THE CPA IN MEDIATION AND ARBITRATION
A Practical Guide to Mediation
By Philip Zimmerman
CPAs faced with a potential or actual threat of litigation would be wise to reduce their financial risk and possible loss of reputation during a public trial by seeking mediation. Major liability insurers offer meaningful incentives for CPAs that elect to mediate rather than to litigate (see Exhibit 1). During the last few years, the IRS has offered mediation of disputes arising in its enforcement division before the dispute reaches the appeals division. Courts in New York, New Jersey, and elsewhere have offered and even mandated mediation to save the parties time and money and reduce the courts’ caseload.
What Is Mediation?
Mediation is a facilitated negotiating process in which the parties to the dispute meet with a neutral third party, the mediator, whose function is to assist the parties in reaching an acceptable settlement. Mediation is generally a quick procedure that, properly organized, can be accomplished in a few meetings, with an extremely high success rate (about 80% for skilled mediators). The process is voluntary, and either party can terminate it at any time.
The parties usually come to a mediation conference with their attorneys, with whom they have previously consulted. The parties’ representatives should know the facts behind the dispute and have the authority to settle the dispute. This ability to negotiate and settle is essential to the mediation process.
Several alternative dispute resolution (ADR) organizations are equipped to assist in the preparation of an agreement to mediate and the selection of a qualified mediator. The leading national ADR organizations are shown in Exhibit 2.
The NYSSCPA offers a mediation program to help resolve disputes between members, using CPA mediators who have volunteered their services as a benefit to members. Forms to initiate such a mediation may be obtained from the Society at (800) 633-6320 or online at www.nyss cpa.org (“Member Services” in the Member Center).
Mediation is a voluntary dispute resolution process that does not become binding unless the parties reach their own settlement of the dispute. Arbitration differs in that an arbitrator makes a determination to resolve the dispute that is binding on all parties and can rarely be appealed.
Mediation vs. litigation. Litigation results in winners and losers. Because of that adversarial aspect, the process tends to destroy even long-standing relationships.
Moreover, even if a firm is victorious in litigation, the out-of-pocket cost for counsel, experts, depositions, and copies of documents is usually large. Litigation also takes its toll through time lost from work, and emotional trauma.
Satisfaction with litigation is generally low, because the involved parties generally lose control over the process. Counsel argues the case when it goes to trial, and a pretrial settlement is generally based on the hazards and costs of litigation. If the case reaches a jury, the outcome is extremely unpredictable.
The cost of mediation is lower than either arbitration or litigation. Since mediation does not usually require a great deal of an attorney’s time, the out-of-pocket costs are not considerable, and the quick process minimizes the loss of valuable partner and staff time.
How Does Mediation Work?
Parties can enter the mediation process either under a mediation clause that was part of an engagement letter or contract prior to the dispute, or they may agree to mediation after the dispute arises. In some cases, a court will order mediation after litigation has started.
Sample mediation clauses can be obtained on the website of the American Arbitration Association (AAA; www.adr.org), other national ADR organizations, or some insurance companies. Regardless of where obtained, an attorney should be consulted before putting a mediation program into place.
The mediator. The mediator’s task is to help the parties to resolve their dispute in whatever manner the parties decide, with the mediator acting neither as counsel nor advisor.
The AAA applies its rules in selecting a mediator subject to the approval of the parties. If the parties prefer, they may select their own mediator. Other ADR agencies maintain lists and biographies of experienced, trained mediators.
The parties should ready themselves for mediation by preparing a negotiating plan that does the following:
To expedite the process, each party may prepare and supply the mediator and the other party with a position statement. The parties and mediator must agree upon the length and content of this statement.
The mediation conference. In the next step, a confidential mediation conference (joint meeting) held by the parties and the mediator, the mediator first describes the procedures and the ground rules to be followed. The initiating party and its attorney then present its side of the dispute, what it wants, and why. The other party and its attorney then respond. The mediator tries to understand how each party views the dispute, their interests, and their positions. Fact questions are presented and answered to lay the groundwork for a settlement.
When the discussion gets repetitious, the mediator will usually end the joint meeting and meet confidentially and separately with each party. During this caucus, the mediator attempts to clarify the facts and positions while trying to loosen frozen positions and to explore alternative solutions. The mediator tries to make each side deal realistically with the other’s arguments. A party’s position usually changes after it hears the opposing party’s arguments and explanations, enabling a settlement range to emerge. The mediator also has the parties focus on the risks and costs of litigation. At this point there may be more caucuses, during which the mediator helps to narrow the differences between the parties and to obtain agreement on as many issues as possible.
Settlement. Once the mediator senses that an agreement has been reached, the mediator brings the parties together again in another joint session. The mediator must make certain that the agreement is complete and sufficiently clear to settle the dispute. The final step is for the attorneys to prepare a settlement agreement that is signed by the parties and is binding and enforceable. If a settlement is not possible, the parties may agree to arbitration or go directly to litigation. Many mediations, even if not settled at the session, are settled shortly thereafter due to the process.
Selecting an appropriate mediator. Selecting an appropriate mediator enhances the chances for a successful mediation and an ultimate resolution of the dispute. The mediator’s background should match the needs of the parties and the type of dispute. If the dispute is mainly over legal issues, it is preferable to use a mediator who is also an attorney. If the dispute is over financial issues, such as a purchase agreement or the dissolution of a business, a CPA might be better. Mediators should possess the following personal qualities:
The independence and neutrality of the mediator is necessary for a successful mediation process; it helps to reduce the hostility between the parties by facilitating a frank discussion of each side’s interests, strengths, and weaknesses. An independent mediator can also aid each party in assessing the reality of its position. The parties are then usually able to narrow the issues, deflating the excessive demands that prevented settlement. The result is a high percentage of cases ending in a voluntary settlement at a minimum of cost in time and money.
Mediators use two main approaches:
Advantages and Disadvantages of Mediation
The advantages of mediation include the following:
Mediation’s disadvantages arise when litigation is needed to achieve certain objectives, or other conditions exist. For example:
The Process of Mediation
A CPA firm planning to use mediation or to have it available in the event of a dispute should do the following:
Myths and Facts About Mediation
Myth: “You give away your case.” Fact: The language setting up the mediation can make what is discussed confidential, inadmissible (if solely arising from the mediation) in any subsequent litigation, and can prevent the mediator from appearing as a witness for either party. Contrary to common belief, mediation does not prevent a nonclient from suing the CPA in another action. Most clients of CPA firms are privately held, and third-party suits are rare.
Myth: Mediation can drag on for too long and delay the resolution of the dispute. Fact: A time limit can be put on the proceeding, to be extended only by mutual consent.
Myth: Clients will not want to give up a jury trial and the right to appeal an unfavorable verdict. Fact: If mediation is not successful, the client can still litigate. Even if an unfavorable verdict is appealed, the outcome is uncertain and the costs are high.
Myth: Insurers will not approve mediation. Fact: Most insurers now approve mediation, and some are willing to absorb part or all of the cost.
Philip Zimmerman, APM, CPA
Mediator and Arbitrator
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