Tailor ADR clauses to match needs of parties to commercial contracts
By AdvocateDaily.com Staff
In the final instalment of a two-part series on ADR trends, Toronto lawyer and mediator Eric Gossin offers guidance on how to craft effective ADR clauses in commercial contracts.
The more detailed the alternative dispute resolution (ADR) clause in your commercial contract, the better to address those disputes that will inevitably arise, Toronto lawyer and mediator Eric Gossin tells AdvocateDaily.com.
Gossin, partner with Devry Smith Frank LLP, says ADR clauses are becoming increasingly popular in commercial contracts as business owners and principals wake up to the cost-saving potential of processes that keep the parties out of court.
But he warns against throwing a vague clause into an agreement, especially when the deal involves numerous parties.
“Having some mechanism for responding to a dispute is common sense, but the biggest pitfall I see is a lack of specificity in terms of clauses,” Gossin says.
He says one of the main attractions of ADR is the flexibility it gives the parties to design their own process. But to take full advantage, Gossin says parties need to put some thought into their ADR clauses and tailor them according to the needs of the parties.
“It isn’t something that can be boilerplate,” he says. “Although we all have our standard clauses, they should be amended and carefully designed before being inserted into a contract.”
Most importantly, the clause should describe the ADR process to be used, Gossin says.
“You have a variety of options, depending on how costly you want it to be,” he says, noting that mediation and arbitration are the most popular.
However, Gossin says some parties may prefer a combination of techniques — such as providing the opportunity to mediate with a mandatory arbitration using the same mediator/arbitrator (called med/arb) — in the event the mediation segment fails to generate a settlement.
Each technique has its own variations, allowing parties the chance to experiment with different styles of dispute resolution. For example, Gossin says some may favour a collaborative form of mediation, or a baseball arbitration, which sees both sides present a single best offer, with the arbitrator forced to choose one as the winner.
Gossin says a well-drafted ADR clause will also include instructions on how to start the process, as well as timelines for every step, including the initiation, exchanges of documents, and the actual mediation or arbitration, if applicable.
“I see standard clauses that are all over the place. Some don’t set any timelines, and others fail to deal with what happens in the event of non-compliance,” Gossin says.
In a process such as arbitration, he says the parties will need to spell out a mechanism for selecting the neutral party or risk hitting another impasse. In some complex arbitrations, each party selects one arbitrator to sit on a panel, who then together choose a third panellist to hear the case.
“What it all comes back to is customization,” Gossin says. “You want an opportunity to say, ‘if we run into a problem, here’s what we will do about it.’”
Click here to read part one where Gossin discusses the cost-effectiveness of alternatives to litigation.