Legal Writing

Drafting ADR Clauses for Business Contracts

Learn how to draft effective ADR clauses that minimize costs, protect relationships, and streamline dispute resolution in business contracts.
  • Joe Regalia
This special guest post is a collaboration between the American Arbitration Association and Write.law. 
Incorporating well-drafted Alternative Dispute Resolution (ADR) clauses into your business contracts is a proactive and practical way to handle disputes. By doing so, you can ensure that your clients will have an efficient, cost-effective, and relationship-preserving dispute resolution process.  
ADR clauses serve as a pre-agreed roadmap for resolving disputes, eliminating uncertainty, and setting clear expectations for all parties. Key benefits of incorporating ADR clauses are: 
  • Cost Savings: Arbitration and mediation are typically less expensive than litigation, with fewer procedural complexities.  
  • Efficiency: ADR offers faster resolution timelines, helping businesses avoid prolonged disruptions. 
  • Privacy: Unlike public court proceedings, ADR ensures that sensitive business matters remain private.
  • Flexibility and Customization: ADR clauses allow parties to tailor dispute resolution processes and procedures to suit their needs.

How to Incorporate ADR Clauses

1. Tailor the Clause to Your Clients' Needs
Generic, one-size-fits-all clauses can lead to inefficiencies and disputes over procedural ambiguities. Customizing the ADR clause to reflect the unique nature of the business relationship is key.  
  • Consider the types of disputes likely to arise and specify whether arbitration, mediation, or both will apply to all disputes or only certain types of claims.
  • Factor in the value of potential disputes when deciding between mediation, arbitration, or a combination of both. 
2. Decide on the ADR Methods
  • Mediation: Ideal for fostering collaboration and preserving relationships, mediation works best as a first step for resolving conflicts amicably.
  • Arbitration: For more complex or contentious disputes, arbitration provides a binding resolution and ensures finality.
  • Tiered Processes: Include a step-by-step approach that starts with negotiation or mediation and escalates to arbitration if needed. Clearly define timelines for each stage so that your clients are not in limbo or stuck on an endless loop.  
3. Specify Rules and Procedures
To ensure clarity and enforceability, reference established rules from reputable organizations, such as the AAA Commercial Arbitration Rules and Mediation Procedures. If you anticipate small-value claims, include expedited procedures for faster resolutions.  
4. Be Clear About Arbitrator Selection
Define the number of arbitrators and how they will be selected. Consider the following: 
  • Under the AAA Commercial Rules, a single arbitrator hears all cases for claims/counterclaims of less than $3 million. A panel of three arbitrators is automatic on cases for cases with a claim of at least $3 million. 
  • Reducing the number of arbitrators will be harder post-dispute, and three arbitrators cost five times as much as a single arbitrator.  
  • Specify industry expertise if disputes involve technical or niche matters.
  • Avoid overly restrictive requirements that limit the pool of available arbitrators.
5. Define Costs and Fees Allocation
Specify how arbitration and mediation costs will be shared or allocated. For example:
  • Include a provision stating that fees will be shared equally unless the arbitrator decides otherwise.
  • Consider giving the arbitrator authority to award fees and costs to the prevailing party. 
6. Address Geographic and Jurisdictional Considerations
Choose a precise and mutually convenient locale for ADR proceedings. At a minimum, include a city and state. Leaving this blank will result in procedural inefficiency and inevitably add cost to the process. Include provisions for virtual or hybrid hearings if appropriate.
7. Ensure Enforceability
Use tested standard clauses from reliable providers like the American Arbitration Association to ensure the clauses are enforceable and legally sound. Avoid vague or ambiguous language that could lead to delays or court intervention. For drafting help, the AAA's clausebuilder and clausbuilder.ai tools are free. 

Best Practices for Drafting ADR Clauses

Be Specific Yet Flexible
Strike a balance between providing clear procedural guidelines and allowing flexibility for unforeseen circumstances.
Consider Emergency Relief
If disputes may require urgent resolutions, include provisions for emergency relief within the arbitration rules. Otherwise, you will end up with a court procedure and an arbitration procedure that could be conflicting.  
Confidentiality Provisions
Explicitly state that all ADR proceedings and outcomes will remain confidential to protect sensitive business information. Under the AAA Rules, arbitration is confidential for the AAA and the arbitrator. While the arbitrator may issue a confidentiality order during the proceedings, including this language in the contract is best to avoid post-dispute conflicts. 
Leverage ADR Resources
The AAA's ClauseBuilder Tool offers an easy, customizable way to draft ADR clauses tailored to your industry and agreement type. It covers essential components, such as governing rules, arbitrator selection, and cost-sharing mechanisms.

Sample ADR Clause

Here's an example of a comprehensive ADR clause:
"Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be resolved through mediation administered by the American Arbitration Association under its Mediation Rules. If mediation fails, the dispute shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules. The arbitrator(s)' decision shall be final and binding, and judgment on the award may be entered in any court having jurisdiction thereof. The costs of arbitration shall be shared equally by the parties unless otherwise determined by the arbitrator."

Conclusion

Incorporating well-drafted ADR clauses into your contracts is a strategic move to manage disputes efficiently and protect business relationships. Businesses can ensure their ADR processes are robust and effective by using tools like the AAA ClauseBuilder and considering key elements such as rules, arbitrator selection, and costs.
For more guidance, visit adr.org and explore tools like the ClauseBuilder to streamline your clause-drafting process. Don't wait until a dispute arises—plan to safeguard your business's interests and resources.
Angela Romero Valedon, Esq. Vice President, American Arbitration Association 

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