Mediation/Arbitration in Business Cases: Dispute Resolution Whose Time Has Come

Let’s face it. For most routine business disputes, the civil justice system is rarely utilized all the way through trial.  Most sophisticated business owners seek practical resolutions to their legal disagreements and realize that the expense, delay, unpredictability, administrative headache, and in some cases, unfriendly venues involved in traditional court litigation commonly compel them to seek other methods of resolving cases.  Most notably, with the assistance of counsel, such cases gravitate towards mediation along a fairly predictable course.

TRADITIONAL COURSE TOWARDS MEDIATION

From the business litigator’s vantage point, the case comes in, the facts are obtained, research is performed, and various claims for relief are identified.  Hopefully, early efforts at resolution between the parties directly or through counsel are undertaken, but perhaps to no avail.  The aggrieved party then files suit, oftentimes theorizing that the mere prospect of looming expensive litigation will convince the defendant to capitulate.  Surprise!  Counsel for the defense, either through an insurance company, or self-retained, answers the complaint and fires up a cross-claim for its own affirmative relief, raising the stakes all around.  The battle lines are drawn.  Discovery begins and the attorney fees meters are whirring away.  After a few procedural salvos are fired by each side, and perhaps at the urging of a supervising judge at a case management or status conference, the notion of mediation appears on the radar.  Names are exchanged and an agreeable neutral is selected. Here’s where the fun starts.  Sort of.

When mediation first came into vogue, lawyers and their clients were universally prepared to actually settle the case at the mediation.  More recently, counsel have increasingly viewed mediation as merely another tool to accomplish a variety of goals ranging from test-driving factual and/or legal theories with an experienced retired judge, to sizing up the ability and preparation level of opposing counsel.  Frequently, the process is used in an effort to discover the weaknesses in the other side’s case – hoping that during mediation, the smoking gun document or irrefutable defense might be exposed; the expert’s pretrial evaluation might be revealed; or other sensitive information discovered that would assist in the later prosecution or defense of the case.  The perceived confidentiality of the process does not seem to diminish counsels’ creativity in taking what is learned in mediation and attempting to capitalize on it for the remainder of the case.

At the same time, even an unsuccessful mediation often serves the useful purpose of narrowing the dollar range of settlement, identifying non-monetary alternatives that might be helpful to achieve a resolution, and otherwise getting a read on the overall case theories and client presentation from the mediator.  Many times if asked, the mediator (especially if well-known to counsel) will offer some candid thoughts and opinions on almost any aspect of what he or she observes in the process.  But yet the case remains unresolved.  The parties return to their respective camps, more discovery costs are incurred, and at some point down the line the case may settle at a second mediation or a few months out from trial.  Even, where the parties have contractually agreed or stipulated to arbitrate the case, they usually plot the same course through mediation as when headed to a court trial.

A more strategic approach to dispute resolution has evolved, commonly known as Med/Arb, in which the combined advantages (and disadvantages) of both mediation and arbitration are used in a preordained proceeding.

THE NEW ROUTE OF MED/ARB

The concept of Med/Arb is one where, when the dispute first arises, the parties mutually design and commit to their own specific ADR process that puts in place a predetermined methodology for determining the outcome of the case with finality by arbitration, while at the same time building in a mediation phase in order to encourage settlement before that arbitration actually takes place.  It is the prospect of a final binding arbitration that drives the parties to engage in serious settlement discussions to resolve the dispute in mediation; and at the same time acts as a definitive method for obtaining an outcome one way or the other.   Usually, the mediation takes place with the same neutral who, if the case doesn’t settle, will be called upon to decide it.   The advantages of Med/Arb are many.

