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Critical role of ADR and dispute system design in corporate management & governance

In Europe, commercial mediation is on the constant rise, but the business community is still largely unaware of its benefits  or even its attributes. In the United Kingdom, civil commercial mediation has experienced substantial growth since the Woolf Reforms, but it is still more often referred to than practiced. In both markets, the practice is more often looked upon as a means of resolving family and community disputes than as a method of adding value to a business relationship or a technique to manage outside legal costs. In many other countries commercial mediation is an object of study more than of practice.

In the US most corporate legal departments understand the process of commercial mediation and many companies are responding to competitive pressure to reduce their legal budgets by looking to the principles of ADR to guide them in creating dispute management systems, rather than merely using mediation as an alternative to litigating or arbitrating particular cases.

ADR systems have proven to be a highly reliable method of managing streams of cases in employment and other departments.

If at its heart ADR is, in fact, a tool for management, then what does it manage?

Commercial conflicts, and more importantly, commercial relationships. Any serious student of mediation readily appreciates that the process results in the reformation and clarification of business dealings, at least as much as it does the issuance of an award of damages. It is useful in the management of critical business functions and stakeholders such as vendors, customers, channel partners, associates and employees.

There are two aspects of corporate governance that imply a role for ADR skills. One is in facilitating the work of the board itself, and the other is in creating shareholder value.

Corporate governance principles provide, that ‘corporate governance issues between shareholders, the board and management should be pursued by dialogue and, where appropriate, with government and regulatory representatives as well as other concerned bodies, so as to resolve disputes, if possible, through negotiation, mediation or arbitration. But the principle seems not to have been applied in real cases of managing internal or external board conflict. It is in the second role of the board – ensuring the creation of shareholder value – that the most intriguing possibilities lie for application of the core principles of interest-based facilitated negotiation.

The management of particular disputes by the legal department is something that has gone very seriously wrong, in which case it is too late.

But is not the prevention of disputes and management of critical business relationships clearly a board matter?

Of course it is. And it may be entirely prudent for any board to ask senior management these questions, and be satisfied with the answers:

  • Does the company have a system of early case assessment, and a method of establishing reserves against contingencies that the auditor approves? If not, why not?
  • Does the company have a rigorously designed method of identifying and addressing streams of employee disputes? What is the track record of that system, and what trends have been uncovered? How many claims of racial or gender discrimination have been voiced, and is there any indication of mismanagement that might give rise to a suit that would have serious reputational consequences to the company? What percentage of employee disputes have remained unresolved and risen to the level of the filing of arbitration or lawsuits?
  • What impact has the system had on rates of employee turnover and outside counsel costs?
  • Does the company have an early dispute detection and resolution system with respect to its critical procurement functions such as vendors, suppliers? If not, why not?
  • What systems does the company have in place to manage disputes involving its patents and trademarks? What are the trends of outside counsel costs in the area of protecting intellectual property rights? What percentage of such claims result in licences, and what transaction costs are incurred between the onset of the claim and the licence agreement?
  • Does the company have a policy that its transactional attorneys and business people draft dispute management clauses in critical contracts, that are designed to protect the value of the deal? What resources are expended to provide such training for the professionals who negotiate and draft these critical deals?
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