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July 27, 2023

Mediate Before Arbitrate?

Robert E. Bartkus

Parties to an arbitration agreement regularly ask whether they should first attempt to resolve their dispute through mediation rather than a lengthier, more costly arbitration. The values of mediation are well known among lawyers and sophisticated parties—it provides a structured process, facilitated by an experienced neutral, in which the parties can explore reaching an agreement, rather than having a third party acting as adjudicator impose a resolution. Mediation should be private and confidential, under the governing statutes and rules. A mediated settlement agreement allows the parties to evaluate the pros and cons of potential settlement options and make an informed decision, rather than subject their business to the risks of adjudication: the vagaries of a rogue decision-maker or credibility determinations.

It therefore is not uncommon for parties to incorporate one or more pre-arbitration “steps”, including mediation, in their contracts. When a dispute arises subject to that ADR clause, the parties may agree to skip the mediation, but absent such a mutual waiver of a precondition to arbitration, courts almost inevitably hold the parties to their self-imposed “steps”. Arbitration fora such as the AAA, JAMS, and CPR suggest that mediation be undertaken before the dispute is submitted to arbitration. Even without a step clause, parties may voluntarily agree to mediation before undertaking an otherwise mandatory arbitration.

What factors do - or should - parties consider in making that election? The topic has received considerable commentary. Note: This article is about standard mediation, not the more complex med-arb or other so-called “mixed-mode” processes in which the same neutral switches hats at various points in the ADR process.

Several factors to consider may overlap; and their ordering does not necessarily reflect the weight to be given to any one factor. Although there is some logic to the ordering of this “Top Ten List,” their relative importance depends on the dispute.

  1. Confidentiality. Statutes fostering mediation in some states and local mediation rules require that all participants maintain the confidentiality of the process, with limited exceptions subject to court orders. The Model Revised Uniform Arbitration Act does not contain a similar provision; other than a uniform rule of confidentiality for arbitrators, the standard arbitration fora are not consistent in mandating confidentiality. Whether or not the parties have agreed to confidentiality in an arbitration, a court asked to confirm, modify, or vacate an award typically does not carry over confidentiality to such public proceedings. As a consensual contract, a mediation agreement normally does not face the same risk of public disclosure. Thus, although confidentiality can never be guaranteed, many believe that mediation provides greater protection than does arbitration.
  2. The Stage of the Dispute: Is Mediation Premature? Construction, labor, joint venture and other relationships often have a practice of negotiating their differences but find that a more structured format such as mediation is needed to “bring it home.” Mediation requires an agreement at the outset, as well as a willingness to compromise, such that the mindset may not fit a dispute that has recently arisen with tempers flaring. Indeed, early in a dispute the parties may struggle to agree on a mediator; the lawyers may be still in the client’s mindset and not want to appear “weak.” The parties may not have the documents or other evidence needed to argue their positions or make an informed decision, and not all mediators have the authority or predilection to direct a discovery phase—indeed, that discovery may delay resolution and could better be conducted in arbitration with a mediation “pause” once discovery is concluded and parties have had the time and experience to better see the contours of the dispute. Emotion-driven situations take longer to “cool”, also lengthening the mediation process and delaying the day when a cost-effective and efficient arbitration can resolve the dispute or present other opportunities to mediate or settle mid-arbitration.
  3. The Effect of Delay and the Need for Immediate Resolution. A threat to remove property from the jurisdiction or set up a competing business (or discovery of one) requires quick intervention. Where a Cease and Desist Letter has been ineffective, and a TRO or seizure application is needed, to court or arbitrator, the delay of mediation may create a risk of greater harm. Remember that arbitration fora may offer “expedited” procedures for emergencies. That process may lead to a mediation or the regular arbitration. Unlike an emergency arbitrator, a judge hearing a TRO or preliminary injunction application may also attempt to settle or mediate the case—but at least a process will have begun that may lead to a compromise resolution faster than formal opinions and appeals. If the statute of limitations is near, parties should agree on a tolling or first file for arbitration.
  4. Whether Settlement Is Likely. Parties may resist mediation where they conclude that the mediation will not succeed. A party may be mistaken in that view, but absent statutory or contractual coercion, a party may need a real-life view of an arbitrator or the preliminary arbitration processes to see the strengths and weaknesses of its position. Parties adamantly opposed to mediation, as a “waste of time,” may come to a different view once they have experienced the process, but that can take time and patience.
  5. The Nature of the Dispute. Mediation can work well on all nature of disputes: family “battles” filled with emotion; intellectual property; simple or complex injury or commercial. Sometimes, it may be a question of whether the stakeholders will later change their view of the process when circumstances change. These may require a judge or arbitrator to blame. Although some believe that mediation is not appropriate in IP cases, at least one study shows that it can succeed in Lanham Act cases in federal court. Where non-signatories to the arbitration agreement are important to the dispute, they may agree to mediate, reserving their rights regarding arbitration.
  6. The Sophistication of the Parties. A party that understands the process and the stages of dispute resolution — and is aware of the strengths and weaknesses of the dispute at hand—may be more willing to take the time to have its position critiqued in a mediation. Some may feel that a party unaware of the strengths of the other side’s position may be too insecure to participate effectively. To reach the necessary level of confidence or self-awareness, the parties may need discovery or the determination of a legal issue; in that case, it may be best to go right to arbitration, get the needed information or rulings, and then begin a settlement or mediation process better informed.
  7. The Level of Trust Among the Parties. Mediation can begin with sufficient trust to reach agreement or the mediator can help develop the necessary level of trust over time. Without the first, parties must ask if they can take the time to reach that level of trust. Where a party fears that the other has lied or is withholding information, mediation is less likely to succeed; a mediator must be able to order and supervise disclosure to bridge that level of mistrust—but that takes time.
  8. The Predominance of Unsettled Legal or Factual Issues. Uncertainty regarding the legal or factual issues at stake can be either a pro or a con in any given case. Sometimes, the parties are not aware of how unsettled the facts or issues may be until the mediation begins, so parties should consider whether they can proceed in the absence of a clearer record. Or they may want an issue to remain unsettled as long as the dispute is resolved.
  9. The History of the Parties. The parties’ history with each other can either drive or choke a mediation. Given the option of a mandatory arbitration in which parties can consider their situation and settle during a “pause” in the arbitration, their history must be considered—pro or con — in evaluating whether the delay of mediation at the outset is warranted.
  10. Whether There Is a Continuing Relationship. Parties with a continuing relationship may need the structure of a mediation to resolve a dispute, so they can move on to completing the project. A precedent can be set — or avoided — by agreement; or they may need an outside arbitrator to make the call, knowing that it will affect their futures.

Parties, attorneys, and ADR fora or professionals can offer other and more expanded advice on making the decision whether to risk the delay of a mediation before arbitrating a dispute. Some parties may seek the advice of an ADR Facilitator. The processes are sufficiently flexible to accommodate most any situation, but parties must consider the pros and cons of any one in context.

    Robert E. Bartkus

    Anselmi & Carvelli, LLP

    Robert E. Bartkus is of counsel to Anselmi & Carvelli, LLP, in Morristown, N.J. and New York, N.Y. He is co-author of New Jersey Arbitration Handbook (ALM 2023) and a Fellow of the College of Commercial Arbitrators.

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