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Nov 1994

Resolving business disputes through mediation and arbitration. (Accountant's Liability)

by Berman, Peter J.

    Abstract- Two trends in the legal profession promise to reshape the practice of American law. One trend is the move toward greater use of alternative methods of resolving disputes, while the other trend is the move toward increased use of alternative fee arrangements. In cases involving business disputes, it is the former which is expected to have the greater impact on how cases are settled. The use of alternative methods provides several notable benefits. Most notably, it allows the parties concerned to avoid the judicial gridlock that has arisen, an important consideration now that the courts are required to give precedence to criminal cases. Should both parties decide to resolve a case outside the courts, several avenues are open to them. These include private mediation, arbitration by an objective third party, a mix of mediation and arbitration, and minitrials conducted by a private organization.

It is well known that the courts in this country, both federal and local, are congested. Federal cases often take more than two years to come to trial. Furthermore, federal judges preside over civil and criminal cases and the requirements of the Speedy Trial Act make it necessary for judges to give priority to criminal cases. As a result, it is very difficult to determine when a case will be called to trial in districts with heavy criminal case loads.

Prejudgment interest is often not awarded to a successful plaintiff. Consequently, the time value of money has provided a disincentive to defendants to settle cases. Yet, many defendants find that a plaintiff has been awarded damages that are much greater than what was expected. And the costs of litigation often exceed the amount the defendant expected to save from not paying pre-judgment interest.

The problem of assessing risk also applies to plaintiffs. When the costs of pursuing a claim are measured in time, effort, and money, plaintiffs frequently conclude that they would not have filed their lawsuit if they had the opportunity to do it all over again.

What litigants often fail to realize is that the aggregate projected costs of the litigation could be allocated to a settlement of the dispute. For example, if there were a dispute involving $500,000 between a distributor of a given product, the manufacturer of that product, and a third party who allegedly caused the termination of the distribution agreement, the parties could easily engage in litigation for several years at a cost of $75,000 each before the matter is resolved. If the parties behaved rationally, they could reduce the dispute to $275,000 by allocating the aggregate projected costs to the settlement of the dispute.

Some court systems have instituted mediation or non-binding arbitration programs that are designed to relieve court congestion. However, many courts lack the resources to institute them. Even when programs have been instituted, many are not available for business disputes. Moreover, the mediators and the arbitrators associated with court-sponsored programs cannot devote more than a few hours to the mediation of a dispute. In many instances the mediators and the arbitrators lack any formal training in this area. In addition, court-sponsored programs are only available after a lawsuit has been filed. When used effectively, mediation can avoid the filing of a lawsuit entirely. Finally, many of the court-sponsored programs are mandatory and no mandatory program will work as well as a voluntary one.


The alternative method of dispute resolution that is least used for resolving business disputes is private mediation. This is unfortunate because the opportunity for resolving a dispute promptly and inexpensively is greatest with mediation. Mediation also allows the parties the opportunity to discuss settlement in a structured environment without making their allegations public. While mediation can result in the settlement of a dispute in a cost-efficient manner, it can also preserve business relationships that might be destroyed through litigation because the participants rarely feel as though one side has won and the other has lost. Indeed, the discussions leading to settlement often result in a better understanding of how the disagreement arose and how such disputes could be avoided in the future.

There are a number of excellent organizations located throughout the U.S. that offer the services of former judges and other professionals to effectively mediate business disputes.

The parties begin by entering into a mediation agreement. The agreement establishes a framework for the discussions that will follow. The organizations sponsoring the mediation provide form agreements that address most concerns about the mediation process. After a recitation of the parties' intentions to negotiate in good faith, the parties state their acceptance of a mediator to mediate the dispute. The person is chosen from a list of available mediators who are affiliated with the organization. While these organizations provide resumes of their mediators, they are usually well known in the legal community. They have been retained by these organizations because of their fine interpersonal skills, intelligence, good character, and fair-mindedness. Their recommendations are usually given a great deal of weight.

The parties usually agree to the production of documents and an exchange of information. The parties may also discuss whether any key witnesses within their control are to be made available during the mediation to provide their account of what occurred. This process is important because no one wants to settle a case without knowing the essential facts. If there are disputes about discovery, the parties will usually address these issues in a preliminary conference with the mediator.

