Business Law Today: Building an ADR program

ABA Section of Business Law
Business Law Today
March/April 1999

Building an ADR program

What works, what doesn’t

By HARRY N. MAZADOORIAN

Mazadoorian is assistant general counsel and coordinator of ADR activities at CIGNA Companies, in Hartford, Conn. He is chair of the Corporate ADR Committee of the ABA Section of Dispute Resolution.

Your client has decided that ADR’s time is here. Are you ready to advise?

As use of ADR in private and court-annexed settings has burgeoned over the last 10 years, creative new programs and uses have been tried in many settings. Commercial, consumer, community and even criminal ADR programs have emerged and proved their effectiveness in reducing some of the delay, expense, inefficiency and hostility associated with traditional dispute-resolution processes.

In no setting, however, has alternative dispute resolution demonstrated such potential, success and acceptance as in the commercial arena: A number of the most successful corporate ADR efforts were described in a 1997 Center for Public Resources (CPR) book written by Cathy Cronin-Harris, Building ADR into the Corporate Law Department. ADR-related cost savings have been demonstrated time and time again. A recent CPR survey covering a five-year period demonstrated that 652 reporting companies that used CPR-sponsored programs saved more than $200 million with an average savings of more than $300,000 per company.

However, benefits have by no means been limited to dollar savings. A survey of business executives and lawyers for example, has indicated that 80 percent of respondents believed that mediation helped preserve business relationships.

During the past five years, a number of studies have indicated a substantial increase in corporate ADR use. These include: Deloitte & Touche’s 1993 and 1995 studies; a 1996 Price Waterhouse, LLP study; a 1996 ABA Journal Poll; a 1998 survey by the Cornell/PERC Institute of Conflict Resolution (Editor’s note: The authors of the survey wrote an article in this pull-out section of Business Law Today.). Each of these polls and surveys has indicated substantial increases in ADR use.

Other developments have confirmed the rise in the use of corporate ADR:

The fact that more than 800 corporations with 3,200 subsidiaries have signed the CPR ADR "pledge" to consider ADR in any dispute with another signatory to the pledge.
The development of specific industry-wide protocols for use of ADR within an industry. Examples include programs developed by the National Association of Securities Dealers, National Healthcare Lawyers Association, World Intellectual Property Organization, Wireless Industry, Construction Industry Partnering Programs and numerous insurance industry programs. Also, the Center for Public Resources has developed programs for franchise, banking, chemical and food-industry disputes.
Incorporation of ADR not only into law school curricula but also into business school curricula.
A recent 1998 week-long online seminar involving business managers and ADR.

Increasingly, corporations have turned to ADR for the resolution of specific and complex matters that just a decade ago would have been thought to defy alternative methods of dispute resolution. Included in this group are class-action insurance matters, telecommunication disputes and patent-law matters.

Probably the most striking trend in the corporate use of ADR is the dramatic movement toward mediation. The Deloitte & Touche survey clearly indicates this, as do a number of other studies involving specific industries, such as the construction industry.

As both anecdotal and systematic reports of corporate ADR success stories circulate, companies that have not yet systematically sought to regularly use ADR express increasing interest in developing programs.

Lawyers knowledgeable in ADR regularly receive requests from corporations seeking information on how to go about starting a program without identifying the purpose of the program. It should be immediately evident, however, that simply asking "How do I create an ADR program?" without first determining what is needed is reminiscent of the Cheshire Cat’s response to Alice in Wonderland:

Alice: "Would you tell me please which way I ought to go from here?"

"That depends a good deal on where you want to get to," said the cat.

"I don’t much care where," said Alice.

"Then it doesn’t matter which way you go," said the cat.

Nothing can doom an ADR program to failure or ensure that ADR efforts will soon be discontinued more than an attempt to create a program without sufficient prior analysis, personalized design and careful implementation.

Without a thorough and thoughtful analysis of a company’s universe of disputes, an ADR program should not be attempted. Critical questions must be answered:

Are there other concerns besides cost savings and delay reduction? Is the company concerned with preserving business relationships or perhaps maintaining privacy in company-to-company disputes?
How many disputes does the company encounter in any given year and how are these disputes resolved?
Are there already industry-wide or other processes available that achieve prompt and acceptable resolution?
Are the costs of the existing dispute-resolution processes, whether they be litigation or other methods, too high?
Are there certain types of disputes for which an alternative process is needed, while other disputes could be handled through traditional processes?
What experience has the company had in various categories of disputes including employee, customer, vendor, governmental and corporate-to-corporate disputes?

