Alternative dispute resolution (ADR), what it is and how it works

Alternative dispute resolution (ADR) is the umbrella term for resolving a dispute outside the court system, usually with the help of a neutral third party. It covers everything from a two-hour mediation over an unpaid invoice to a full arbitration hearing with witnesses and a binding award. For most Australian small businesses, ADR is not an abstract legal idea. It is the thing your contract's dispute resolution clause points to when a customer, supplier or business partner stops paying or stops performing.

This article explains what ADR is and how it works in practice, including:

• The three families of ADR: facilitative, advisory and determinative processes, and how they differ.
• How ADR connects to the courts: when courts can refer disputes to ADR, and what happens if you settle.
• A worked example: how a small business dispute plays out through mediation.
• The common misconceptions: why "ADR is just mediation" and similar ideas are wrong.
• When to get help: what a dispute resolution lawyer actually does.

What ADR is

ADR is a spectrum of processes, not a single procedure. At one end a facilitator simply helps you and the other party talk; at the other end an arbitrator hears evidence and makes a binding decision. What the processes share is that the dispute is resolved without a court judgment, and usually with a neutral third party involved.

Australian definitions of ADR have long grouped these processes into three families, based on how much influence the third party has over the outcome. The former National Alternative Dispute Resolution Advisory Council (NADRAC) classified them as facilitative, advisory and determinative, in ascending order of the practitioner's influence. The Australian Dispute Resolution Advisory Council, which carries on that classification work, uses the same categories today. Understanding which family your process falls into tells you who decides the outcome: the parties, an adviser, or a decision-maker.

Facilitative ADR: mediation and its close cousins

Facilitative processes are the most common form of ADR, and mediation is the best known. The mediator does not decide anything. Their job is to help the parties identify the issues, develop options and reach their own agreement.

That description is built into NSW law. Section 25 of the Civil Procedure Act 2005 (NSW) defines mediation as "a structured negotiation process in which the mediator, as a neutral and independent party, assists the parties to a dispute to achieve their own resolution of the dispute". Two features follow from that definition. First, the mediator cannot impose a settlement on anyone; the outcome is the parties' own. Second, the parties remain in control of the content of any agreement.

Facilitation and facilitated negotiation work the same way and are often used earlier in a dispute, or where a group of stakeholders is involved. Because facilitative processes leave the decision with the parties, they tend to be the cheapest and quickest ADR option, and the most likely to preserve a commercial relationship.

Advisory ADR: getting an expert read on the dispute

Advisory processes sit in the middle of the spectrum. Here the third party considers the dispute and gives the parties their view of the facts, the law and the likely outcomes, but does not make a binding decision. NADRAC's definitions place expert appraisal, case appraisal, case presentation, mini-trial and early neutral evaluation in this family.

In practice, advisory ADR is a reality check. A small business in a contract dispute might engage an expert to appraise the claim, or have a neutral evaluate both sides' cases before trial. The value is usually calibration: an independent, commercially experienced third party tells each side how strong their position really is, which often unlocks a settlement that was stuck because both sides overestimated their prospects. The opinion is not binding unless the parties agree it will be, but it gives both sides a reliable basis for negotiating.

Determinative ADR: arbitration and expert determination

Determinative processes are the closest ADR gets to court. The third party hears the parties' cases, and sometimes formal evidence, and makes a determination that resolves the dispute.

Arbitration is the most significant determinative process. It is governed in Australia by the uniform Commercial Arbitration Acts, which implement the UNCITRAL Model Law (in New South Wales, the Commercial Arbitration Act 2010 (NSW)). Two features make arbitration a genuine alternative to litigation:

• It is binding and enforceable: Section 35 of the Commercial Arbitration Act 2010 (NSW) provides that an arbitral award is recognised as binding and is enforced on application to a court. Winning an arbitration gives you an enforceable award, not just a piece of paper.
• It can displace court proceedings: Section 8 of the same Act requires a court to refer parties to arbitration if one of them sues on a matter covered by an arbitration agreement, unless the agreement is null and void, inoperative or incapable of being performed.

Expert determination works on a similar idea but is purely contractual. The parties appoint an expert to decide a defined question, usually a technical one such as the value of shares or whether work complies with a specification, and agree in the contract that the determination is binding. Private judging, where the parties appoint a retired judge or senior lawyer to decide the matter, sits in the same family.

