Robert Smith

The Other Side of ADR

Even though my book generally advocates the use of ADR to resolve commercial disputes, ADR does have a less advantageous side.

While the disadvantages of ADR and of particular ADR processes are not ignored in the book, advocates of ADR sometimes seem to promote it with almost evangelic fervor.

Any party considering ADR should consider the possibility of encountering the following pitfalls:

  1. Few or no checks on the power of the neutral may lead to anomalous or unanticipated results. One example may be a neutral rewriting the parties’ agreement to reflect what he or she believes is fair, rather than what is commensurate with business practices, or what accurately reflects the intent of the parties.
  2. Costs may not always be reasonable, especially in low-value cases. The public court system is, at least, free, except for filing fees, jury fees, and other administrative costs. For example, if a low-value case is referred to a discovery master or referee, that neutral’s fees may quickly mount to where they can exceed any reasonable recovery or settlement. Parties and referring courts do not always choose the most cost-effective method to resolve disputes.
  3. The possibility of bias or a conflict of interest–or at least the appearance of impropriety–may arise if a neutral gets a good deal of repeat business from the same institution.  ADR providers are businesses.  Presumably, they prosper when satisfied customers return with more business.  If an institution regularly uses one neutral, is there a danger the neutral may slant his or her rulings in that party’s favor to stay in the customer’s good graces?

This is adapted from ADR for Financial Institutions by Robert M. Smith (West Group, 2nd ed.1998,
1200 pp.)  [Footnotes omitted]