Perhaps most importantly, the process gets the matter out of the court system with all of it flaws, delays, procedural barriers, and incompetencies.  Moreover, it engages the clients directly in definitive legal proceedings that they know will resolve their case if it is not otherwise settled.  As we all have come to learn, clients often times just want their “day in court.” In the traditional court process that desire can come at a high price, not only in terms of cost and delay, but also because of all of the ineptitudes inherent in the current court system.  To some extent, a traditional mediation without arbitration does allow a party to tell his or her “story” in a context where someone in a quasi-authoritative role is participating.  However, the confidential caucus sessions that the mediator has with each side sometimes leave the parties wary of what’s actually going on, and the lack of transparency can breed discontent, or worse, distrust of the outcome.  As a result, the confidence in a settlement reached in mediation can be undermined, sometimes leading to further post-mediation disputes.  How often do we see breakdowns in the settlement of a business dispute reached at mediation where the nature of the parties’ business or financial relationship is necessarily ongoing (e.g., family trust disputes; business competition disputes; partnership disputes, etc.)?  Convening a Med/Arb for which counsel and their clients are fully prepared, gives the clients assurance that if a settlement is not reached at the mediation, a final binding decision in their case will actually be made; right then and there, regardless.

Secondly, because the parties must be ready to actually call witnesses and put on evidence after a failed mediation, the process forces counsel to be fully prepared before engaging in the mediation – thus, perhaps allowing each side to more fully appreciate the strengths and weaknesses of their positions, which arguably should help settlement efforts.

While the agreement to a Med/Arb should be reached at the outset of the dispute, it is best utilized only after each side is confident that they have engaged in sufficient discovery to thoroughly understand the case, identified key witnesses and evidence, and are focused in on the primary theories of recovery and defense.  Contractual arbitration is private and binding by its nature, so Med/Arb allows parties to bargain in advance for what amounts to the arbitrator’s decision if it becomes necessary, without strict application of the law and rules of evidence.  As we all know, the extent of pre-trial discovery is not often as critical in arbitration as it is in a case that must suffer along the choppy seas of traditional court litigation.  In that environment we have, for some reason, grown accustomed to ‘scorched earth’ tactics because everyone seems to use them as way of posturing their case.  In arbitration, the prospect of dealing with an available and interested neutral whom the parties are paying to understand and follow closely their case, those tactics are generally not persuasive, and thus the level of formal discovery necessary is reduced. ADR providers recognize this fact in their arbitration rules.[1]

CHART YOUR COURSE CAREFULLY

A well thought out and sophisticated written agreement or stipulation to enter into Med/Arb is necessary. Not only must the parties articulate the agreed-upon process specifically as between themselves, but the neutral selected to serve in both capacities must also enter into his or her own separate Med/Arb agreement with the parties and counsel directly, so as to carefully document the process the neutral intends to follow, obtain the appropriate waivers of confidentiality where applicable, and to address the general immunities protecting the neutral in both capacities.  Two well-known ADR providers JAMS and ADR Services each have standard forms used for Med/Arb available to review on their websites.  Counsel should of course feel free to expand on the provisions of the Med/Arb engagement suggested by the neutral in order to thoroughly protect the Med/Arb process from challenge.  The rules pertaining to mediation and arbitration for the jurisdiction where the process is to take place must be reviewed and addressed, as well as any specific rules governing the proceeding, which might be applicable to the particular case (e.g., AAA rules, JAMS rules, etc.).

HEADWINDS:  CONFIDENTIALITY AND INADMISSIBILITY ISSUES

The two hallmarks of mediation imposed by the law are that the proceedings themselves and everything said or provided in them are confidential; and that statements and materials used in mediation are inadmissible in any later proceeding.  The literature on mediation sometimes confuses these notions.

Inadmissibility refers to the legal prohibition against the introduction of information prepared or used in mediation in a legal or quais-judicial proceeding (e.g., trial, arbitration, administrative law hearing, etc.)

Confidentiality requires that the parties or other persons receiving or hearing the information hold it in confidence and not reveal or share it with others.

In California, Evidence Code section 1119 attempts to address both issues:

Section 1119(a):

No evidence of anything said or any admission made for the purpose of, or the course of, or pursuant to a mediation or a mediation consultation is admissible . . .

Section 1119(b):

No writing . . . that is prepared for the purpose of, in the course of, or pursuant to a mediation or a mediation consultation is admissible . . .

Section 1119(c):

All communications, negotiations, settlement discussions by and between participants in the course of a mediation or a mediation consultation shall remain confidential.

