Mandatory out-of-court dispute resolution: an effective solution or an obstacle for businesses?

Monday, February 3, 2025

Nadia Milesi

Lawyer

The reform of Organic Law 1/2025, which amends the Organic Law of the Judiciary, has introduced a series of measures that profoundly affect companies when facing a potential commercial dispute. In an attempt to streamline the administration of justice and ease the workload of the courts, the law requires the use of alternative dispute resolution mechanisms (ADR), such as conciliation, mediation, and arbitration, among others. This means that business owners must review their contracts to include clauses that regulate the what, how, and when of these mechanisms before resorting to judicial proceedings.

While the intention behind the reform is to improve efficiency and reduce the costs of the judicial system, the imposition of these types of “admissibility requirements” raises several questions and inevitably generates problems that call for a more critical analysis, especially when it comes to access to justice.

The direct impact this will have on the contractual sphere of companies is evident. When signing lease, sale, service, or other agreements, they will need to consider the economic and time costs of going through a formal and structured negotiation process. Only once this out-of-court procedure has been exhausted may judicial proceedings be initiated. This requirement, though well-intentioned in its aim to reduce litigation, creates a series of problems and limitations that may harm businesses.

Main contractual issues of the reform

Firstly, the obligation to submit any commercial dispute to conciliation, mediation, or arbitration before accessing the courts—or at least before filing a lawsuit—may limit the parties’ autonomy in negotiating the terms of the contract. Although the law seeks to promote alternative dispute resolution methods, it forces the parties to engage in out-of-court mechanisms that are not always the most suitable depending on the nature of the dispute. Moreover, in our experience, many negotiations do not begin until the lawsuit has been filed, served, and even scheduled for trial. In such cases, the law imposes a preliminary process that could prove unnecessary and costly, extending the time and expenses of the dispute instead of reducing them.

Additionally, the law does not seem to take into account the extra financial burden that including these out-of-court procedures in contracts entails. While judicial conciliation has no associated costs, arbitration and mediation can be expensive, especially if the parties must hire arbitrators or expert mediators to resolve a dispute. The expenses arising from these processes could exceed those of traditional judicial litigation and, in many cases, might not even lead to an effective resolution. If the parties are unwilling to reach an agreement, they will ultimately be forced to turn to the courts, which generates more costs and unnecessarily prolongs the process.

The introduction of the binding offer, another aspect of the reform, also deserves critical analysis. According to this rule, any offer made by one of the parties during the negotiation process, if accepted by both, becomes binding. Although this measure aims to expedite dispute resolution, it may place undue pressure on the parties, forcing them to accept solutions that do not align with their interests or expectations, which will also directly impact the legal costs of the proceedings.

The reform seems to respond to a clear objective: drastically reducing the number of cases that reach the courts. The requirement of these out-of-court procedures is not a mere option but an obligation imposed on the parties, who must seek a swift and definitive resolution without resorting to the courts. This strategy, while understandable from an efficiency perspective, raises the question of whether satisfactory conflict resolution is being sacrificed for the sake of speed, especially when there is no agreement that meets both parties’ needs.

In this regard, several questions arise: with ADR mechanisms, is the legislator thinking about the users of the justice system—and the judicial protection of their rights—or about court operators and the relief of the system’s workload? Are ADR mechanisms a measure to improve conflict resolution, or a way to reduce the burden on the courts at the expense of hindering access to justice?

A practical view

For practical purposes, the reform of Organic Law 1/2025 presents a series of risks that companies must take into account when drafting their contracts. To mitigate these risks, business owners must ensure that their clauses are adapted to their specific needs and circumstances. The clauses must be clear regarding the dispute resolution process, deadlines, and conditions of the binding offer. It is essential for companies to define their needs in advance—such as time, costs, and outcomes—in order to properly draft the ADR clauses.

Below are some examples of contractual clauses:

Conciliation clause: “In the event of a dispute between the parties related to this contract, they agree to submit the dispute to a conciliation process before the Court of Barcelona within 30 days from the start of the dispute. If no agreement is reached, the negotiation process shall be deemed concluded and either party may resort to judicial proceedings.”

Arbitration clause: “The parties agree that any dispute arising from this contract shall be resolved through binding arbitration administered by the co-director of the law firm GRÀCIACALBET, Erola Gràcia Malfeito. The arbitration shall be conducted in accordance with the arbitrator’s arbitration rules, and the arbitral award shall be final and enforceable in the competent courts.”

Binding offer clause: “Either party, in the event of a dispute or conflict, may either request judicial conciliation (by adding the conciliation clause described above) or submit a binding offer which, if accepted by both parties, shall be mandatory.”

* Attention: this is a generic proposal, which does not guarantee a specific outcome. Each case must be analyzed individually in order to provide the best advice for the particular situation.

Better safe than sorry

In conclusion, the reform of Organic Law 1/2025, by requiring the use of an ADR mechanism before accessing the judicial system, may involve additional economic and time costs. Therefore, it is crucial for business owners to thoroughly review their contracts and include the appropriate clauses to control and mitigate the risks, time, and extra costs resulting from this mandatory out-of-court procedure before resorting to judicial proceedings. Because, as popular wisdom says, better safe than sorry.