The Economics of ADR:  Is ODR the Next Efficiency?

Elisabeth Opie* 
Senior Legal Counsel, CSIRO

Abstract

Recent studies have sought to identify the characteristics of companies who choose to use ADR as an efficient means of dispute resolution rather than litigation. Analysing these qualities, and looking at traits identified as necessary for users of ODR in recent literature, this paper explores the current state of alignment between (possible) users of ODR and ODR.

Introduction

Alternate dispute resolution (ADR) has become a global phenomenon, with online dispute resolution evolving into one of its latest tools for those seeking to settle disputes without resorting to litigation. 

Some recent studies in the U.S. have sought to identify the characteristics of companies who choose to use ADR as an efficient means of dispute resolution.  Assuming that the characteristics of corporate ADR users are, at least to some extent, similar in many countries, this paper explores by analogy the current state of alignment between (possible) corporate users of ODR and the ODR process itself.  That is, are current corporate users of ADR predisposed to using online dispute resolution (ODR)?  It is felt that a reasonable comparison can be made between these two user groups, given the recent advances in translating or replicating the off-line environment in cyberspace. 

Although these recent studies are based on U.S. corporations, the characteristics of these corporations could be reflective of the broader corporate community as a result of a number of unifying factors:  the increase of competition globally; the increase in prominence worldwide of corporate governance, director accountability and shareholders; the prominence of multinationals worldwide; and the rise in the use of litigation and ADR globally.  Having said that, it is also important to highlight that some countries which have always included ADR in their dispute resolution processes, not because of an underlying governance or economic rationale, but because of culture.[1]  It is beyond the scope of this paper to address the use of ADR in those corporate communities.

I will conclude by offering a prediction of future trends in the use of ODR based on the economic and non-economic considerations relevant to the corporate ADR user group.

ADR and Corporate Disputes

In 1998, David Lipsky and Ronald Seeber from Cornell University published the results of their study ‘The Appropriate Resolution of Corporate Disputes:  A Report on the Growing Use of ADR by U.S. Corporations’.   The authors defined ADR as ‘the use of any form of mediation or arbitration as a substitute for the public judicial or administrative process available to resolve a dispute’ (at p 7).  This in turn defines the scope of this paper: to look at the use of alternate dispute resolution by corporations for commercial disputes as opposed to litigation.

The sample population for what I will refer to as the Cornell Study was taken from the Fortune 1000; this sample also matched the industry distribution of Fortune 1000 companies.  The eight types of ADR surveyed in the Cornell study were mediation, arbitration, med-arb, in-house governance, mini-trial, fact-finding, peer review and ombudsman.  It was found[2]:

·        there is a preference for mediation or arbitration;

·        the frequency of use for each type of ADR surveyed varied;

·        corporate ADR experience is once of significant breadth but little depth; and

·        frequent users of mediation or arbitration are much more likely to have experimented with less commonly used methods of ADR. 

Lipsky and Seeber found that ADR was being used as a successful means of resolving business disputes for a number of reasons, with the main ones being[3]:

·        cost and time benefits as compared with litigation and administrative agency processes;

·        the ability for participants to have control over the process;

·        difficult cases involving business risks that called for the innovative handling of dispute resolution processes;

·        the need for streamlined ways to handle growing numbers of ordinary disputes

·        industry needs to continue a contract, project or even a business (or conversely, the impact of, or length of time for, going to court or reaching a settlement);

·        the type of relationship between the claimant and respondent (long-term, one-off, the size of the transaction);

·        the adoption of ADR clauses in contracts;

·        court ordered ADR (particularly mediation or arbitration);

·        the requirement by certain industries to use ADR (such as the Uniform Dispute Resolution Process implemented through the ICANN);

·        public policy movement (such as institutionalisation of ADR in court procedures); and

·        the development of corporate policies relating to dispute resolution.

It was speculated that corporations first try mediation or arbitration; if those are of value to them, they continue to use them but also experiment with other forms of ADR.[4] 

ADR as a business strategy

Part of the focus of the Cornell Study was to determine whether there was an atypical strategy for dispute resolution for different types and sizes of companies.   It found that[5]:

·        only 5 to 6% of corporations always chose to litigate whether defending or initiating proceedings. 