The most troubling issue inherent in a Med/Arb is how the neutral at the time of arbitration, is to treat whatever confidential information he or she receives in the mediation phase.  Or more colloquially stated: How does the neutral ‘un-ring the bell’ after hearing, or even seeing, each side’s dirty laundry or other confidential information?[2]  A common approach to this problem is for the parties, and all persons who participate in the mediation, including the neutral, to agree and confirm in writing in the Med/Arb agreement, that the neutral will ignore everything that was communicated in the mediation, and start with a clean slate at the arbitration.  In this way, all information imparted to the mediator during the mediation arguably retains its confidential and inadmissible nature (unless introduced by the proponent of the evidence in the arbitration without waiving confidentiality), neither side is aware of the other side’s secrets, and the neutral has pledged not to consider such information for any purpose, unless it is actually admitted in the arbitration.  Care must be taken to address when the mediation ends so that the confidentiality cut off of the protections afforded by statute is clearly understood by everyone involved.

Another approach is for the parties to agree in writing to waive the confidentiality and inadmissibility protection normally afforded to mediation communications and other information disclosed in the mediation entirely.  In California, this can be done under Evidence Code section 1122.  As a practical matter, there may not be much discussed confidentially in a mediation that actually proves to be of any critical, material significance in the overall case.  When mediation does not result in settlement, it is rarely because one party has succeeded in withholding critical evidence or information from the other that would ultimately serve to win the case.  To be sure, parties and their counsel in mediation usually reveal to the mediator in confidence their particular settlement strategies, ranges of settlement value, perhaps even bottom line positions, and occasionally, the existence of what they believe are smoking gun pieces of evidence.  However, by the time sufficient preparation is made for arbitration where a Med/Arb is used, which includes completion of the agreed upon discovery or exchange of information, the likelihood of any such critical or surprise evidence is significantly reduced.  And if a Med/Arb process is selected where confidentiality is waived, counsel can be careful during the mediation phase if settlement appears unlikely, to perhaps hold those cards closer to the vest rather than surfacing them as turning points for the mediation.  Judgment calls along those lines are made all the time anyway in most mediations.  If a written waiver is selected as the method to address confidentiality and/or inadmissibility, the neutral, along with any other participants in the mediation, must also enter into the agreement allowing disclosure.

A hybrid approach to dealing with confidentiality in the mediation phase of Med/Arb has been utilized where, before beginning the arbitration, the neutral asks each counsel privately to identify substantive materials or other information revealed to the neutral in mediation confidentially that counsel believes might be persuasive in the arbitration of the case.  The neutral can then request permission from the side that has disclosed such confidential information to identify it to the other side.  If consent is granted, this method surfaces the information to both parties, and allows them to deal with it as they wish in the arbitration.  Alternatively, should consent be withheld, the arbitrator must continue to disregard the information according to the terms of the Med/Arb agreement and applicable provisions of law.

At first blush, even the potential of the arbitrator hearing confidential information disclosed to him or her in the mediation phase may seem to be risky, insofar as a practitioner may be worried that a confidential expression of any concern to the mediator about her client’s case might suggest to the neutral that the client was prepared to lose, and might then predispose the neutral to deciding against that party.  Others are concerned that their blunt or ‘hardball’ approach in the mediation may alienate the mediator turned arbitrator.  The reality is, an experienced neutral is usually impressed with honest case evaluations by lawyers, understands the need for posturing in settlement, and is very well trained in appreciating the importance of ignoring inadmissible material.  After all, neutrals do so routinely in virtually every contested case they hear, one way or the other.  The fact that information might be expressed in a mediation where it is protected from admissibility, makes it no less easy to disregard in a later arbitration than in any other context.  Furthermore, since counsel is generally in control of the disclosure of any confidences or other information in mediation, she can explain to the mediator how, and why, certain confidential information imparted would have no bearing in a contested arbitration, although it might help in the dynamic of settlement efforts.  Counsel can also use the opportunity of the private setting with the mediator to obtain express reassurance from the neutral that he or she will not consider such information in a later arbitration if it becomes necessary.

The concerns about confidentiality and inadmissibility underscore another critical factor in determining whether Med/Arb will work for your clients: The importance of the selection of the single neutral to serve in both capacities.  Only a highly trusted and skilled neutral can fulfill both roles in a way that will garner the confidence of counsel and their clients throughout the entire process.  To be sure, as in any case, the eventual losing side will be disappointed when arbitration is over.  But experience teaches that a process in which parties have interaction with a mediator who may later decide the case can produce more satisfaction with the result than where a party has not had such a connection, even when that party ultimately loses.  The reasons given by the arbitrator for the ultimate decision in a case may be more easily digested by a litigant after the first course of settlement efforts during mediation has been served up.  At some level, a relationship will have been developed between each party and the neutral during mediation that hopefully instills some confidence in the parties that the overall process is fair.

