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American Bar Association - Defending Liberty, Pursuing Justice

March 2008

Vol. 4, No. 2

Litigation

 

Frequently Asked Questions Regarding Alternative Dispute Resolution: Commercial Arbitration and Mediation

Alternative Dispute Resolution (ADR) has been called “The Courtroom of the Twenty-First Century,” yet it seems misunderstood by most lawyers and businesspeople, to their disadvantage. We examine below several Frequently Asked Questions to introduce this potentially useful arena, and urge that this be a steppingstone to further study and practical application, for the benefit of counsel and client alike. Discussion here focuses on business or commercial ADR as practiced before the major national forums such as the American Arbitration Association and the National Arbitration Forum. Note that significant procedural and substantive differences may exist in ADR processes applicable before other forums and in other areas of dispute such as personal injury, labor, consumer, and matrimonial.

For starters: What is alternative dispute resolution (ADR)?

Simply put, ADR includes arbitration (binding), mediation (consensual), conciliation, early neutral evaluation, and other binding and nonbinding means of resolving disputes without resorting to court. ADR is appropriate for many types of cases and clients, and is far superior to court litigation in many (but not all) instances. We limit our focus here to arbitration and mediation, the two most common forms of ADR.

What are the main differences between arbitration and mediation?

Arbitration is essentially a less formal trial conducted privately before a panel of one or three (usually) neutral arbitrators who may or may not be retired judges. It is a binding process, resulting in the arbitrator’s award, which can be converted to a judicial judgment and enforced as such.

Mediation, in contrast, is a nonbinding form of confidential settlement negotiation, facilitated by a trained impartial (neutral) outside mediator, who leads the parties (usually assisted by their counsel) to reach a voluntary resolution that is confirmed in a written agreement. The mediator helps the parties identify issues, explore options, mend fences constructively, and reach a mutually acceptable outcome. Mediators do not decide or determine issues (unless asked to serve an evaluative role), but may assist the parties in exploring alternative solutions they might not have considered on their own. The parties ultimately control the decision whether to settle and the terms of any resolution.

What are some of the principal considerations in selecting whether to have a case determined through arbitration as contrasted with court litigation?

A provision in the parties’ written agreement may require that all disputes arising out of or relating to that agreement be resolved by arbitration. There, the parties lack any real choice whether to litigate or arbitrate (unless they stipulate mutually to waive the provision). Conversely, even where there is no applicable contractual arbitration clause, and no other mandate for arbitration, the parties can consent in writing to submit their dispute to arbitration. Thus the decision whether to arbitrate can be made either before or after the dispute has arisen, but in either event it typically requires agreement. An advantage to arbitration is that the parameters that can be specified in the governing arbitration clause are virtually limitless, including identifying the governing forum and applicable rules, number of arbitrators, their qualifying expertise and experience, how much discovery may be conducted, available remedies, the locale of the hearing, whether the award will be “bare” short form or expressly and fully reasoned, and many other criteria.

Arbitration is intended to be more streamlined and faster (and therefore less expensive) than court litigation. Arbitrators (who usually are part-time contractors engaged in another profession such as law, accounting, architecture, or engineering) tend to have smaller case dockets than judges, and can focus more closely and with greater familiarity on controlling individual cases.

Arbitrators usually are selected from specialized panels, based on their knowledge and experience. Other than those judges who preside over specialized parts (matrimonial, criminal, and the like), jurists usually are generalists, hearing a variety of cases in broadly divergent substantive areas. Arbitration has no juries.

In arbitration, counsel for the parties have a say in selecting the arbitrator(s) on the panel; in court, “judge-shopping” is frowned upon, to say the least.

Each phase of an arbitration case typically proceeds more quickly than in litigation, and there usually are fewer phases in arbitration (for example, fewer motions). Arbitration encompasses a more streamlined pretrial informational and documentary discovery process, based on the governing arbitration clause and the discretion of the arbitrator. Less discovery, and less discovery motion practice, substantially diminishes the cost and duration of the process.
 
Arbitral evidentiary hearings usually proceed in a somewhat less formal manner than in most court trials. The testimony of witnesses and admission of documentary evidence is not necessarily subject to all the strict legal rules of evidence, within the discretion of the arbitrator. Arbitrators generally render their binding decisions more quickly than judges.

Arbitration entails greater finality than litigation; arbitral awards generally are not subject to appeal or vacatur except in relatively rare circumstances (such as the arbitrator’s demonstrable fraud or bias, exceeding the scope of granted authority, or in some jurisdictions a manifest disregard of unassailable legal authority cited by the parties). Judicial review of arbitral awards is extremely limited and narrow. Where you desire a meaningful opportunity to pursue an appeal, arbitration may not fit the bill as well as resort to the courts.

Commercial arbitration awards are not public, and do not serve as precedent. This can be advantageous where a party engaged in repetitive disputes does not want to “make law.”

The bulk of United States Supreme Court decisions over the past decade adjudicating issues pertaining to arbitrability or the scope of arbitration squarely favor arbitration over litigation. Thus, it is endorsed by our highest court, and is likely to become more prevalent in future.

What are some of the principal considerations in selecting whether to have a case resolved through mediation?

Mediation is a collaborative rather than combative process. It allows parties to express themselves (to “vent”) in a way that neither their “day in court” (with its evidentiary admissibility rules) or even arbitration (with its emphasis on adjudicating fast, fair justice) can permit. This “venting” process often directly and rapidly leads to settlement of disputes.