·        approximately 11% of corporations would always try to use ADR;

·        approximately 50% would use a mixture of litigation and arbitration, if one or the other was not appropriate; and

·        20% of companies had no corporate policy, but set a strategy on a dispute-by-dispute basis.

Based on their data, corporate policy seemed to be largely independent of a company’s status as the defending or initiating party.[6]

While ADR was used selectively, it was found that it was more likely to be used for certain types of disputes[7]:

·        Employment;

·        Commercial/contract;

·        Personal injury; and

·        Construction.

and for certain types of industries[8]:

·        mining and construction;

·        manufacturing; and

·        trade.

The prevalence of ADR in certain industries appears to be due to an historic way of settling disputes in a particular industry (as we are seeing today in the growth of online processes for internet-based products and services), or due to resolution of disputes by ADR being more amendable for a particular industry (such as construction, where it is generally essential to keep a project on foot in spite of an ongoing dispute).   The type of ADR used therefore appears to be industry-related.  Indeed, different patterns of use were identifiable and were continuing to develop for each industry.[9]

Barriers to ADR

Just as some industries were identified as more pro-ADR than others, there are certain industries which were identified as anti-ADR (such as the finance industry and the transport, communications and utilities sector). 

The barriers to ADR cited by the anti-ADR corporations included:[10]

·        a perception that use of ADR will mean an unnecessary compromise to a party’s position;

·        wanting to establish a certain type of reputation in enforcing its rights;

·        wanting to inflict some pain and suffering on the adversary;

·        a lack of trust and confidence in ADR neutrals, especially arbitrators;

·        the risk of exposing one’s strategy to the other side;

·        a belief that ADR is too complicated;

·        it being difficult to appeal the result if it was binding (in the case of arbitration);

·        some ADR processes may not lead to a binding resolution of the dispute (such as with mediation);

·        ADR requires a level of sophistication that the company does not have;

·        senior management does not wish to be involved in ADR;

·        it is easier to file a claim in court;

·        there is a win-lose mentality;

·        where the stakes are very high, corporations prefer to fight their battles in front of judges than in front of mediators or arbitrators; and

·        importantly, the dispute involved an important legal principle and a precedent has value. 

This underlying negativity towards ADR may also be heightened if mediation or arbitration is imposed on an anti-ADR company by court order, particularly because such companies are unlikely to have had much or any experience with these ADR processes.  It is interesting to note that the Cornell study found many corporations lacked confidence in the professional competence of neutrals, particularly arbitrators.[11]

Changing corporate culture

Lipsky and Seeber found that strongly pro-ADR companies tend to be the largest ones in Fortune 1000, were known for adopting so-called progressive policies in other areas (such as total quality management, team-based production systems, dispute prevention mechanisms, including training and education of employees), and were leaders in introducing high-performance work systems.[12]  A pro-ADR policy seems closely linked to this array of corporate policies.[13]    There also appeared to be a significant correlation between the frequency of corporate use of ADR in domestic disputes and its use of ADR in international trade.[14]

Companies which never used ADR tended to be smaller than average, but were very profitable (not under any cost pressure).[15]  There was no analysis undertaken of the efficiency of these companies systems, nor whether any companies with these characteristics were in fact more profitable if they used ADR rather than those that did not.  There was, however, a strong relationship between corporate size and ADR policy.[16]

As companies do go through cycles of growth and down-turn, it may be that a long-term down-turn for those ‘litigate only’ companies, or an increase in competition, will mean that different dispute resolution strategies (that is, ADR) will be adopted or experimented with by them. 

Indeed, a number of factors seem to be forcing companies to re-evaluate or at least introduce corporate policies on dispute resolution.  The most obvious, perhaps, is the introduction of mandatory mediation or arbitration in many judicial systems as part of the litigation process. 

