33752 TheWorld Bank S e p t e m b e r PREMnotes 2 0 0 5 n u m b e r 9 9 Public Sector Alternative dispute resolution-- when it works, when it doesn't Initial results from alternative dispute resolution programs in developing and transition economies suggest that reformers do not appreciate the programs' limitations. Alternative dispute resolution encompasses arbi- tration. The disputants agree on a neutral third tration, mediation, conciliation, and other party to resolve the matter or on a process for methods--short of formal litigation--for naming the third party. They also agree on the resolving disputes. Alternative dispute reso- rules the arbitrator will follow in deciding the lution offers several advantages over a lawsuit. case and whether the decision will be binding It is less adversarial and in some cases can or simply advisory. Complex contracts, such Alternative dispute be faster and less expensive. It can also reduce as those for construction of a power plant, court workloads. For these reasons its use is often contain arbitration provisions spelling resolution offers being promoted by court reformers in many out in advance how disputes will be handled. developing and transition economies. In other cases the parties do not decide to arbi- several advantages But unlike a court, arbitrators, mediators, trate a dispute until it has arisen. and other third parties cannot force the par- To facilitate commercial arbitration, most over a lawsuit ties to a dispute to appear before them or to countries have enacted legislation based on comply with the decision rendered. They must the Model Law on International Commercial rely instead on the litigants' willingness to sub- Arbitration, published in 1985 by the United mit the dispute to them and respect the result- Nations Commission on International Trade ing decision--a key limitation when devising Law. This law makes arbitral awards legally an alternative dispute resolution program, and binding, grants broad rights to commercial one that too many designers ignore. parties in choosing how they will arbitrate dis- putes, and directs courts to overturn awards Different approaches only in the narrowest of situations. Alternative dispute resolution can be tied to To serve their members, chambers of com- the filing of a lawsuit or freestanding. When merce in Argentina, Colombia, and Peru have connected to the filing of a lawsuit, a judge established commercial arbitration centers. or court employee will examine the dispute The centers resolve cases more quickly and and suggest--or in some cases order--the par- cheaply than if they had been taken to court. ties to attempt to resolve their differences Moreover, the courts in these three countries through alternative dispute resolution. This are becoming more comfortable with arbi- may take the form of mediation, conciliation, tration and so resisting the temptation to or even a mini-trial. Under each approach a second-guess arbitration awards. neutral third party will try to get the disputants Community-based alternative dispute reso- to reach an amicable settlement. If they do, lution is a second freestanding form. It builds the case is dismissed, saving the court and the on traditional models of popular justice that parties the time and expense of litigation. rely on elders, religious leaders, or other com- One common form of freestanding alter- munity figures to help resolve conflict. In the native dispute resolution is commercial arbi- 1980s India embraced lok adalats, village-level from the development economics vice presidency and poverty reduction and economic management network Table 1 Outcomes of alternative dispute resolution programs in Albania, Ecuador, and the West Bank and Gaza Months program Cases Cases resolved Cases Economy in effect submitted (percentage of total) pending Albania 16 8 0 (0) 1 Ecuador 10 888 214 (24) 0 West Bank and Gaza 12 13 3 (23) 6 Alternative Source: World Bank data. dispute resolution institutions where trained mediators seek In Argentina, Colombia, and Peru any to resolve problems that earlier would have firm that fails to arbitrate a dispute after can succeed only gone to councils of village or caste elders. agreeing to do so--or refuses to pay an In the Philippines the leader of the local award--quickly becomes known as an unre- if claimants and barangay, or neighborhood, tries to resolve liable business partner. Thus a firm's con- minor disputes between residents. In Latin cern about its reputation provides a powerful defendants have America the juece de paz, an officer of the state, incentive to participate in alternative dis- can use informal procedures to conciliate or pute resolution and respect the outcome. incentives to mediate small claims. Role of incentives make it work Common drawbacks The absence of such incentives can seriously Although commercial arbitration is work- undermine such efforts, as indicated by the ing well in Argentina, Colombia, and Peru, results of donor-sponsored alternative dis- alternative dispute resolution programs have pute resolution programs in Albania, not fared as well in many other developing Ecuador, and the West Bank and Gaza (table countries. One problem with many com- 1). The programs in Albania and the West munity-based systems is that norms con- Bank and Gaza are freestanding, while trolling dispute resolution can contradict Ecuador's is court-connected. In Albania and national laws. the West Bank and Gaza less than one case In Bangladesh village justice systems a month has been submitted to an alterna- often recognize oral divorces despite a 1962 tive dispute resolution panel. Although the law requiring that all divorces be in writing. number of cases is much higher in Ecuador, A second problem with community systems the percentage resolved remains low. Yet in is that those deciding the cases are often all three projects significant investments were biased--against women, poor people, and made in training mediators and arbitrators other underprivileged groups. and in publicizing the advantages of alter- Training, outreach, and legal awareness native dispute resolution--to both the legal programs can help solve these problems. community and the general public. But these programs cannot solve the larger Why such poor results? Project docu- problem of incentives. In most developing ments reveal that designers ignored incen- and transition economies the courts are not tives: cases were referred to alternative strong enough to enforce contracts requir- dispute resolution when defendants had lit- ing that disputes be submitted for alterna- tle or no interest in resolving disputes. tive dispute resolution or that the losing A dispute that arose in the West Bank and party pay the resulting award. Alternative Gaza program illustrates this principle. The dispute resolution can succeed only if dispute was between a Turkish manufacturer claimants and defendants have incentives and a Palestinian buyer that paid in advance to make it work. using a letter of credit. When the buyer PREMnote 99 