Does ADR save time and money? In a nutshell, ADR saves an average of 38% of litigation costs while ranging from 3% to 50% savings. In terms of time, ADR is 5.5 months shorter than litigation. However, there are other factors to considers such as failure rate and actual overall cots.
This article is written by Inessa Love, who is a senior economist in the World Bank, as part of the Investment Climate Impact Project.
The ability to enforce contracts is essential to support the efficient allocation of resources and growth in an economy. The ease with which contracts can be enforced varies dramatically across economies.
According to data from the World Bank’s Doing Business project, the time required to enforce a contract, from the moment the plaintiff files the lawsuit until payment is made, ranges from about five months in Singapore and seven in New Zealand to more than four years in Guatemala, Afghanistan, and Suriname.
Meanwhile, the cost ranges from less than 10 percent of the contract value in Iceland, Luxembourg, and Norway to more than 100 percent in such countries as Cambodia, Indonesia, and Sierra Leone.
Among the reasons that contract enforcement is so inefficient in many countries are the lack of modern laws, deficient and underfunded court systems, and prevalent corruption.
So, does Alternative dispute resolution (ADR) save time and money?
Alternative dispute resolution (ADR) has emerged as an alternative to court litigation that may offer a more efficient and less expensive avenue for resolving disputes. It provides confidentiality, choice of neutral parties, more flexibility of procedure, and other benefits.
Hint: Our worldwide map for arbitration costs can assist you in estimating your arbitration fees.
This article summarizes the findings of the literature on the effectiveness of ADR mechanisms as an alternative to traditional litigation. More about ADR’s advantages and disadvantages here, Alternative dispute resolution (ADR) and it’s advantages and disadvantages and daily life use in Upwork Resentment and disputes between you and Upwork. How to win a dispute against Upwork
Other platforms in different countries such as Canada are discussed in Canada’s First ODR: The CRT and Its evolution
What is ADR?
ADR is defined as any process or procedure other than adjudication by a presiding judge in court—litigation in which a neutral third party assists in or decides on the resolution of the issues in dispute (Rozdieczer and Alvarez de la Campa 2006).
Among the many different types of ADR processes, the most common are mediation, arbitration, conciliation, and early neutral evaluation, which we will detail in the next section. Others include summary jury trial, mini-trial, and settlement conferences.
However, even the same process can be applied in many different ways. There are also differences in the extent of ADR in a country. ADR may involve a small center in a single location—or a network of large centers around the country.
ADR can involve different types of disputes—such as between businesses, between employees and management, between businesses and creditors (insolvency, restructuring), between investors and the state (investment treaty arbitration), or between businesses and the government (tax disputes).
All these differences make ADR a rich field, but they also make evaluating its effectiveness more difficult. Different processes and applications may have different impacts, making it difficult to make any general statements about the overall effectiveness of ADR.
In addition, the legal treatment of ADR processes differs in different jurisdictions, and the impact of an ADR process will depend on local laws.
It can increase the effectiveness of courts by reducing bottlenecks and improve trust in the legal system, which may increase foreign investment.
Finally, one case can differ significantly from another, and subjecting the same case to different processes is not feasible. Therefore, caution must be made in drawing conclusions.
Common Types of ADR
- Arbitration: involves using a neutral arbitrator to decide the outcome of the dispute. Once the parties have agreed to the process, arbitration is binding (the decision is final and can be appealed only on very narrow grounds).
- Mediation: a process in which a neutral mediator helps the parties discuss and find a mutually acceptable solution.
- Conciliation: a variation of mediation in which a conciliator meets with the parties separately (rather than jointly, as in mediation) and seeks concessions from the parties that would help resolve the dispute. Unlike arbitration, conciliation is not legally binding.
- Early neutral evaluation: a process in which a case is referred to an expert, usually an attorney, who provides a balanced and unbiased evaluation of the dispute and offers an opinion on the likely outcome of a trial.
More about mediation and arbitration in What are the Main Types of Alternative Dispute Resolution – ADR and Online and Offline Arbitration: What is the Difference?.
ADR Impact on Cost
Many studies have explored the effectiveness of ADR in reducing the costs of dispute resolution relative to litigation. Estimates of cost savings vary substantially from study to study, depending on the type of ADR process evaluated, the type of cases, the type of intervention, and the local conditions.
As table 1 below shows, estimates of the total costs incurred by firms that use an ADR process range from 3 to 50 percent of the costs incurred by firms that go through a court litigation process.
One study, performed by the staff of the International Finance Corporation (IFC 2006), looked at the introduction of ADR centers in Serbia, Bosnia and Herzegovina, and the Former Yugoslav Republic of Macedonia.
It evaluated more than 1,000 cases resolved through mediation and compared the outcomes with those of similar court cases.