The market has also changed dramatically since the writing of the Cornell study, thus requiring many companies to move towards more efficient and cost-effective transactions.  This trend is seeing a number of companies introduce new systems to complete contracts (such as over the internet or through the use of standard form agreements), which may in turn mean that the dispute resolution mechanism is not really negotiable. For those high performance companies who are rationalising the way they provide products or services, their strategy for doing businesses generally takes a sophisticated and holistic approach:  attracting clients, entering into agreements, having paralegal staff ‘completing the blanks’ in standard form agreements as opposed to legally trained staff, managing and carrying out the agreement, and also setting up systems to resolve disputes in the event that expectations or contractual obligations are not met.  It is these companies who will generally incorporate some form of an alternate dispute resolution clause in their agreements.

Translatable Efficiencies – ADR to ODR?

Company culture appears to play a great part in the choice of dispute resolution processes.  So too does knowledge, experience, familiarity with ADR, and an ability to make the process economically viable for the company – in terms of cost, use of management time, the affect on production or the carrying out the business’ services, reputation and relationships.  Economics and process-control have been identified as the main reasons why corporations have moved toward ADR.  For those companies with sophisticated and/or streamlined high performance corporate strategies, having an ADR policy also appears to be important to developing and maintaining their competitive advantage.

The efficiencies gained through the use of ADR extend beyond the corporate ADR user to the courts, and ultimately society.  This is not only due to the decrease in caseloads for the courts and a decline in public spending for administering the legal system.  It is also expected that corporations who use ADR more frequently will decrease the length of time in litigating their own claims (should they go to court) as court-ordered arbitration or mediation may not be necessary for them - those avenues would have already been exhausted as a means of dispute resolution.[17]

The 2003 study conducted by the American Arbitration Association ‘Dispute-Wise Management:  Improving Economic and Non-Economic Outcomes in Managing Business Conflicts’ (the AAA Study) broadly confirmed the findings in the Cornell study with respect to the ongoing use of both mediation and arbitration by legal departments of Fortune 1000 companies as well as in a sample of mid-sized and small firms (at 26).  The AAA study also records an increase in the use of ADR procedures along with improvement in the perceived qualifications of mediators and arbitrators.[18]  It also showed that the conclusions of the Cornell study could extend to small companies, thus demonstrating that small companies do not differ significantly in their use of ADR.

The question is whether these users of ADR are likely to move to ODR as a dispute resolution tool.  There are a number of features of ODR which make it attractive as a dispute resolution mechanism:  cross-border communication; having a greater pool of expertise available; online accessibility to a variety of ADR tools; detemporalisation; and cost-efficiency.  There may also be many inefficiencies or inhibitors to the use of ODR:  technological failures; cultural differences; language; the non-recognition of ODR – and even ADR – as a legitimate dispute resolution process in some legal systems; and the lack of the human element.[19]

Many writers on corporations have concluded that the ultimate competitive advantage for a company is ‘flexibility’ or ‘adaptability’[20] – traits which are also required for the uptake of new technologies and changing or novel environments.  Given the characteristics of corporate ADR users identified in the above studies, it seems likely that ODR will be experimented with and consequently used more widely as part of an ADR toolkit when knowledge and familiarity is (further) developed.  The change in the mind-set required to use technology to facilitate the resolution of commercial disputes is being impacted on by the UDRP process and other online dispute resolution systems, and the cultural phenomenon of ‘technology kids’.

Conclusion

ADR is fairly well-entrenched in the dispute resolution processes of companies, with ODR now becoming available as part of the entire ADR package available to businesses.  While ODR is initially industry specific, the above studies demonstrate that its use should grow as users become more knowledgeable of, and experienced with, the processes.  In time, it is envisaged that ODR processes will be adapted for specific industries.   The impact of ODR should also be felt by the judicial system, resulting in a further decline of caseloads and trial time, as well as a reduction in public expense.

However the use of ODR will not only need to be cost efficient and maintain the confidentiality of information disclosed in online negotiations or proceedings.  Its processes will also need to be clear and conducive to finding a durable result, and the outcome acceptable in terms of preserving business relationships for current corporate ADR to engage in ODR. 

Naturally, ODR needs to be accessible before it can become a viable ADR tool, particularly for international trade disputes.  Adaptability (or cultural change), global access to technology and legal recognition of ODR are therefore three of the main prerequisites for its continued development as an efficient means of dispute resolution.