Alternative Dispute Resolution (ADR) for businesses

Take five guide - Alternative Dispute Resolution (ADR) for businesses

Before resorting to legal action, disputes can often be resolved out of court. Here’s our quick guide to Alternative Dispute Resolution, known as ADR.

1. What is ADR?

Alternative Dispute Resolution) means using other ways to resolve a legal dispute that do not involve going to court.  

Often this involves a confidential process with an independent third party overseeing it, either to make a determination as to the dispute or to encourage and facilitate the parties to reach a settlement.

ADR does not have to involve any third party though and can simply be, for example, a ‘without prejudice’ meeting between the relevant parties.


2. What are the different kinds of ADR?

There are many different forms of ADR, the most common of which are:

  • Mediation. This involves an independent third party, appointed to help both sides develop effective communications and reach an agreed settlement. Unlike adjudication and arbitration where a decision is made by a third party, in mediation both sides are guided towards reaching a compromise together. If it fails and the disagreement is taken to court, details of the mediation won’t be revealed in court. If an agreement is reached at mediation, it will be binding on the parties.

Mediation is far cheaper than court proceedings and both sides normally share the cost of the process.  Recently a new form of mediation has been developed, called blind bidding, which involves the parties submitting sealed bids to a mediator over the course of three rounds to see whether the parties can reach a settlement by way of submitting the same bids or bids that overlap. If settlement isn’t reached on the day, the parties often carry on negotiations thereafter and reach a settlement that way. For more information, see our blind bidding article.

  • Adjudication. This is most commonly used within the construction industry in order to protect cash flow and reduce insolvency in the industry. Once the third-party adjudicator has received a referral notice, which starts off the formal process, he or she aims to reach a decision within 28 days. The decision remains binding and enforceable until the matter is finally determined in arbitration or litigation (as appropriate), or when the parties agree it should be final. In normal circumstances, the parties have to bear their own costs of the adjudication.
  • Arbitration. Here, an arbitrator will be appointed to preside over the dispute – he or she is usually legally qualified or holds a membership with the Chartered Institute of Arbitrators. Similar to a judge, their decision is absolute and enforceable. Unlike adjudication, the arbitration process may be lengthy, however, it is usually more flexible than court proceedings, and disputes can sometimes be resolved through written submissions from both parties. As with adjudication, the parties will bear their own costs of arbitration.
  • Expert determination. This is often used where the issue in dispute is a technical one and therefore the expert is familiar with the relevant specialist or technical issues to resolve the dispute. The process is usually cheaper, quicker and less formal than both arbitration or litigation and, given the nature of it, can also be less adversarial, meaning it can help preserve the parties’ business relationships. Unlike with arbitration, an expert determination, although contractually binding, cannot generally be enforced without further court action or arbitration proceedings on the decision.


3. What are the benefits of ADR?

ADR can enable parties to reach solutions that are not based on a "win/lose" paradigm, and can save considerable time and expense by cutting through the legal or technical rights and wrongs, and focusing on the solution. ADR processes are also normally confidential in nature, which can give the parties freedom to air sensitive commercial issues and enable full and frank negotiations.

Even if the ADR process in question does not result in settlement, it might produce other benefits for the parties, such as narrowing the issues in dispute, testing the strengths and weaknesses of each party's case and allowing the parties to air their different perspectives.


4. How do the courts view ADR?

ADR is heavily encouraged by the courts, both at a pre-action stage and during proceedings, not least because it means that, if parties are utilising other processes and forums to resolve their disputes, there is less strain on the court’s own resources. 

The court’s encouragement of ADR is evident from the Civil Procedure Rules (CPR) and the court’s Practice Direction on Pre-Action Conduct and Protocols which states that litigation should be a last resort and that the parties should consider whether ADR might enable them to settle their dispute without commencing proceedings. The court’s Pre-Action Protocol for Construction and Engineering Disputes goes one further and actually mandates that the parties discuss how the claim might be resolved without recourse to litigation.

If a party does not engage in any form of ADR then that party will be at risk of being penalised on costs should the claim be determined at trial. 


5. What happens if the ADR process fails?

Sometimes, despite best intentions, it is possible that every avenue outside of court is exhausted. You will then find yourself in the position of needing to engage specialist commercial litigation lawyers to pursue the dispute through the courts.

Your case may still settle at some point before it reaches trial, but if a trial does take place the result will be an adjudication to decide what the remedy should be, and this will be enforceable.


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