December 21, 2012 Articles

Mediate, Arbitrate, or Litigate Disputes?

By P. Jean Baker

Deciding whether mediation, arbitration, or litigation should be the preferred way to resolve a potential or pending dispute is not as straightforward as many attorneys believe. Pros and cons are associated with use of each of the three major methods of resolving disputes. The key is to select the best dispute resolution option or combination of options following an in-depth discussion with the client.

To Mediate?
Mediation works best when it is voluntary and the participants—both parties and attorneys—are cooperating with each other. The potential for settlement is greatly enhanced when the parties seek to resolve the current dispute with a minimum of acrimony so that they can maintain a long-term business or personal relationship. Parties who will have zero contact following mediation, are not willing to make concessions, or are going through the motions of mediation because it is required are more inclined to reach an impasse. Mediation may be the preferred alternative dispute resolution (ADR) option if parties are seeking a confidential forum; it may also be the only form of ADR that a public entity is legally authorized to use. Rarely will parties agree to voluntarily submit to arbitration after a dispute has arisen, but many times they will agree to mediate to avoid litigation. Mediation can also be used prior to trial to narrow legal issues or resolve discovery disputes.

Provided mediation results in a settlement, it is less expensive in terms of legal fees and costs than the alternatives. Commentators disagree as to how much discovery, if any, needs to take place before mediation. From my experience, parties and legal counsel need to have engaged in sufficient investigation and discovery to fully understand what would constitute a reasonable settlement offer. Attorneys who fail to conduct this assessment run the risk of leaving client money on the mediation table—prompting buyer's remorse and a refusal by the client to voluntarily comply with the terms of the mediated settlement. Or the mediation ends in an impasse because of inflated and unrealistic client and/or attorney expectations. Telling a client that a case isn't worth as much as she had expected can be a difficult discussion for an attorney to initiate. Hiring an expert to deliver the bad news adds to the costs, but it can greatly enhance the potential for a negotiated settlement.

Or Not to Mediate?
Engaging in an unsuccessful mediation prior to either arbitration or litigation not only adds to the costs, but also a party may have revealed, to its detriment, important information concerning case strategy. Because mediation is rarely conducted via either telephone or videoconference, international parties or parties residing on different coasts may incur substantial travel expenses. Mediators are not licensed or regulated. There is no universal requirement that all mediators adhere to a code of ethics. And because mediation is viewed as a consensual process, legislatures and courts have not been concerned about the potential lack of due process—for example, a mediator failing to reveal a potential conflict of interest. Confidentiality cloaks the vast majority of mediations. So who really knows what a mediator did or did not say behind closed doors with only one party present? For this reason, careful selection of a mediator is crucial.

Because much of what is said occurs during private caucus with just the mediator and one side, nothing prevents a party from lying, and nothing prevents the mediator from relying upon the lie when discussing settlement options with the other side. To avoid this, experienced mediators bring the parties together in joint session to confirm the basis for reaching agreement on settlement terms. Material representations by both parties upon which the other side relied should be documented in the settlement agreement.

To Arbitrate?
A law firm compared the estimated time and costs of arbitrating versus litigating a complex civil dispute. Total time for litigation was 4.3 years, and total costs ranged from $727,000 to $1,357,500. In sharp contrast, the total time for arbitration was 11 months, and total costs ranged from $323,200 to $610,000. Savings derived from arbitrating consisted of 3.4 years in time and from $408,800 to $747,500 in anticipated costs. Most of the cost savings came from: (1) reduced legal fees, (2) simplified pleadings, (3) restricted motions practice, (4) limited discovery, and (5) no right to an appeal. However, the more arbitration begins to mirror litigation, the smaller the cost savings.

Parties can further reduce costs by customizing the arbitration process at two points in time: pre-dispute during contract negotiations or post-dispute during settlement discussions. Cost-saving provisions include the following: (1) to reduce unnecessary expenses associated with the filing of prehearing motions (such as motions in limine or motions for summary judgment), require that permission be obtained from an arbitrator before such motions can be filed; (2) if the technology or science underlying a dispute is cutting edge, require the filing of Daubert-type motions prior to the introduction of expert testimony or reports; (3) specify the qualifications for prospective arbitrators and, if appropriate, limit the number to one; (4) because neither the rules of evidence nor the rules of civil procedure apply, agree to the preparation of joint-exhibits books and demonstratives; (5) in lieu of in-person hearings, agree to submission of documents only or desk arbitration consisting of submission of documents and telephonic hearings; (6) impose strict time limits that can only be waived by the arbitrator for substantial good cause; (7) tailor discovery to fit the needs of the parties and require arbitrator approval based upon substantial good cause for additional discovery; and (8) specify that the award shall not be reasoned unless agreed to by both parties.

