Hr and Adr: a Marriage Made in Heaven

What HR Professionals Should Know About Alternative Dispute Resolution

Robert K. Wrede, J.D., LL.M.

Faced with overburdened, unresponsive and generally inefficient national judicial regimes worldwide, and especially around the Pacific Rim, international business is increasingly, and justifiably, turning to means other than traditional litigation. Alternative dispute resolution ("ADR," which can include non-judicial adjudication, i.e., arbitration, and/or negotiation assisted by an expert, i.e., mediation) has become the preferred means of dealing with the conflicts that inevitably accompany both domestic and transnational business. (See, e.g., David F. Day and Keith W. Hunter, International Mediation: The Internationalization of Business Relationships in the Pacific, Hawaii Bar News, April 1992, page 18 et seq.)

ADR has generally proven superior to traditional litigation in providing expeditious, cost-effective, and more "user-friendly" means for resolving both domestic and international commercial disputes. In fact, a wide range of businesses, insurers, healthcare providers, employers and others faced with the possibility of having to deal with disputes are now including pre-dispute resolution clauses in their contracts. This has the effect of referring future disputes into non-litigation forums rather than expensive, time-consuming and unpredictable lawsuits. Thus, contract provisions requiring ADR are now common in employment and consumer contracts, massive construction contracts, sales contracts for goods and services, credit card and securities transactions, and healthcare admission documents. (See, Brady, The Arbitration Train that Cannot be Stopped, 11 Metropolitan Corporate Counsel, No. 6, page 1.)

The use of non-litigation conflict management and resolution techniques in this country had its beginnings in the field of labor-management relations. Early judicial antagonism to non-judicial problem-solving was reflected in English common law, which refused to acknowledge the enforceability of arbitration agreements because judges viewed them as an attempt to encroach on the province of judges, who were paid by the case. This English judicial hostility to extra-judicial proceedings was thus simply a judicially erected barrier to the entry of non-judges into the field of conflict resolution.

Early in the 20th century, American courts shared that attitude. This resistance to the non-judicial resolution of conflicts was only overcome in the 1920s when Congress adopted the Federal Arbitration Act. It expressly acknowledged enforceability and encouraged use of agreements for non-judicial dispute resolution.

There followed a series of United States Supreme Court decisions acknowledging and supporting the Congressional objective of encouraging the use of arbitration as an alternative to litigation,many of which arose in a labor/management context. The tensions between labor and management that grew out of the Industrial Revolution, and the fact that neither labor nor management could thrive without the other, eventually resulted in the adoption of mediation and arbitration as the dispute resolution mechanisms of choice both in collective bargaining agreements and in non-union employment contracts.

Today, disputes arising in an employer/employee context are most frequently managed or resolved either by mediation (of which traditional grievance proceedings are a prime example and which is simply negotiation of the disputing parties under the supervision and guidance of an experienced neutral third-party), or arbitration (which involves a ruling deciding a dispute rendered by an experienced neutral third-party), or a combination of both. Such non-judicial dispute resolution processes are generically referred to as "Alternative Dispute Resolution" or ADR. ADR generally encompasses both adjudicative and non-adjudicative procedures.

Adjudicative ADR, called “arbitration,” is simply private litigation before one or more arbitrators generally chosen by the parties for their expertise in the arbitration process and the substance of the dispute. Non-adjudicative ADR includes processes referred to by a variety of frequently ill-defined terms (e.g., mediation, conciliation, settlement conferences, early neutral evaluation, etc.), each of which is characterized by the retention of power for ultimate resolution of their dispute by the parties themselves. No agreement, no resolution.

In non-adjudicative ADR, disputes are addressed in consensual, informal, confidential proceedings, either by direct, unassisted discussions between the parties (“negotiation”) or by “facilitated” negotiation (“mediation” or “conciliation”). The latter usually involves neutral expert outsiders, chosen by the parties for their special subject matter and/or procedural expertise, whose function is to: (1) enhance communication between the parties and their advisors; (2) minimize inter-party conflict; (3) offer new and different perspectives; (4) propose creative solutions; and (5) encourage and “facilitate” agreement between the parties respecting the terms and conditions of their settlement of the dispute.

Arbitration, on the other hand, involves surrender by the parties of their right to accept or reject a proposed resolution to a third party or parties in whom they vest the power to render a judgment, just as a court would.

One major reason for resorting to ADR in seekingto resolve employer/employee disputes is the critical importance of dealing with such problems without risking serious disruption in the operation of the employer's business. At the same time, ADR affords the employees an expeditious and less costly means of obtaining closure. The objective of mediating or arbitrating employment disputes, rather than going to court, is to preserve the working relationship between employer and employee as much as reasonably possible under trying circumstances.

