Parties entering into international business contracts should consider, at the outset of negotiations, whether they wish to resort to the courts or use Alternative Dispute Resolution ("ADR") in the event a dispute arises. Well-designed ADR offers neutral, private proceedings responding to the particular needs of the parties. A well-drafted ADR clause may not only result in more effective dispute resolution, but also deter breaches of the parties’ agreement.

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The principles described here can necessarily only be basic. The reader should consider consulting one established arbitral institutions or others with expertise, before finalizing any contract terms.

Private Sector Dispute Resolution or ADR Mechanisms

There are many forms of ADR. The two most commonly used are mediation and arbitration however conciliation is also used in the NAFTA Region.

Mediation

Mediation usually provides a private and confidential forum in which an impartial third party -- the mediator -- facilitates communication between the parties with the aim of achieving a settlement of the dispute. The mediator acts as an intermediary with whom each party should feel comfortable discussing its view of the dispute. The mediator seeks to focus the parties on the critical issues in dispute and on the interests of each party in achieving a settlement. The mediator may propose settlement options for the parties to consider, but the recommendations of the mediator are not binding on the parties.

The mediator may or may not be an attorney. It is recommended that he or she be someone whom both parties trust. Mediation is often conducted without involvement of legal counsel representing the parties.

Arbitration

While mediation is designed to encourage the parties to find a mutually acceptable settlement, arbitration is an adversarial process that results in an award that is binding on the parties. Depending on the provisions of the arbitration clause, the decision may be rendered by one or three arbitrators.

The parties generally present arguments, witnesses and documentary evidence to the arbitrators. Rules of procedure and evidence that judges apply in court do not usually apply at arbitration. The rules followed in arbitration are generally very flexible. Attorneys are frequently involved in representing the parties, but it is not always necessary to retain counsel. Arbitrators are often attorneys, but they may also be business people or other professionals with knowledge or skills relevant to the dispute.

Most arbitration awards are observed voluntarily by the losing party. However, if the losing party does not voluntarily comply with the award rendered by the arbitrators, it may be enforced by local courts with jurisdiction over the losing party. Canada, Mexico and the United States are parties to various international treaties that require their courts to enforce arbitration awards with very few exceptions (such as fraud or corruption). Thus, unlike a court judgment, there are very few grounds to appeal an adverse arbitration award.