Buyers have a wide range of options for resolving disputes with a supplier or contractor. The choices are litigation, arbitration or one of the forms of alternative dispute resolution such as mediation.

But they are not mutually exclusive. A dispute may first be referred to mediation and then, if agreement is not reached within a defined time scale, may be referred to arbitration. Only with construction contracts as defined by Part II of the Housing Grant, Construction and Regeneration Act 1996 must each party have the right to proceed to adjudication before arbitration or litigation. So how do these methods compare?

Litigation is an adversarial action under procedural rules established by statute and produces a legally binding decision (which sometimes may be appealed to a higher court). But, despite reforms, litigation is still complex and time consuming. As a result, costs are high - often more than the value disputed - and judgements delayed. For example, an appeal was allowed in April1996 in an action first heard in 1994 arising from events in 1992. The case was simple and straightforward, involving no difficult questions of law and the amount disputed was just over £4,000. The costs must have been many times the sum, and it took four years from dispute to final judgement.

The proceedings are public and, under the procedures for disclosure of documents and cross-examination, matters may have to be revealed in court which the plaintiff may prefer to keep secret. Costs are awarded against the losing party.

Arbitration resembles litigation in that it is conducted under rules established by statute and it results in a legally binding award enforceable in the same way as a court judgement. However, the proceedings are in private - so unwanted publicity is avoided - and the arbitrator is chosen by the parties.

In the past, because the procedures adopted have been closely modelled on the courts, the time taken and costs have also been similar. Now, under the new Arbitration Act 1996 the parties and arbitration tribunal have considerable procedural freedom and it is hoped that both time and costs will be substantially reduced. As in litigation, costs are usually awarded against the losing party.

Adjudication differs in that it is a process of expert determination. The expert is appointed by agreement between the parties, either generally or to decide a particular issue. Provided the expert keeps within the terms of the appointment and does not show bias or act fraudulently, there is no restriction on the way the decision can be reached. Unless constrained by the terms of the appointment, there are no binding rules of evidence - there need be no discovery of documents, oral submissions or cross examination - and the expert can decide issues of law and fact. It is therefore both quicker and cheaper than either litigation or arbitration.

If the contract provides for the expert determination to be final and binding, a court will not interfere even if a mistake has been made - unless the expert had gone outside the terms of appointment or acted fraudulently. The expert does not have to give reasons for the decision unless required to do so by the terms of the appointment.

The expert’s decision cannot be enforced as a judgement, but only through an action for breach of contract. Unless the agreement provides otherwise, there is also no power to award costs (usually divided equally between the parties). Such powers, however, are proposed for adjudicators of construction contracts under the Construction Act.

Alternative dispute resolution (ADR) is essentially a voluntary procedure of structured negotiation under which the parties are led by a mediator or conciliator to reach their own agreement on the dispute. The parties are free to settle the details of the procedure to be followed and it is essential that these are agreed at the outset. Non-contractual factors such as the award of future business often feature in the settlement agreement.

It produces no decisions or award, but the agreement itself can be made contractually binding and its breach enforced as a breach of contract. Costs are usually shared equally. All depends on the willingness of the parties to come rapidly to an agreement and on the mediator’s skill in guiding them and removing the emotional factors that often blind parties to their true advantage.

Which method should the buyer choose?

For construction contracts, both parties have the right to refer the dispute to adjudication, so the real choice is between the subsequent arbitration or litigation. With the new Arbitration Act, the advantage would seem to lie along this route, although much depends on how the parties use their freedom under the act and how well the new reforms to court procedure work.

For other kinds of contracts, it is suggested there should be a first step before recourse to arbitration or litigation. If the parties prefer a continuing business relationship, then ADR is more attractive because it avoids the win-lose syndrome. Even if the parties have not chosen ADR in their contract, the court in commercial cases now often invites the parties to take positive steps to set in motion ADR procedures.

If, however, either party actually wants someone else to make a decision for them, or no future business between them is foreseen, then the dispute should be referred to adjudication. As to whether the expert decision should be final and binding, we suggest it should be binding on a particular issue, but there should be a right of appeal on a general one.

SM

Peter Marsh and Frank Griffiths are associates at project strategy and contract management consultancy FGA Ltd (0116 279 3383)