How ADR sits alongside the courts

ADR and the court system are not opposites. Australian courts actively use ADR as part of case management and can direct parties into it.

In NSW, section 26 of the Civil Procedure Act 2005 (NSW) lets a court refer any proceedings to mediation, with or without the parties' consent. The Federal Court has a similar power under section 53A of the Federal Court of Australia Act 1976 (Cth), and can refer disputes to mediation or another ADR process even where one party objects (referral to arbitration requires both parties' consent). A dispute resolution clause that requires mediation before litigation is therefore consistent with, not contrary to, what the courts expect.

Two further features of the legal framework matter for businesses:

• Settlements are enforceable: An agreement reached at mediation is a binding contract. If court proceedings are already on foot, section 29 of the Civil Procedure Act 2005 (NSW) allows the court to make orders giving effect to the agreement, so it becomes a court order.
• The process is confidential: Section 30 of the Civil Procedure Act 2005 (NSW) provides that what is said, and any admissions made, in a court-referred mediation cannot be used as evidence in later proceedings, and the mediator is restricted from disclosing it.

A worked example: the faulty stock batch

Sydney-based Coastal Foods supplies packaged goods to a chain of 14 cafes. A batch of sauce delivered in July was defective, the cafes returned it and withheld payment of $48,000. Coastal Foods claimed the cafes had damaged the stock in storage and demanded payment in full. The cafes' lawyer pointed to the supply agreement, which contained a dispute resolution clause requiring the parties to meet and then mediate before either side could sue.

The parties met, got nowhere, and went to mediation with a commercial mediator. Each side gave a short opening statement and the mediator moved between the rooms, testing assumptions: the cafes had photographs and delivery records showing the sauce had arrived warm; Coastal Foods had its own warehouse temperature logs. By the afternoon the mediator had helped the parties structure a deal: a 30% price reduction on the batch, the balance paid within 14 days, and a revised delivery and inspection process going forward. The terms were written into a deed of settlement, and both businesses kept trading.

The whole process took about six weeks from first meeting to signed deed. The direct cost was the mediator's fee, shared between the parties, plus a few hours of each side's time. A court case over the same $48,000 would likely have run for a year or more, cost many times more in legal fees, and ended the commercial relationship.

Common misconceptions about ADR

Three misconceptions about ADR come up repeatedly in commercial disputes:

• "ADR is just mediation": Mediation is the most common ADR process, but arbitration, expert determination, case appraisal and early neutral evaluation are all ADR too, and some of them produce binding outcomes. When a contract refers to ADR without naming a process, that ambiguity is itself a problem.
• "ADR is non-binding, so it is a waste of time": True only of some processes. Arbitration awards are binding and enforceable like court judgments under section 35 of the Commercial Arbitration Act 2010 (NSW), and a signed mediation settlement is a contract. The real risk is the reverse: treating the outcome of a non-binding process as if it were binding without documenting it.
• "Agreeing to ADR locks me out of court": Mediation and most advisory processes preserve your right to litigate if they fail. The exception is arbitration: signing an arbitration agreement means the court must refer the dispute to arbitration, so you have deliberately chosen a private tribunal instead of the court system.

When a lawyer's help is worth it

The most common mistake businesses make is treating the dispute resolution clause in a standard contract as boilerplate. It is not. The clause decides which process applies, whether the outcome is binding, who pays for it, and whether the proceedings are confidential. A dispute resolution lawyer can:

• draft or review the dispute resolution clause so it names the process, the decision-maker's powers and the consequences of failing to engage;
• advise which ADR process fits the dispute, rather than defaulting to mediation for every disagreement;
• prepare the case for mediation, including the documents that will persuade the other side;
• draft the settlement deed or consent orders so the agreement is enforceable; and
• act in an arbitration or expert determination, including enforcement of the award.

The question to answer before you sign

When you next sign a contract with a dispute resolution clause, ask what actually happens if the dispute escalates. Does the clause name a process? Who decides, and is that decision binding? Who pays? Is the process confidential? If the clause just says the parties "will attempt to resolve the dispute", the attempt can go on indefinitely while the relationship sours and the invoices age.

ADR is rarely a second-best option. For most commercial disputes, a well-chosen ADR process delivers a faster, cheaper, more flexible and more private outcome than litigation, and often preserves a relationship that a court case would destroy. The decision the clause forces on you is which process fits your dispute: one that keeps control with you, one that gets you an expert view, or one that ends the matter with a binding decision.