One size certainly does not fit all in connection with the development of a dispute-resolution system. Once the company examines its volume, type and experience in connection with existing disputes, a decision must be made about what changes are sought for future disputes. Does the company simply want to be able to determine on an ad hoc basis what dispute resolution options are available when a dispute erupts? Does the company want to commit it and potential adversaries to a certain dispute-resolution process by the use of an obligatory ADR contract clause? Does the company wish to institutionalize the use of ADR by internal forcing mechanisms that will encourage disputes toward ADR processes and motivate lawyers and managers to use ADR? Once these questions are answered, the conclusions reached in the ADR audit and analysis can be used to design a company-specific program.

In the design phase, the corporation can do the following:

Define which ADR mechanism it prefers;
Develop specific mechanisms and screens to identify which cases are appropriate for ADR;
Define responsibilities for implementing the ADR program.
Not surprisingly, companies that have attempted similar ADR programs have reported substantially different experiences and differing levels of success. Frequently, unsuccessful programs are caused by shortcomings in implementation. Among the omissions in ADR implementation are very often the following:
Failing to enlist appropriate support from key participants within the company. This could mean support from senior management within the company and the legal department and support from rank-and-file managers who would be responsible for implementing the ADR procedures on a day-to-day basis. Additionally, the ADR program must be sufficiently explained to all who are expected to take part to achieve both their understanding and support.
Starting with too ambitious a program. The use of ADR generally involves a learning process. Creating a program without any institutional experience can be an insurmountable tactical error. Experimentation with a pilot program is generally a good idea and allows the development of a good learning curve and the avoidance of many potential costly mistakes.
Not seeking assistance from available experts. A company should not feel compelled to make its own mistakes but rather to learn from the experience of others. A wealth of ADR experience has been developed in the last 25 years. Much can be learned by asking the right questions and seeking out the right consultants. Major ADR organizations such as the American Arbitration Association, the Center for Public Resources and the ABA’s Dispute Resolution Section have developed valuable ADR tools and best practices and are most willing to share them.
Not inquiring as to previous experience with ADR within the company. Early in my tenure as CIGNA’s ADR coordinator, I decided that it would be helpful to search the company archives to review earlier uses of ADR. I found ADR language — not terribly different from the "modern" ADR clauses that are being discussed at the many current symposia — in insurance policies issued by Insurance Company of North America, which is a major CIGNA Companies affiliate, as far back as the year 1793! (See the sidebar.)
Once an ADR program is initiated, the company must remain vigilant to recognize pitfalls to be avoided in the implementation phase. Experience has identified a number of common mistakes, which can easily be avoided with a little planning.
Failure to dedicate resources for the ADR program and failure to assign responsibility. An ADR effort will be time intensive and require front-end investment of human and financial resources. It will not run on automatic pilot. Individuals within the legal department as well as the business areas must be identified and responsibilities for the program assigned.
Resistance must be anticipated, recognized and appropriately dealt with. An ADR program frequently seeks to change decades of conventionally accepted processes or a contrary company culture. Lawyers as well as nonlawyers will suggest assorted reasons for following the traditional litigation path (It’s too early for ADR, we need discovery first, let’s show the other side we mean business......). Training programs and incentives should be aimed at this resistance.
Failure to closely monitor the program. Without a reliable method to measure and monitor ADR efforts, an adequate database to gauge success and to make necessary adjustments will not be developed. Critical indicators must be developed during the design stage and then carefully monitored during implementation.
Despite the substantial variation in the way corporations have gone about designing and implementing ADR systems, several "best practices" emerge from a review of numerous corporate ADR systems. These practices appear to constitute a core body of initiatives without which ADR programs are not likely to succeed. Among the practices:
It is advisable to articulate the company’s philosophy on ADR in a written policy statement. Such a policy, issued by the general counsel or the chief executive officer, not only signals support from the top for ADR but also empowers company lawyers to take a pro-active stance in pursuing ADR, as well as providing a vehicle to initiate ADR discussions with other corporations without having to worry about the "who blinked first" or "sign of weakness" syndrome.
One of the key practices that so many corporations report to be central to their ADR success is the development of specific ADR contract clauses for use on a pre-dispute or post-dispute basis. The selection of the right ADR clause is so important that it should not be left to a time when parties are feverishly trying to put a contract together or frantically searching for language to structure an ADR procedure. The ADR clause must be carefully crafted at a time that is not fraught with pressure and threats.

