosing a method of ADR

There are a number of considerations to bear in mind when considering which method of ADR may be the appropriate way to resolve the dispute.

The first and most obvious is what the contract in question says. Most often the contract will provide for any dispute to be dealt with through legal proceedings or, in some cases, arbitration.

Even if the contract does say what method of ADR must be used (eg. Court proceedings), it may still be possible to agree an alternative approach with the other party, although this is unlikely.

If you fail to follow the approach required by the contract, the other party will be able to obtain a court order to force you to follow the approach. So, for instance, if you issue legal proceedings and the contract says that any dispute must be dealt with by arbitration, the other party will be able to obtain a court order requiring the legal proceedings to be discontinued.

The lesson from this is that the correct stage at which to consider what type of dispute resolution is appropriate is when you are entering into the contract.

There are a number of considerations to bear in mind when choosing a form of dispute resolution. These include:

  • Publicity: Would a confidential process be required or be beneficial?
  • Speed: How quickly will you want the dispute to be resolved?
  • Costs: Would you be prepared to accept a process which was more difficult to appeal and potentially more "arbitrary" if the process was cheap?
  • Enforceability: Is it possible that you will need to enforce the pursuit the decision in another jurisdiction?
  • Flexibility: Do you want to specifically require parties to adopt a flexible dispute resolution process, such as mediation or negotiation via internal escalation?
  • Technical: Will some disputes be very technical in nature and, if so do you want to refer the dispute to a technical expert to decide (expert determination)?
  • Relationships: Is it important that the dispute resolution process allows the parties to preserve working/commercial relations insofar as possible?
  • Concurrency: Can it be used alongside other methods of dispute resolution?

In the next article we will consider the pros and cons of the major types of dispute resolution.

About the author

Justin Byrne Consultant

Justin specialises in commercial disputes, with particular emphasis on IT. His expertise includes strategic and tactical advice on software development and implementation, contracts, out-sourcing agreements and all manner of IT contracts.