September 2005 received the goods, it found that they were no way to avoid a trial by using repeated defective and called the manufacturer to adjournments and other delay tactics and complain. The manufacturer said that the that an accurate decision will be entered on goods were fine when they left its plant, so a certain date, alternative dispute resolution the damage was not its problem. The Pales- is often a more desirable alternative. tinian buyer then requested mediation at Without such certainty, the defendant-- the recently established mediation center in the party usually content with the status Ramallah. But the Turkish firm ignored quo--may agree to alternative dispute res- repeated requests to visit Ramallah to medi- olution simply to delay final resolution. In ate the dispute. The administrator of the such cases the defendant hopes that the alternative dispute resolution program con- claimant will grow weary and abandon the cluded that the problem was lack of aware- claim or that inflation will devalue the worth Forcing both sides ness of the program's benefits--that if the of any recovery. Recent research in India Turkish company had better understood the confirms that this is happening in some lok to participate in advantages, it would have come. adalats. Many claimants are poor people In reality, the failure here was one of case who cannot wait years to receive compen- such a process can selection. The Turkish firm had no interest sation for motor vehicle accidents or for in any other outcome. It had already being wrongfully fired or laid off. impede a speedy received its money from the buyer. Why Reformers introducing a combined pro- would it risk going to Ramallah, where the gram of alternative dispute resolution and recovery best outcome would be a decision that it improved case management must therefore could keep the money? monitor the effectiveness of the case man- Had the initial circumstances been slightly agement reform to avoid abuse of the alter- different, the outcome would likely have been native dispute resolution element. much different as well. Suppose the order that the Palestinian buyer placed was the first Voluntary or mandatory? of what the Turkish manufacturer expected One question that often arises with court- to be many, spanning several years. Or sup- connected alternative dispute resolution is pose the manufacturer had a thriving busi- whether it should be voluntary or manda- ness with other Palestinians. In either case, tory. Should the courts allow one or the as with the members of the chambers of com- other side to reject a recommendation to merce in Argentina, Colombia, and Peru, it submit to the process and instead proceed would have had a concrete reason for want- with a lawsuit? Or should the court have the ing to resolve the dispute: to ensure that it power to order the two parties to try alter- did not lose future business opportunities. native dispute resolution even if one thinks True, in such cases the two disputants often it will be futile? negotiate a deal without requiring a third Forcing both sides to participate in such party. But in close cases a skilled mediator a process can prejudice creditors, victims of can prevent a bargaining impasse. motor vehicle accidents, and other claimants Court-connected alternative dispute res- seeking speedy recovery. When a judge olution projects in developing and transi- requires the two sides to submit to alterna- tion economies are almost always paired with tive dispute resolution and the case is not judicial reform programs that include resolved, it goes back to court. Thus, as India's improvements in case management systems. experience shows, mandatory alternative dis- Well-functioning case management systems pute resolution simply becomes another hur- increase the certainty that cases will be heard dle blocking just resolution of claims. and resolved by the courts by introducing On the other hand, mandatory alterna- deadlines for filing necessary papers and pre- tive dispute resolution can overcome dif- senting evidence. Such certainty provides an ferences in interests between lawyers and incentive to resort to alternative dispute res- their clients that block speedy resolution. olution. If both litigants know that there is This partly explains the contrasting expe- PREMnote 99 September 2005 riences of the Philippines and Venezuela in approach is appropriate and when it is not-- using alternative dispute resolution to and tailor their projects and expectations resolve employment disputes. In such dis- accordingly. putes lawyers for the firm and for the dis- gruntled employee have their own interests. Further reading For example, both may wish to drag out the Galanter, Marc, and Jayanth K. Krishnan. dispute to increase their fees. 2004. "`Bread for the Poor': Access to Jus- Accordingly, the Philippines and Venezuela tice and the Rights of the Needy in India." require that an effort be made to mediate Hastings Law Journal 55 (4): 789­834. an employer-employee dispute before liti- Golub, Stephen. 1993. "Evaluation of Asia gating it. But whereas Venezuela requires both Foundation Legal Services/Human Rights Reformers must the employer and employee to attend the Programming in Bangladesh." [http:// alternative dispute resolution session, the www1.worldbank.org/publicsector/legal/ understand when Philippines requires neither to do so. Not sur- BangladeshADRreview.pdf]. prisingly, in Venezuela nearly 95 percent of Hensler, Deborah. 1999. "A Research Agenda: alternative dispute such cases are resolved through such ses- What We Need to Know about Court-Con- sions--while in the Philippines the figure is nected ADR." Dispute Resolution Magazine resolution is closer to 5 percent. 6(1): 15­17. Why? When both the employer and the Landes, William, and Richard Posner. 1979. appropriate employee attend, the real interests of both "Adjudication as a Private Good." Journal are put ahead of those of their two lawyers. of Legal Studies 8 (2): 235­84. For example, the employee likely just wants Mnookin, Robert H. 1998. "Alternative Dis- his or her job back (not a lawsuit), and the pute Resolution." In Peter Newman, ed., employer probably wants an experienced The New Palgrave Dictionary of Economics worker back on the job (not a distracting and the Law. vol. 1: London: MacMillan court case). Again, a skilled mediator can Reference. get the two to recognize their mutual inter- ests and work out a deal. This note was written by Richard E. Messick (Senior Public Sector Specialist, Public Sector Conclusion Group, PREM Network). Under the right conditions, alternative dis- If you are interested in similar topics, consider pute resolution can be an important part of joining the Legal Institutions Thematic Group. judicial reform. But as programs in Albania, Contact Rick Messick (x87942) or Luba Beardsley Ecuador, and the West Bank and Gaza show, (x88164) or visit http://www.worldbank.org/ reformers must understand when such an publicsector. 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