The most attractive feature of Med/Arb is that the process can be tailored to the particular circumstances of the case.  The parties can agree to all the usual elements for arbitration (limited discovery, streamlined pre-trial process, relaxed rules of evidence, timing of award) and then build in the pre-arbitration mediation to give the parties and the neutral a very concentrated and informed environment in which to try to resolve the case.  They might even wish to agree in advance to engage in a mediation followed by arbitration, but where a different neutral is used for the arbitration or where either side retains the right to opt out of the scheduled arbitration, perhaps at the cost of absorbing the neutral’s cancellation fee.

Another creative form of Med/Arb is where the arbitration takes place first, the Arbitrator takes the matter under submission and writes the decision, and the award is held by the arbitrator to allow for a post-hearing mediation.  This process would appear to require that the mediation take place before a separate neutral in order to avoid what might be the overwhelming impression that were the arbitrator to hear the dispute and then conduct the mediation, he or she would somehow signal the impact of the decision to the losing party to leverage a settlement. Although that circumstance can also be viewed as an advantage by the parties since it gives a best last chance for settlement.  A post-hearing mediation does give the parties the advantage of actually hearing and seeing all of the evidence and arguments made, knowing that unless a settlement is reached, the arbitration award will be issued, to one party’s advantage and the other party’s detriment.

Another closely related dispute resolution method akin to Med/Arb is termed “binding mediation.”  In binding mediation, the parties empower the neutral to simply decide the case at the conclusion of the mediation based on what was presented in the confidential setting.  The method has been criticized as undermining the concept of party-controlled settlements; however, at least one court appears to have sanctioned its use by enforcing a settlement agreement that included terms requiring that if the case did not settle in mediation, the neutral would chose either the Plaintiff’s demand ($100,000) or the Defendant’s offer ($5 million).  (See Bowers v. Raymond J. Lucia Companies, Inc. (2012) 206 Cal.App.4th 724.)[3]  It is unclear to the author what waiver of confidentiality or inadmissibility, if any, was made by the parties in order for the decision to be made in the Bowers’ case.  The court approved the result by enforcing the settlement agreement, which adopted the binding mediation process, thus giving sufficient legal regard to the parties’ freedom to contract for their own method of dispute resolution.

A variation of both Med/Arb and binding mediation along the lines of Bowers could be adopted in a circumstance involving a business dispute where after a lawsuit is filed, the parties agree to arbitration and settle their basic claims, leaving other matters for later resolution or arbitration.  The settlement terms resolving the basic claims could leave open the details of matters involved in carrying out the settlement.  An interim step could be built into the settlement agreement where the parties agreed that the mediator would, upon request by either party, hear any disputes over carrying out the terms of the settlement and would then make a written recommendation, supported by factual and legal analysis to an arbitrator selected by the parties.[4]  By agreement, the recommendation by the mediator would become binding between the parties unless, within 10 days, a party lodged a request for arbitration on the issue presented.  The settlement agreement could further provide that in that circumstance, the arbitrator could consider the recommendation of the mediator, but may not be bound by it, permitting the parties to conduct a full arbitration on the disputed matter before the appointed arbitrator.  The idea behind such a process is that the parties would have enough confidence in the mediator – who, by virtue of the lengthy mediation, would be intimately familiar with the nature of the case and the areas of dispute – and that a reasonable recommendation by the mediator would stand a good chance of being accepted by both sides.  The mediator’s recommendation would be based on a depth of understanding that might not necessarily be available to the arbitrator in the more restrictive context of a fact finding resolution process.  However, if the mediator’s recommendation were unacceptable to either side, a contested hearing would take place.  The arbitrator could then give the mediator’s recommendation the weight and consideration he or she determined it might deserve in light of the evidence presented.  The procedure described here is not dissimilar to the interim appointment of a referee to determine specified contested facts, e.g., value of property; the parties’ historical conduct under contested contract terms, etc.  Of course, care must be taken to properly document an agreement as elaborate as this example supports.