Much has been written about drafting effective dispute-resolution clauses and a wealth of sample forms exist to guide the lawyer. Particularly useful references are: CPR Legal Program, Dispute Resolution Clauses: A Guide for Drafters of Business Agreements , (1994); American Arbitration Association, Drafting Dispute Resolution Clauses: A Practical Guide , (1993); A Drafters Guide to Alternative Dispute Resolution, Corinne Cooper & Bruce E. Meyerson, editors, Committee on Dispute Resolution, Business Law Section (1991). The Center for Public Resources makes its clauses available on a user-friendly disk.

Many of these dispute-resolution clauses use multi-step procedures encouraging negotiation first and then some form of mediation prior to attempting an adjudicatory form of ADR.

However, the availability of existing clauses should not cause the corporate lawyer to take them mechanically "off the shelf" for incorporation into a contract nor to use them as boilerplates. A number of thoughtful commentators have recently pointed out that knee-jerk use of inappropriate dispute-resolution clauses can cause more problems than they solve.

Just as ADR contract clauses need to be developed well before they are needed, so too should key managers and lawyers become familiar with fundamental ADR concepts and procedures before a dispute arises. The time to be learning about the difference between a mini-trial and a summary jury trial is well before a corporation is negotiating ADR options with its adversaries. Among the most critical ADR concepts that must be understood are:

The fundamentals. Parties must understand the difference between adjudicatory and mediative processes, be conversant with procedures such as the mini-trial and summary jury trial and know about hybrid procedures like med-arb. Furthermore, parties should understand the fundamentals of mediation including the joint session, the private caucuses and the difference between evaluative and facilitative mediation styles.
How to conduct a suitability analysis to determine whether a procedure is appropriate for ADR and if so, which ADR procedure is appropriate. This analysis can be done by a simple checklist or a more elaborate suitability screen.
The corporate lawyer must be able to evaluate the expertise of prospective neutrals. It’s essential that corporate ADR specialists know how to research the background of potential neutrals including the training they’ve received, the number of matters previously handled (including success rates), the styles employed and whether they sit exclusively for one provider or participate on several panels. Significantly, the Cornell study points to concerns of corporations concerning the quality of neutrals. Similarly, the ABA Journal poll reports that 70 percent of respondents are somewhat concerned about personal biases and qualifications of arbitrators as neutrals.
The best way to resolve a dispute is to prevent its occurrence in the first place. Therefore, effective dispute-resolution systems should contain a mechanism for early evaluation of potential disputes. Early case assessment is being increasingly used by corporations with marked success.
While ADR can be effective at any stage of a dispute, it is most likely to produce beneficial results when used early.
The time when use of ADR was purely a private matter has long passed. Today, courts, both state and federal, are embracing ADR with unprecedented enthusiasm and frequency. Additional court-annexed ADR is expected with new programs regularly being introduced at both the state and federal levels. The recently enacted Federal ADR Act of 1998 (Public Act No. 105-315) will bring about even more use in the federal courts.

These programs must be factored into any comprehensive ADR programs adopted by a corporation so that in-house efforts can be integrated with available court initiatives. Recognizing that competent ADR services will be made available by the courts can present valuable opportunities to achieve optimal ADR use in a cost-effective manner.

While ADR is used in most instances to resolve specific disputes, corporations should recognize the broader potential that it has to achieve other benefits, such as, (1) learning more about shortcomings and risks in corporate business practices and processes, and, (2) presenting opportunities to change the very culture of the company in the areas of dispute recognition, avoidance and resolution.

During the past five years, a substantial body of statistical data has emerged demonstrating the growing patterns of ADR use within the corporate community as well as preferences for certain types of procedures, such as mediation. With increasing use, corporations are being asked to consider ADR with greater frequency and are initiating ADR efforts at an unprecedented pace. The experience developed in the public and private sectors indicates certain "best practices" to optimize the chances that a corporation’s dispute-resolution system will be effective and efficient.