Why is Alternative Dispute Resolution a good idea?

Because it is significantly cheaper than court based litigation.

Unless you are dealing with a claim that involves damages in the six figures, the cost of litigation may be more than the value of the claim. On the plaintiff’s side, it doesn’t’ make economic sense to spend more in legal costs than the value of the claim. On the defense side, the cost of litigation can easily double your exposure if you lose.

Mediation and arbitration can offer a mechanism for resolving disputes that save both sides significant time and expense. Mediation can be a very effective first attempt to get the parties together and talking to see if a resolution can be reached. If Mediation is not successful, arbitration can be used in quick succession to resolve the dispute. The key to being able to approach dispute resolution in this manner is to make sure the parties agree to this mechanism from the outset. As long as both parties agree and the dispute resolution mechanism is reduce to writing in contract form, there should be no question as to participation in the event of a dispute. Alternative dispute resolution can’t be forced on a party after the fact and the only way to guarantee participation is by agreement before-hand.

One caveat is to make sure that any insurance companies providing coverage in connection with the job sign off on the alternative dispute resolution language in your contract before the job begins. Dictating a form of resolution that does not allow the insurance company to protect its interests can result in a denial of coverage. But for any potential dispute not covered by insurance, it can be a cost effective way to limit legal expense exposure. If your jobs are typically under $25,000, you can specify arbitration by document submission only in your ADR clause. The auto industry already uses a similar approach to resolving property damage subrogation claims between insurance companies.  Alternatively, you can allow more flexibility between the parties by allowing selection of the arbitration process once a claim arises.

While you can’t totally control whether disputes arise in a job setting, you can control the mechanism for resolving those disputes and the related costs. Including ADR language in your contract is a very effective way to control litigation costs in a construction setting.