The study finds that in Bosnia and Herzegovina the direct costs of mediation averaged US$225, about 50 percent of the costs of litigation (about US$470).
Similarly, Jorquiera and Alvarez (2005), surveying firms in nine Latin American countries on their use of ADR, found that the firms relied on ADR in 26 percent of cases and the judicial system in 17 percent (private negotiations were used the most).
Using firms’ survey responses, the authors analyze relative costs for a hypothetical company in Argentina. The report costs US$431 for mediation, US$2,536 for arbitration, and US$14,295 for litigation.
Uniquely, this analysis attempts to factor in all costs including the cost of time invested, the opportunity costs of capital, and legal costs.
Other studies of ADR found that it saved about US$500 per party in the United States and about US$6,000 per case in Canada. However, savings in Canada varied widely, ranging from only about US$2,000 to more than US$20,000.
Wissler (2004), reviewing 27 studies of general civil mediation, also reports mixed results on cost savings.
|Country or countries||Study||Reform||ADR cost as % of litigation cost|
|Bosnia and Herzegovina, FYR Macedonia, Serbia||IFC 2006||Introduction of ADR centers||50|
|Colombia||Alvarez de la Campa 2009||Conciliation made mandatory (before court filings)||40-50|
|9 Latin American Countries||Jorquiera and Alvarez 2005||ADR use||3-18|
|Country||Study||Reform||Cost savings (US$)|
|United States||Barkai and Kassebaum 1992||Court-annexed arbitration program||500 (per party)|
|United States||Cited in Stipanowich 2004||Introduction of early mediation pilot programs in 4 superior courts||6,000 (per case)|
|Canada||Hann and Baar 2001||Introduction of mandatory mediation in Ottawa and Toronto||6,000 (per case)|
When ADR fails
For cases that fail to reach a resolution through ADR, the total costs can be higher. Many cases that attempt to use ADR, mainly under mandatory mediation, end up in court anyway.
Genn and others (2007) study an involuntary program, automatic referral to mediation, introduced in London. Of 1,232 cases referred to the program, only 14 percent were mediated; the rest went back to court.
The settlement rate was 55 percent in no-objection cases and 48 percent in cases where parties were persuaded to mediate. The study estimates that for cases that failed to reach a settlement through ADR, total legal costs were US$2,000–4,000 higher than they would have been if no attempt had been made to use ADR.
Rosenberg and Folberg (1994) use a randomized experimental design to study early neutral evaluation (ENE) in California. They report that while about 40 percent of parties believed that they saved money with ENE, 38 percent of attorneys and parties believed that ENE added about US$4,000 on average to the cost of litigation.
ADR Impact on Time
The time it takes to resolve a dispute through an ADR process relative to traditional litigation is also of interest in evaluating the effectiveness of ADR.
This time is also referred to as time to disposition, measured as the total time from filing a complaint to settling the case. Researchers use a variety of methods to study differences in time, including surveys, archival data sources, and randomized experiments.
The estimates of the differences in time between ADR and traditional litigation vary widely among studies, again depending on the ADR mechanism. The time savings found range from one month to about a year. Table 2 below summarizes these studies.
Rosenberg and Folberg (1994), in their study of the ENE program in California, find that it shortened the time compared with a court process. Similarly, Hann and Baar (2001), studying a mandatory mediation program in Canada, find that mediation resulted in more cases being settled sooner.
At six months, for example, 25 percent of cases under the mandatory mediation rule were disposed, compared with only 15 percent of control cases.
Barkai and Kassebaum (1992) find that the court-annexed arbitration program in Hawaii was four months faster on average than traditional litigation. Wissler (2004) reports that in five studies of appellate cases, the time to disposition was one to three months shorter for cases assigned to mediation than for other cases.
Bingham and others (2009), studying outcomes of ADR use by the U.S. federal government, estimate that ADR saved about 88 hours of staff time and about 6 months of litigation time per case—showing that ADR can reduce public costs as well as private.
While there are many studies of ADR effectiveness in the United States and a few other developed countries, there are very few such studies in developing countries.
One of these is by Alvarez de la Campa (2009), who studied a reform in Colombia that made conciliation mandatory before court filings in 2001. He reports that tenant eviction cases took 15 months on average in court but only 4 months in mandatory conciliation.
Is ADR realy shortet than litigation?
Yet some studies find no significant reduction in the duration of cases with ADR.
An early study of the introduction of ADR in the United States known as the RAND report, produced in 1996, concluded that there was “no strong statistical evidence that the mediation or neutral evaluation programs significantly affected time to disposition, litigation costs or attorney view of fairness and satisfaction” (Stipanowich 2004, p. 852).
Later research questioned and criticized these conclusions. More recently, however, Genn and others (2007) reported no significant impact of mediation on total case duration.
This was the finding of a formal survival analysis of case duration using data from a randomized experiment of mediation assignments and controlling for case value, case type, and presence of counterclaim.