Mediation can be undertaken consensually even during the course of a litigation or arbitration proceeding. It often is the sole realistic escape route for parties mired in expensive and time-consuming battle. Mediation frequently can terminate a lengthy dispute in one or two sessions, proving extremely cost-effective and beneficial to the attorney-client relationship.

Mediation tends to set the stage for preserving, rather than ending, relationships. Parties who have successfully mediated a dispute (even after commencement of litigation or arbitration), often find themselves able to do business together in future. When one side wins after an adjudicated process, however, that prospect almost always disappears.

It often would be wrong for counsel to surmise that they simply could start a litigation or arbitration and then readily move the matter into settlement mode. A mediator, in contrast, can add considerable value to the negotiation process, employing training, skills, leverage, perspective, and structure that counsel alone lack. Many litigators do not realize this until they actually have been through the process with a skilled mediator.

One of the principal benefits of mediation is that it allows the parties—through a process led by the neutral facilitator—essentially to customize the resolution of their conflict, often employing facts and considerations that would not be deemed relevant to adjudication of a matter by a judge or even by an arbitrator. Mediation can employ tax costs or savings, “soft dollars” techniques, the “swing” between wholesale and retail price, tangentially related agreements, continuing relationships, and other exogenous aspects to effectuate creative settlements, whereas those factors would have no place in more formal proceedings.

What are some of the most common myths about arbitration?

Myth: “Arbitrators simply ‘split the baby,’ rather than award parties what they deserve, so why arbitrate?” Emphatically, this is not so. At best, this is historical artifact; most likely, it is a misconstruction (not surprising, as so many people confuse arbitration with mediation). Formal independent studies demonstrate conclusively that arbitrators rarely award in the 50% range or otherwise merely compromise between the arbitrating sides’ positions. Modern arbitrator training specifically warns against simply compromising by “meeting in the middle.”

Myth: “Arbitration is too expensive.” Similarly, not so. Arbitration does tend to be more “front-loaded” in terms of cost: The parties pay a more substantial initial filing fee to the arbitral forums than they do to file a case in court, and they pay refundable deposits for arbitrator compensation relatively early in the case (a component absent from litigation, where compensating the judges beyond their governmental salaries is, like judge-shopping, discouraged in all jurisdictions). However, the overall cost is substantially diminished in most cases, because the process is so considerably streamlined and shortened. (Note: Lawyers need not fear decreased incomes due to ADR: Shorter duration of proceedings allows for greater caseloads, and happier clients lead to great word of mouth, so the bottom line is enhanced rather than reduced.)

When might ADR be a bad idea?

Simply put, shy away from ADR when its advantages are inapplicable to your situation, or when its distinctions from litigation may operate to your client’s disadvantage. Some examples:

  • ADR is less appropriate when you need a temporary restraining order or preliminary injunction to maintain the status quo pending resolution of the matter. Although many arbitral forums have rules providing for “interim measures,” these generally are not as readily enforceable as judicial injunctions. However, a party to an arbitration can seek a judicial injunction in aid of arbitration, typically to preserve the status quo pending arbitration. An analogous situation exists with respect to enforcing certain subpoenas.
  • ADR is inappropriate when you want to set favorable judicial precedent that will be publicly disseminated; however, be very certain of the merits of your case, or the undesired effect of adverse judicial precedent may result.
  • ADR may be less appropriate when you need to ensure the ability to conduct significant discovery.
  • ADR may be less appropriate if you believe your adversary cannot endure expensive, protracted litigation.
  • ADR may be inappropriate when you “inherit” a poorly conceived and poorly drafted arbitration or mediation clause in an agreement; you are contractually bound to governing language that may be ambiguous, logistically impractical, difficult to enforce, or otherwise problematic. (The cure: Try to renegotiate the clause for the greater good of all parties to the contract; in the alternative, consider seeking a declaratory judgment.)

How can I go about proposing mediation to my adversary without appearing weak?

More than 95% of all commercial litigations resolve before trial. In much the same fashion that one side in a dispute must raise the prospect of settlement before negotiations can commence, counsel can broach the notion of mediating the dispute. This can be done prelitigation or midlitigation, depending on the case. Indeed, it arguably is less of a “show of weakness” to be the one suggesting submission of the dispute to an independent facilitator who may to some extent evaluate the respective merits of the parties’ positions. Proposing mediation also demonstrates a willingness to negotiate but within a structure that follows some procedures. It can be proposed from a position of strength as a pragmatic prospective solution to what otherwise might become a quagmire for both sides. Cases tend to diminish in value over time, particularly as costs are incurred. As mediation has become more accepted, it is easier to propose. The proof is in the proverbial pudding: Formal surveys and individual mediator reports alike demonstrate that greater than 80% of commercial disputes that voluntarily submit to mediation successfully resolve the matter.

ADR alternatives are appropriate means toward resolution of the substantial majority of commercial disputes. Practitioners who ignore this fruitful arena do so to the detriment of their practices and their clients.

David J. Abeshouse practices business litigation and alternative dispute resolution law in Uniondale, Long Island, New York. He serves as an arbitrator on the Commercial Panel of Neutrals of the American Arbitration Association and other forums, and maintains a private business mediation practice. His website is www.BizLawNY.com, and he can be reached at David@BizLawNY.com.

© Copyright 2008, American Bar Association.