If you have signed a commercial contract, you are likely familiar with the term Alternative Dispute Resolution (ADR). In brief, ADR refers to a suite of processes and procedures involving a neutral third party that assists parties to a dispute to resolve their disagreement without initiating formal legal action. The overarching purpose of ADR is to help parties settle their dispute as quickly, efficiently and amicably as possible. ADR is also typically cheaper than seeking resolution in a court or tribunal. For this reason, many commercial agreements include a clause requiring the parties to attempt ADR before starting legal action. Below, we discuss the different types of ADR as well as why parties should include an ADR clause in their agreements.

What is Facilitative ADR?

There are three main kinds of ADR:

  • Facilitative;
  • Advisory; and
  • Determinative.

Facilitative ADR describes procedures such as mediation, conciliation, facilitation or facilitated negotiation. These are processes in which an independent third person with experience in dispute resolution helps parties to identify issues in dispute, develop options to overcome them, evaluate the alternatives and hopefully reach a mutually acceptable agreement.

Typically, parties can undertake these processes voluntarily, and the third party cannot impose a resolution on the parties. Their role is strictly to assist and guide the parties to reach an agreement themselves. Importantly, a mediator will not advise the parties on the law applicable to their issue or the likelihood of success in the court system.

What is Advisory ADR?

Advisory ADR describes procedures in which a practitioner in dispute resolution listens to the parties to a dispute, evaluates the issues and provides advice about the facts of the dispute and the relevant law. The practitioner might also advise how parties can achieve possible favourable outcomes. The most common type of advisory ADR is conciliation, however, other advisory processes include expert appraisal and case appraisal.

What is Determinative ADR?

Determinative ADR refers to a process whereby a dispute resolution practitioner evaluates and makes a determination on a disagreement. This type of ADR most reflects the formal legal process and can include hearing formal evidence and having parties submit formal statements. Examples of determinative ADR include arbitration, private judging and expert determination.

Why Include an ADR Clause in your Commercial Contract?

Parties to a commercial contract should include a clause requiring parties to undertake ADR. The process is typically cheaper than legal action, and parties reach an agreement quicker than through the courts.

ADR, unlike litigation, can also help parties to a dispute preserve a long-term relationship due in part to the emphasis on finding a mutually agreeable resolution. ADR is a more flexible process than litigation – where courts decide remedies, the parties to a dispute in ADR can come to an agreement that is considered otherwise unusual in a standard legal setting.

If you choose to specify a particular kind of ADR process in your contract, be sure to settle on one that suits your business – no one method will suit everyone. For example, arbitration is more likely employed in large scale construction disputes, than say, by small businesses.

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If you have any questions about which type of ADR best suits your situation or need assistance drafting an ADR into your commercial contract, get in touch with our disputes team on 1300 544 755.

Carole Hemingway

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