Alternative Dispute Resolution Clauses in Contracts: Not Just Boilerplate

The inclusion of an Alternative Dispute Resolution (“ADR”) clause in a contract should never be taken lightly. While the form of ADR required by a contract may range from mediation to binding arbitration, agreeing to any form of mandatory ADR is a surrender of your right to have disputes about the contract heard by a court. Courts in many states, including Colorado, have found that ADR agreements that waive a party’s right to bring suit in court are enforceable. See Lane v. Urgitus, 145 P.3d 672 (Colo. 2006); see also Allen v. Pacheco, 71 P.3d 375 (Colo. 2003). Moreover, Colorado has adopted a version of the Uniform Arbitration Act which specifically addresses the enforceability of ADR provisions in Colorado. C.R.S. §13-22-201 et. seq.

Although the enforceability of contractual ADR provisions is an area of the law worthy of discussion, that is not the purpose of this article. The purpose of this article is to inform the reader about the pros and cons of agreeing to an ADR provision in a contract. By making an informed decision regarding a proposed ADR provision at the time of contracting, you can avoid unknowingly surrendering your valuable right to a remedy from the courts.

Before moving on, a couple of definitions:

1. Mediation: A method of nonbonding dispute resolution involving a neutral third party who tries to help the disputing parties reach a mutually agreeable solution.
2. Arbitration: A method of dispute resolution involving one or more neutral third parties who are usually agreed to by the disputing parties and whose decision is binding.
   Black’s Law Dictionary

A Few of the Pros of ADR:

1. In instances where the disputing parties need to preserve their relationship, ADR may allow the parties to find a mutually agreeable solution and prevent adversarial proceedings resulting in a “winner” and a “loser.”
2. In instances of complex or generally unfamiliar contractual subject matter, the ability to select a mediator/arbiter with an appropriately specialized background may help insure the issues in dispute are fully understood.
3. Because the parties agree to participate in ADR through contract, they can select specialized rules that best suit their needs. The parties can tailor everything from the time limits to the rules governing evidence. For this reason ADR might be able to provide a quicker, more cost effective resolution.
4. ADR is often confidential. The parties can keep their dispute, the subject matter of the contract/their business and any resolution out of the public eye.

A Few of the Cons of ADR:

1. The parties must hire the neutral. Unlike the court system, which is largely funded by taxes, ADR neutrals are hired by the parties. The costs of a private neutral can easily be tens of thousands of dollars or more.
2. ADR often involves the application of concepts of equity. While the court system can address equity, its backbone is the application of law. The application of law tends to produce more uniform and predictable results. By comparison, equity-focused ADR may produce less predictable results.
3. Parties rarely enter into a contract with the expectation of a future dispute. Consequently, they may find it difficult to anticipate what type of ADR may be helpful or efficient to resolve an unknown dispute at the time of contracting. As a result, parties often adopt a predetermined set of ADR rules such as those proliferated by the American Arbitration Association. In the end, these rules may not be the best fit for the dispute and may eliminate protections provided by the court system in the name of perceived efficiency.
4. ADR often has limited rights of appeal. A party who believes they were treated unfairly or prejudiced during ADR may have no right to a new proceeding or rehearing of the issues.

These are just few of the issues parties should consider when making a decision about whether to include an ADR provision in a contract. Because the inclusion of an ADR provision can drastically impact the parties’ rights and remedies following a contract dispute, an ADR provision should not be viewed merely as boilerplate contract language. The parties should thoughtfully consider and negotiate of what, if any, ADR provisions might be included in a contract. Properly addressing the parties’ dispute resolution rights at the time of contracting is vital to protecting all parties’ contractual expectations. Although admittedly a cynical view of contracting, a party’s contractual rights may be seen as only as valuable as that party’s ability to enforce them. It may be wise to negotiate a contract with the best of expectations but preparing for the worst.

If you have any questions about ADR in general or contractual ADR provisions, any attorney on the commercial litigation team at Burg Simpson would be happy to discuss these matters with you more fully.