Wissler (2004), reviewing 27 studies of general civil mediation, also reports mixed results on differences in case duration.
|Country||Study||Reform||Time Savings (months)|
|Colombia||Alvarez de la Campa 2009||Conciliation made mandatory (before court filings)||11|
|United States||Genn and others 2007||Introduction of quasi-compulsory automatic referral to mediation||None|
|United States||Bingham and others 2009||ADR use by federal government||6|
|United States||Cited in Stipanowich 2004||Introduction of early mediation pilot programs in 4 superior courts||1|
|United States||Barkai and Kassebaum 1992||Court-annexed arbitration program||4|
Direct and Indirect Impact of Alternative dispute resolution
The direct impacts of cost and time savings for those participating in ADR are the easiest to measure. Nevertheless, ADR processes can have other direct impacts for ADR participants as well as indirect impacts benefiting even those who do not participate directly in ADR.
Among the direct impacts noted for ADR participants:
- Clients’ higher satisfaction with ADR outcomes. Others might include jobs retained rather than lost or new jobs created.
- The IFC report (2006) notes that because ADR resolutions are faster, they may allow plaintiffs to avoid bankruptcy thanks to receiving the payment earlier, and may allow defendants to avoid a negative public image.
These direct impacts are more difficult to measure (because of the lack of counterfactuals), and no empirical evidence on these impacts has been found.
Indirect impacts of ADR may include increasing the effectiveness of courts, which benefits firms that are going through the courts rather than an ADR process.
ADR can improve the functioning of the formal court system by reducing the number of court cases filed (by diverting some cases that would have ended up in court to the ADR process) and thus alleviating bottlenecks in courts.
Barkai and Kassebaum (1992) found that after the court-annexed arbitration program was introduced in Hawaii, the backlog in courts decreased. Gropper (2010) reports that after the introduction of an ADR process for tax appeals in Pakistan, the number of pending cases fell from 2,500 to 770.
In the United States, there has been a long debate on the “vanishing trials” (the pronounced decline in rates of trial in past decades), with some noting the important role ADR has played in this trend (Stipanowich 2004).
Wissler (2004) reports that a mediation program can save costs for the courts by reducing the caseloads of judges and their staff.
Intangible Benefits of ADR
ADR may have another intangible benefit: improving the perceived quality of the legal system and increasing trust in the fair resolution of conflicts. Chemin (2010) finds a causal relationship between improvements in court speed in India and outcomes for firms, such as increased investment and better access to finance.
The IFC study of Balkan countries (2006) reports survey evidence of greater trust in the legal system among clients who used mediation.
ADR may also affect investors’ perceptions. Judicial system weaknesses are often cited as a constraint on foreign investment in emerging markets (EIU 2007).
ADR can improve foreign investors’ perceptions of the business environment in a country, which may result in more foreign investment (see, for example, World Bank Group 2010).
In addition, foreign investors prefer ADR mechanisms to transnational litigation (PWC 2006), and as of September 2011, 146 parties had ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention). There is, however, no direct evidence of increased foreign investment as a consequence of introducing ADR.
Other less tangible benefits of ADR include improvements in the quality of business relationships and problem-solving skills.
The IFC study (2006) claims that introducing ADR improved professional and business relationships and supported the continuation of business relationships because of the non-adversarial nature of mediation.
Similarly, a PricewaterhouseCoopers survey (PWC 2006) finds that the continuation of business relationships is an important factor in firms choosing to use ADR.
The survey by Wissler (2004), however, reports mixed results on litigants’ relationships.
Another possible effect of mediation could be an improvement in conflict resolution skills allowing parties to take responsibility for solving their problems in the future.
There is no empirical evidence on the effect of ADR on other important economic outcomes, such as investment, employment, access to credit, insolvency, and growth.
While some ADR processes (such as binding arbitration) offer final solutions, there is a risk that cases will go back to court, and this may increase the total cost and time.
Thus for policymakers seeking to improve the efficiency of court systems, maximizing the share of ADR cases that are successfully resolved should be a priority. Moreover, cost and time savings might be just the tip of the iceberg.
The indirect impacts—such as improvements in court effectiveness, the business environment, and trust in the legal system—could potentially be even more important in the overall contribution of ADR to economic development.
There is almost no research on these indirect impacts, which are less tangible and more difficult to measure. ADR programs appear to be an attractive option in many developing countries because of their slow and ineffective courts.
ADR could also alleviate courts’ case backlogs and improve their effectiveness. Nonetheless, this should not be a prescription for reducing the importance of well-functioning courts, which remain the backbone of the justice system.
In support of that, Voigt (2009) finds that ADR programs complement state dispute resolution where a better quality of courts is associated with more frequent use of ADR services. This suggests that ADR should be developed alongside improvements in the traditional litigation processes.