BE CREATIVE WITH MED/ARB

Arguably, there is no limit to the creativity that counsel might envision in order to cooperatively create a Med/Arb process that suits the unique needs of their clients’ case.  Med/Arb clauses might well be inserted into contracts in the place of standard separate mediation and arbitration provisions.  An “early Med/later Arb” procedure could be adopted whereby an early settlement effort is made through mediation followed by a hiatus in the process during which discovery is obtained, experts are engaged, and more thorough preparation is made; followed by arbitration on a date certain by the same neutral and perhaps preceded by another final half day effort at mediation.  Parties to a Med/Arb might partially settle in mediation, but agree to continue to arbitrate certain remaining issues, such as damages or the specific dates upon which agreed upon events must occur as called for in the settlement.  A word of caution for counsel is however needed:  Because there are now emerging issues arising primarily out of the mediation world, a thorough understanding and appreciation of not only the substantive rules governing mediation and arbitration is necessary, but also the way in which the rules governing professional conduct might be implicated by the particular method of dispute resolution selected.[5]

By thinking in terms of utilizing our skills in identifying issues and problem solving and then combining some of the methods used in traditional ADR, we can create individualized methods of dispute resolution tailored to the unique characteristics of specific cases and clients.

Reaching out early to opposing counsel to consider developing a method of Med/Arb is always a good idea.  If the process is agreeable, it can provide a well-defined course of action by which a guaranteed resolution of the case will occur in a more controlled environment that the court process allows.  The parties will have an interested neutral in place who has agreed to devote significate time and develop proper familiarity with the parties and their case. Counsel will have specific dates certain selected for both the mediation and the arbitration, allowing for a complete process to have been developed in advance  by which they will know that their case will be resolved in a relatively short timeframe.

When the opportunity arises, select a case that you think might benefit from Med/Arb, work out the details with opposing counsel, review and plan your case in accordance with the rules governing the process involved, and give it a try. You might be surprised how well it works.

 

James E. Simon is an attorney practicing in California and managing shareholder of the Porter Simon law firm located in Truckee, with offices in Reno and Tahoe City.  He has practiced in civil litigation of all types for over forty years, with an emphasis on business and real estate matters and also regularly serves as a mediator and arbitrator.  Jim may be reached at simon@portersimon.com or at the firm’s web site www.portersimon.com.

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The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters. The author makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of this blog and expressly disclaims liability for any errors and omissions.

 

                [1] Incidentally,  as one astute retired judge and now successful mediator reminded me recently, the term  “alternative” as used in the euphemism “Alternative Dispute Resolution,” should refer to the current court system as the “alternative” to the parties’ own mutually agreeable methods for resolving their disputes.  I.e., perhaps we ought to shift our thinking so that traditional litigation is thought of as the “alternative” to more party-controlled methods, like mediation and arbitration

                [2] Issues of confidentiality in mediation are largely governed by statute or rule in both California and Nevada, which authorities should be consulted for the particular circumstances of any Med/Arb process in which counsel may be involved.  (See e.g., Nevada Rules Governing Alternative Dispute Resolution; Nevada Arbitration Rules; and California Evidence Code § 1115 et seq.)

                [3] The mediator ultimately selected the $5 million number.

                [4] In California, this provision would require express agreement of all participants under Evidence Code section 1121.  It is not unusual for mediated settlement agreements to allow for the neutral who conducted the mediation to resolve any later disputes over the settlement.  Counsel sometimes draft provisions in mediated settlement agreements purporting to reserve to the neutral “jurisdiction” to resolve disputes that may arise in implementing the settlement.  The formalities attendant to such contractual dispute resolution provisions should not be overlooked in order to protect the settlement from later attack.

                [5] For example, in response to a Supreme Court decision precluding admissibility of statements made in mediation in a later malpractice claim against an attorney (Cassell v. Superior Court (2011) 51 Cal.4th 113), the California Law Revision Commission has engaged a study entitled:  “Relationship Between Mediation Confidentiality and Attorney Malpractice and Other Misconduct, Study K-402, which may soon result in some proposed legislation.