ADR SPOTLIGHT: Why would I want an ADR provision in a contract?

By Jon H. Kingsepp

"It is a man's honor to avoid strife, but every fool is quick to quarrel" (Proverbs 20:3) That known human characteristic compels the use of alternative dispute resolution (ADR) provisions in contracts. "Mediation" is one commonly known form of ADR but the concept has many variations. The use of mediation goes back thousands of years and is best known in the commercial setting of ancient times. In the current economic times disputes still arise in a variety of contexts, but one must consider more economic and efficient ways in which the dispute can best be addressed. An avenue that can be considered is the development of ADR provisions in contracts and even ordinances that govern certain disputes within a community.

Now however with the advent the Michigan Business Court (MCLA 600.8031 et seq) there exists a panoply of dispute resolution techniques. A look at Section 8033 reveals the court plan of operation which is the lightning rod for the implementation of unique contract provisions directed toward enhancing the efficiency of the business court and using innovative techniques to accomplish that part of the plan when a dispute lands in the business court.

Before adopting any approach to ADR, several important considerations may be necessary as dictated by the particular circumstance. Already ADR provisions are customarily found in casualty insurance policies and employment relationships outside the collective bargaining situation. Business transactions might compel similar considerations above and beyond the current fact settings: i.e. development agreements; complex real estate transactions; construction projects involving millions of dollars; intergovernmental agreements; state or municipal contracts involving complex commercial transactions. What dictates the concept of an ADR provision?

Existing/prior relationship of contracting parties

If a prior relationship has existed, the framework of that history could well dictate the ADR provision in any contract between the parties. The better the relationship of trust and confidence, the less complicated the ADR provision. Sometimes in a particular context, a uniform law may compel an ADR approach (example: Act 12 of 1967 Arbitration of Disputes Involving Interstate Highway Routes) and in others the general relationship may dictate the ADR provisions, i.e. deposit agreements with financial institutions. Many times, there is no ability to alter an ADR provision that may be demanded by one of the parties due to a stronger bargaining position or because of industry or company policy. However, in many commercial and municipal instances, there is the opportunity for flexibility in the drafting and use of ADR provisions.

The difficulty of the negotiation of contract terms

Often times, the intensity of negotiations may dictate the type of approach to an ADR provision. Hopefully the parties will not start with the decision that any dispute under the agreement will be best handled by litigation. More likely in such a background the ADR provision will be more complicated or structured.

The likelihood of issues arising during the contract period

If one has been involved in construction contracts or complex commercial agreements, the possibility always exists of issues arising during the performance of the agreement. These issues may involve ambiguous terms of the contract, performance quality inconsistent with the obligations of a contracting party. Certainly if such issues arise, the concern is to have performance continue to the extent that can be done, but to also address immediately the issue that has arisen. Such an approach not only preserves the relationship between the parties, but allows for a resolution of the particular dispute even to the extent of postponing further discussion until a later date after substantial completion of the contract.

The significance of performance under the contract

If the contract time for performance is an essential term of the contract, the consequence arising from the failure to perform must be considered. If there are significant reasons for performance to be completed, then not only is a liquidated damage provision essential but also an ADR provision that can address how the issue of performance can be handled so completion does occur albeit beyond the time the parties may have contracted.

The sophistication of the contracting parties to ADR

In some situations, one of the contracting parties may not be well versed in the concept of dispute resolution. In that regard, what is the obligation of the party more familiar with ADR to address the form of dispute language put in the agreement? Many an instance may occur in which a contracting party is not represented by counsel, but may be a consumer who is compelled to sign a document filled with legalese. That is not unusual in a credit card application which is the most frequent circumstance of such a situation. Generally the simpler the language on ADR the better off both parties may be in the use of that clause under the appropriate circumstance. However, the level of sophistication of one of the contracting parties may be important

The importance of avoiding litigation

There is no question many contracting parties are reluctant to hire attorneys because of the expense and the dreaded "hourly rate." The general public views attorneys as being well diggers who have a bottomless pit for a client's finances. There is also the corporate concern in maximizing profit and reducing needless litigation expenses. Once an attorney becomes involved or a lawsuit is filed, there is no longer control over the handling of the dispute. Hence the corporate client is in the same position as the individual client who may be the other contracting party. If the parties have control in negotiating the terms of the agreement, why should they give up that control if a dispute exists that drives them into the courtroom? The essence of the ADR provision is to maximize the control the parties have over the contract process and performance. They can continue to determine the expense and cost that they can afford and not what a third party, the Court, may dictate. If the parties deem it important to have a contract between them, they should continue the formality of that agreement in the resolution of disputes.

The reason to arbitrate not litigate

There may be many reasons why litigation is more likely the way in which to settle a contract dispute. However, in the majority of instances, a more informal and less expensive format may be the better approach. The parties need not necessarily have arbitration through a formal structure but can adopt flexibility in achieving the same result but with less expense and formality. In Michigan there are rudimentary rules on arbitration. MCLA 600.5024 and MCR 3.602 Beyond that however, the parties can develop their own approach to the process of arbitration, the timing and the fees to be charged by the arbitrator. Remember there are common interests that arise from a dispute under a contract: the parties want resolution, the parties do not want a delay in resolution, the parties would like the least expensive approach to a resolution and the parties want control over the expense and the process. This commonality allows for dictating the charges of the arbitrator to a reasonable hourly rate that can be shared by the parties; determining the issue(s) to be arbitrated; ascertaining what preliminary discovery is necessary; identifying the number of witnesses to testify either live or by affidavit or deposition; narrowing the factual issues and determining the type of award that should be rendered. Thus any ADR provision should consider the consequence if mediation is unsuccessful. A predicate to the process is contract language requiring a legitimate meet and confer as the first step in a proportionate dispute resolution alternative. Arbitration as the next step after an unsuccessful mediation may be one approach but there are alternatives.

The Michigan Business Court

In those jurisdictions having a business court, innovative approaches will be introduced to the attorney. Evidence based practice concepts will be utilized. Early intervention conferences will be required where each party must set forth a discovery plan and all parities begin consideration of a dispute resolution process. Gone are the days of extensive discovery, depositions and the plethora of discovery motions. Now is the use of the Taxonomy of ADR processes chart in use in the Macomb County Business Court. Now you will be "governed" by the SCAO dashboard dealing with certain metrics evaluating performance and case disposition and use of technology. Upon the horizon will be the implementation of the summary jury trial. These advances are going to reduce trial time substantially because the focus is on the business client and the ability of the courts to resolve those disputes quickly. This new adventure requires rethinking dispute resolution clauses so they can blend with the evidence based practice concept. As the business court now has to work under a plan of operation, your firm business practice may have to adopt the same concepts to assuage client fears and enhance greater efficiency in the resolution of business disputes.

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For more than 40 years, Jon H. Kingsepp has practiced in the circuit and federal courts of Michigan and the federal courts of other states, Puerto Rico and the U.S Virgin Islands in business, commercial, real estate and intellectual property matters. Kingsepp has been involved in dispute resolution since 1988 and participated in seminars on the subject. He has authored several articles on trial practice. He is the past chair of the ADR Section, General Practice Section and Master Lawyers Section of the Michigan State Bar. He is a past president of the Oakland County Bar Association, and past chairperson of the Oakland County Bar Foundation and the Oakland Mediation Center. He is a professional with Professional Resolution Experts of Michigan (PREMi, http://premiadr.com).

Published: Fri, Oct 31, 2014

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