ADR stands for Alternative Dispute Resolution. Its purpose is to offer a formal method of resolving disputes between individuals and organisations without resorting to court. Taking a case to court can be time-consuming, stressful, and expensive. ADR offers a cheaper, quicker and more discrete alternative whilst remaining fair, objective and formal. Some forensic accountants choose to specialise in ADR due to their familiarity with both finances and the legal system.
Uses for ADR
ADR can be used to rectify any kind of dispute between businesses or individuals. Often, interests clash and a third party is needed to come to a decision. ADR can be used in the following situations:
Types of ADR
There are a number of different types of ADR that differ according to the complexity and severity of the rules each one enforces. Different types of ADR include:
- Conciliation - usually a preliminary stage before arbitration for consumer disputes. The clients on both sides must give written details of the complaint to the conciliator, who will then give an opinion as to the best solution. Decisions in conciliation are not binding and clients can still choose to take the case to court if they wish. Conciliation is usually offered as a free service by trade association members.
- Ombudsman schemes - services like insurance companies, building societies and banks use Ombudsman schemes. An Ombudsman scheme can be used after a complaint has made using the internal complaints procedure. The Ombudsman then makes a non-binding decision, which is usually accepted by the supplier. If the client or supplier feels unhappy with the ruling, the case can be taken to court. The court will usually take the Ombudsman ruling into account when assessing the claim. All Ombudsman claims are free.
- Mediation - a type of negotiation moderated by an objective third party. Clients on both sides of the case will be required to submit details of what happened and then sign a mediation agreement. Meetings can include one or both clients but mediation can be completed without the opposing clients having to meet (until an agreement is reached). Agreements are legally binding in order to prevent court action. Mediation can be very expensive but legal aid may be available to those on low incomes.
- Arbitration - a more formal and legally binding method of ADR. Arbitration is governed by the Arbitration Act 1996. The decision of the arbitrator is legally binding and arbitrators tend to be a member of the Chartered Institute of Arbitrators.
The forensic accountant's role in ADR
As financial and legal experts, forensic accountants play a valuable role in ADR. They are in the perfect position to reach a fair decision based on quantitative data provided by both parties. Forensic accountants are most likely to resolve disputes using the method of arbitration, due to their specific expertise.
When is arbitration used?
Arbitration is most commonly used for:
- international disputes
- major corporation disputes
- employment rights disputes.
Often, arbitration will be stated as the preferred method of dispute resolution when contracts between individuals or organisations are first drawn up. This clause is intended to prevent court action, which can be time-consuming, costly and detrimental to business reputation.
Characteristics of arbitration
Arbitration can be defined according to the following characteristics:
- Parties on both sides of the dispute must agree on using the process.
- Any evidence, conclusions and agreements are private.
- The final decision rests entirely on the arbitrator, and not the parties involved.
- The conclusion is reached through the examination of written information and quantitative data.
- If a hearing is necessary, it will be less formal than a court hearing.
- Once arbitration is agreed as a method of ADR, the court cannot intervene and the decision is final.
Arbitration versus court proceedings
The advantages of arbitration over court litigation are as follows:
- faster way to reach an agreement.
- all evidence counts as long as it is relevant and noncumulative
- no public record of proceedings
- choice and flexibility, especially as parties have freedom to choose an arbitrator according to experience and capability
- less chance of damaging a business's or individual's reputation.
The disadvantages of arbitration over court litigation are as follows:
- the arbitrator's word is the final word, even if the arbitrator makes a mistake
- although it tends to be cheaper, arbitration fees do depend on the size of the panel or arbitrators
- there is no jury involved, so the decision rests entirely on one source.
How arbitration works
Although arbitration is strictly governed by the Arbitration Act 1996, it is still less formal, expensive and rigid than court procedures. Arbitration works according to the following four steps:
1. Choose: both parties must agree on who they would like to act as an arbitrator for their case. They can also choose how many arbitrators they need and whether or not to include a chairman or umpire. The larger the panel, the higher the fees. The arbitrator/arbitrators can be revoked, but only if both parties mutually agree.
2. Agree: for arbitration to commence, a written arbitration agreement must be drawn up. This agreement forces both parties to give up their right to find resolution elsewhere, such as in a court or tribunal.
3. Consideration: the chosen arbitrator will examine any written evidence and quantitative data submitted by both parties.
4. Award: the arbitrator's final decision is known as the 'award'. Based on evidence, law and reasonableness, the arbitrator will issue a final and binding award.
Paying arbitration fees
Whereas small claims court has a fixed price, arbitration fees can vary. Any arbitration schemes run by the Chartered Institute of Arbitrators cost between £0-£100, although private arbitration fees tend to be significantly higher. Often, the losing party is required to pay all arbitration fees for both sides. In this case, the winning party will receive a refund for any arbitration fees they already paid.
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