Why You Should Consider ADR Provisions in Your Business Agreements

Last week I joined a group from the Elk River Chamber of Commerce on a visit to the Minnesota State Capitol.  Part of that visit included an excellent meeting with the Chief Justice of the Minnesota Supreme Court, Lorie Skjerven Gildea.

One of the topics we discussed with Chief Justice Gildea was the effect that Minnesota’s tight finances have on the court system.  The Chief informed us that she had submitted a “hold harmless” budget request to the Legislature, meaning that rather than ask for more money, she was simply asking that the Legislature not cut the courts budget any deeper than it already has. 

The funding allocated to Minnesota’s courts has a direct impact on the courts’ ability to deliver timely and efficient services to parties who come before them.  A key point brought up in our meeting with the Chief was the impact this funding issue has on business disputes before the courts.  Simply put, the courts have to give priority to the arraignments, citations and other criminal matters which come before them; the civil matters – breaches of contract cases, shareholder disputes, and the like – are going to face longer waiting times before being heard.

Given this information, business owners in Minnesota need to take steps to resolve their civil disputes outside of court if they want an expeditious resolution of these matters.  How can that be accomplished?  By including alternative dispute resolution (“ADR”) mechanisms in their business agreements.

Alternative dispute resolution refers to the use of a process or processes to resolve a dispute between parties short of litigation.  While ADR takes many forms, the most popular forms are mediation and arbitration.  Mediation is a process where a third party — the mediator — assists the parties to negotiate their own settlement.  Most often, the opposing parties are placed in separate rooms with the mediator shuttling back and forth between them, trying to bring them closer together with each respective visit.  Some mediators may start the mediation session by placing all parties in the same room (but for the most contentious of cases, most mediators avoid this step).  Mediation is usually non-binding, meaning that the mediator does not issue a decision by which the parties are then bound.

By contrast, arbitration is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”), by whose decision (the “award”) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.  Arbitrations are conducted pursuant to certain rules – for example, there exists an organization called the American Arbitration Association (“AAA”) that has promulgated a set of rules for various industries.  If the arbitrator finds for a party and awards a judgment, that judgment is entered in the applicable district court and has the same legal effect as if rendered by a court of law.

A savvy business owner would be wise to consider a mediation or arbitration clause in his/her business agreements, whatever they may be.  Either process is less time consuming than litigation (even without the aforementioned budget-imposed time delay) and is certainly less expensive than litigation (although the mediator or arbitrator has to be paid and it is wise to hire an attorney to represent you in the process). 

How does one include proper ADR provisions in their business agreements?  The answer to this one is simple:  hire a good business attorney to draft them into the agreements. 

 Last summer, my partner, Teresa Ayling, joined me on the Next Stage Business Radio Show (the predecessor to The Advisors) to discuss the basics of ADR — Terry performs mediation services as part of her practice.  You can listen to the archived audio file here.