Because it generally provides a more cost-effective, speedy and satisfactory outcome than going to court, and because it is less confrontational and is more user-friendly, ADR is more and more frequently the conflict resolution mechanism of choice ininternational commercial transactions. These advantages are equally applicable and compelling in a wide range of domestic disputes, including labor management/employment disputes, customer complaints, securities transactions, insurance coverage disputes and the full range of disputes that can arise in our complex society.

Simply stated: Understanding what ADR is and how it can be effectively utilized to avoid, manage and resolve conflict is important to labor and management alike, just as it is to those involved in other commercial enterprises -- domestic or international.

Nobel laureate Milton Friedman once observed that the best way to test an economic theory is to compare it with reality. One stark piece of relevant reality in the world of dispute resolution is that traditional litigation in this country has gone into precipitous decline, while the use of ADR continues to grow by leaps and bounds. Ironically, one of the principal attributes of ADR -- its confidentiality -- makes it difficult to accurately quantify either the growth of its popularity or its cost relative to litigation. Nevertheless, the precipitous decline in the number of civil cases that actually get to a jury trial (at least in the United States) and the explosive growth in the demand for ADR services and the proliferation of public and private organizations delivering such services -- both here and abroad-- provide eloquent marketplace evidence that ADR has become the conflict resolution option of choice, worldwide, at least in a commercial setting.

In the past 10 years, federal civil trials have fallen by more than half, with less than 2% of all federal civil cases now going to trial. In fact, fewer federal cases now end up being tried than in 1962. The same precipitous decline has occurred in state civil cases. (See, Marc Galanter, The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts, Journal of Empirical Legal Studies, 2000).

In the “Arbitration Train” article alluded to earlier, a highly experienced lawyer wrote, "Increasingly, parties are including a pre-dispute arbitration clause in contracts, agreeing to route future disputes into an alternative to legal form -- arbitration -- rather than the lawsuit system. Arbitration agreements are now common in employment contracts, installment sales contracts for goods and services, credit card relationships, securities/stock transactions, and healthcare admission documents, to name just a few."

According to this StanfordUniversity and Harvard Law school graduate, "The reasons for the popularity of arbitration are well-documented. It is much cheaper than traditional litigation; it achieves finality of results much faster (cases are decided much more quickly, and because judicial review may be limited, drawn-out appellate procedures can be avoided); and parties are generally happier with the results: rational decisions are rendered by decision-makers with subject-matter expertise, and expensive, protracted litigation is avoided." (Brady, The Arbitration Train That Cannot Be Stopped, supra, 11 Metropolitan Corporate Counsel No. 3, June 2003.) The same is true of mediation. Those experienced with the use of ADR generally agree that it is superior to traditional litigation in most cases.

Although the highly confidential nature of ADR makes gathering evidence of its efficacy difficult, a landmark study released in November of 2005 by the Federal Mediation and Conciliation Service (FMCS), which has special relevance in the field of labor/management relations, found that the use of mediation in labor negotiations and work stoppages in the United States led to $9 billion in savings to businesses and workers, alike, between 1999 and 2004, with an average annual savings of $1.3 billion to labor and management. Significantly, the savings quantified in the study were limited to those arising from a reduction in the duration of work stoppages or preventing them entirely. The study did not address the saved costs of diverted management time, legal expenses or other collateral costs of work stoppages caused by the underlying conflict resolution. Highlights of the report include:

Annual savings of $80 million in retained company profits, $640 million in retained employee wages and $781 million in retained wages of employees in other companies.
Early mediation showed a 46 percent reduction in the length of a work stoppage, resulting in savings of $217 million.
Without FMCS mediation, the cost to the economy for work stoppages would have been 71 percent higher ($21 billion instead of $12 billion) and would have impacted 4 million workers instead of 1.8 million. Work stoppages would have been 61 percent higher.
Mediation prevented an estimated 1,265 work stoppages over the six-yearperiod resulting in savings of $1.3 billion annually to business, workers and ancillary companies.
A mediator’s involvement prior to a contract’s expiration reduced work stoppages by 84 percent.

Thus, there is good reason why knowledgeable commercial interests now regularly include ADR provisions in their contracts, whether they are employment contracts, credit card agreements, securities transactions or consumer, insurance, sales, construction contracts, or otherwise.

Robert K. Wrede is Of Counsel with the California law firm of Russ, August & Kabat and chairs its Dispute Resolution Group. Mr. Wrede presented a seminar in Hawaii last year, sponsored by the Hawaii International Dispute Resolution Group LLC, .

This article was published in the Society for Human Resources Managers (SHRM) Hawaii Chapter newsletter of July 2006.