Making Peace

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Any time two parties enter into a contract, they can include an agreement to submit any disputes to a specified type of ADR. Suppose your business enters a service agreement with a supplier. Would you want a dispute over payment to escalate into a lawsuit, with all its high costs and hard feelings? If it did, what are the chances you'd be able to continue your business relationship?

In the interest of ironing out problems as quickly and cheaply as possible, consider including an ADR clause in the service agreement. It might specify that in case of a dispute, you'll attempt mediation, using a mediator approved by both parties. Then, if you can't come to an agreement through mediation within, say, 30 days, it might require arbitration. Have your attorney help you draft the ADR clause or review the one offered to you by the supplier to make sure there are no surprises.

While both mediation and arbitration are faster, more flexible, more confidential and less expensive than litigation, there are disadvantages. One is that it's very difficult to appeal the decision in a binding arbitration. Nonbinding forms, on the other hand, may fail to resolve the problem, so you could just be wasting your time. And while the court system offers such protections as excluding hearsay evidence, ADR has no such rules.

If you haven't included an ADR clause in your contract, it's still possible to move that way after a dispute arises. Suggest to the other business owner that it might be in everyone's best interest to mediate or arbitrate.

Given the potential nightmares that arise from employee lawsuits, a growing number of employers are requiring mediation or arbitration of employee disputes. The Federal Arbitration Act of 1925 provides the legal basis for this requirement, and recent court decisions have upheld arbitration of discrimination cases. Lawrence Kipperman, an attorney with Sidley & Austin in Chicago, says that ADR can be advantageous for employees, too. "What's in it for them is a quick resolution of claims, getting their day in court without having to spend time in discovery and years waiting to go to court," he says.

However, requiring arbitration of claims means losing the option of a jury trial. If you're establishing an ADR policy, it's critical to explain it to each employee and have them sign a document agreeing to submit any future claims to arbitration. Otherwise, a court is likely to find the policy unenforceable because the employee had no chance to bargain. Corbett advises explaining the ADR requirement individually, perhaps when going over employee benefits. Use a separate form to record the date of explanation and the employee's opportunity to ask questions. That way, your employees can't later say they never knew they were waiving their right to a jury trial.

So that the agreement is fair, be sure the employee has a means of investigating the arbitrator's background and an opportunity to challenge any apparent bias, Kipperman says. The employee should have the right to obtain enough information to build a case. Having a watertight ADR agreement prepared may cost you several hundred dollars or more, but it's nothing compared to the cost of a lawsuit going to trial.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business

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This article was originally published in the August 1997 print edition of Entrepreneur with the headline: Making Peace.

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