Arbitration may be the best approach to resolution if the parties have no interest in preserving an ongoing relationship and neither side is willing or able to make concessions. Arbitration awards do not create legal precedent, so the award typically only binds the parties to a specific dispute. As a result of ratification of the New York Convention for the Enforcement of Foreign Arbitral Awards by more than 150 countries, arbitration awards are readily enforceable worldwide. Neither enforcement of national court judgments nor mediated settlements are similarly enhanced by any international treaties of comparable scope.

Or Not to Arbitrate?
As with mediators, arbitrators are not licensed or regulated, and there is no universal requirement that all arbitrators adhere to a code of ethics. Yet, arbitrators have more decision-making authority than a sitting judge, and it is virtually impossible under federal and state law to overturn an award. Adequate due process protections are not guaranteed by either the Federal Arbitration Act (FAA) or the Uniform Arbitration Act (UAA). Additional protections are available in the 13 states that passed the Revised Uniform Arbitration Act (RUAA). The RUAA provides for adequate notice, right to legal representation that cannot be waived, disclosure of potential conflicts, and an independent mechanism for challenging an arbitrator for bias. Rules of various ADR providers vary as to the due process protections provided to parties—for example, AAA's rules for consumers, employees, and healthcare recipients contain more protections than are contained in the domestic rules governing business-to-business commercial disputes.

A large number of arbitrations are administered by the arbitrator and not by a neutral third party, such as the AAA. This can create legal issues when the ad hoc arbitrator fails to follow the procedures agreed upon by the parties, or when she introduces less than unbiased behavior into the process. For these reasons, courts favor enforcement of foreign arbitral awards rendered during an arbitration administered by a neutral third party, such as the ICDR or the ICC. Some foreign countries, such as China, have strict requirements concerning administration of arbitration for purposes of enforcement. For example, courts in China will not enforce an arbitration agreement that does not reference an ADR administrator.

Unfortunately, with increased usage worldwide, arbitration is beginning to mirror litigation. Users and legal counsel must take proactive steps to prevent arbitration from becoming the functional equivalent of a "trip to court." Failing to identify and implement best practices can result in arbitrations that are as costly, time consuming, and as unpredictable as going to court without the benefit of an appeal.

To Litigate?
Only a court can render a decision regarding legal rights that is binding on third parties. If the majority of documents and/or witnesses are controlled by the other party, you may need access only provided by the Rules of Civil Procedure. You may want to retain your right to an appeal for "bet the company" business transactions or disputes. China is a signatory to the NY Convention, but it mandates arbitration of what Chinese law classifies as "non-foreign" disputes in China by using Chinese laws, rules, and nationals as the arbitrators. Joinder of parties or consolidation of disputes arising out of different contracts is not automatically available if arbitration is governed by either the FAA or a majority of state arbitration statutes. Many times, larger companies routinely use the threat of unbridled litigation against smaller or economically weaker business partners to obtain more favorable settlement terms should a dispute arise.

Or Not to Litigate?
Trying to navigate the court system in the United States with its strict rules and legal precedents is almost impossible without legal representation—unless the dispute falls within the jurisdiction of a small claims court. Criminal cases take precedent on court dockets, so it can take years before a civil law suit comes to trial. The outcome of the trial varies greatly depending upon who hears the cases—a full-time judge trained in the law or a jury comprised of unpaid and untrained individuals. Trial decisions are routinely appealed, crowding the dockets of the appellate courts and further delaying final resolution by years.

Litigation in the United States is characterized by time consuming and costly rules and procedures: endless depositions, open-ended requests for the production of electronically stored documents, lengthy and repetitive interrogatories. Dispositive motions in litigation are especially expensive because they must be accompanied by a well-written and well-reasoned memorandum of law supplemented by affidavits. Each side is given a chance to respond, followed by a hearing on the motion. Then the court issues a decision, only to have it appealed.

No one should really want to litigate in a foreign country if the parties are from countries that are signatories of the NY Convention or a similar treaty that provides for enforcement of foreign arbitral awards.

There is no right answer about the appropriate forum for resolution of every type of business transaction or pending dispute. Matching the forum to fit the fuss requires a thorough analysis of a number of variables—an analysis that should be conducted jointly by the attorney and the client. By focusing efforts upon rightsizing the resolution process, attorneys will provide an invaluable service to their clients.

Keywords: litigation, alternative dispute resolution, mediation, arbitration