By addressing these questions in advance of the mediation, the parties are advising one another about what they will need to know to make a well-informed decision. The entire process is tailor made for the underlying dispute. There is no need to comply with general rules of civil procedure that have been adopted for litigation in court. Discovery in court is used all too often to harass an opponent by compelling compliance with a discovery request that only has marginal relevance to the case. In mediation, the process of explaining why you need certain documents and information to make a well-informed decision often starts the process of discussing an overall settlement of the dispute.

Mediation agreements generally provide that nothing said during the mediation can be used to impeach or contradict a witness at trial and that the mediator may not be subpoenaed to give a deposition or testify in court if the mediation fails to produce a settlement. While everyone is expected to tell the truth, everyone can be more relaxed and less concerned about their choice of words during the mediation.

After the parties have produced all of the documents and information that have been requested, the parties will usually prepare a memorandum for the mediator identifying their legal positions and the evidence that supports them. The parties will also provide the mediator with copies of key documents to be reviewed in advance of the mediation.

The most significant difference between mediation and other forms of dispute resolution is that no one besides the parties can settle their dispute. For this reason, the parties are well advised to address their remarks to one another, and not just to the mediator. This, of course, is very different from litigation or arbitration where the parties attempt to persuade a judge, jury, or arbitration panel on the merits of their case. This does not mean that the parties should not direct their arguments to the mediator as well. A mediator will acknowledge valid arguments at appropriate junctures and encourage an opponent to give appropriate weight to them during a private session or when making his final recommendations about the case.

When the mediation begins, a mediator will make opening remarks describing how the mediation will proceed. Counsel for the parties will then make an opening statement setting forth their positions. The mediator then meets privately with each of the parties to discuss their positions in greater depth. It is at this point that the parties usually begin to let their guard down. Once a mediator understands a party's position and has developed a level of trust with that party, the mediator will meet with the remaining parties. When the mediator has met with all of the parties, he or she will reconvene the entire group to discuss the case. The mediator will restate the pivotal issues and look for opportunities to stimulate discussion about settlement. The mediator will continue meeting privately with the parties and then with the group as a whole in a form of "shuttle diplomacy" that is geared to narrowing the gap between the parties.

A mediator will never reveal a party's settlement position to another party without permission. To do so would break down the trust that has developed and discourage candor during the private sessions with the parties. When permission is given, the mediator will discuss a party's settlement position with the other parties and gauge their reactions.

After the shuttle diplomacy has run its course, the mediator will make a statement assessing the facts and the parties' legal positions. When the mediator is a former judge, he or she speaks authoritatively as one who has decided similar cases while sitting on the bench. Indeed, references made by the mediator to the disposition of similar cases usually have a great impact upon the parties. The mediator will evaluate the plaintiffs chances of prevailing and the amount of the damages that might be awarded. The parties will then meet separately with their counsel to discuss the mediator's remarks and reevaluate their positions. When the group reconvenes, the parties state their "final" settlement positions. If a settlement is not reached shortly thereafter, the mediator may suggest other avenues for the possible settlement of the dispute.

Depending on the complexity of the case, the mediation may take more than one session to complete, but usually one or two sessions are enough. In most instances a settlement is reached on the date of the mediation. On some occasions the parties take time to reflect upon the negotiations and determine whether a settlement should be reached after the mediation. In cases where a settlement is not reached and a lawsuit is filed, the framework for further negotiations is in place with or without the mediator. (In fact, many mediations are initiated after a lawsuit has been filed.) While broad statistics are not kept, Endispute, Inc., which has offices in five cities throughout the U.S., notes that more than 90% of the cases that were submitted to it for mediation during 1992 were settled within 90 days of completing the mediation.


Arbitration is another alternative to litigation. Unlike mediation, arbitration is binding upon the parties. The parties present their evidence to an arbitrator or panel of arbitrators who will decide the case. Discovery is allowed, but it is limited. Unless the parties agree that depositions of the parties and their employees may be taken, they are generally not allowed. Depositions of non-party witnesses may be taken only if they cannot be subpoenaed to the arbitration hearing. When disputes arise about the scope of the documents or information that has been requested, the arbitrators will resolve the discovery dispute.

The hearing is structured like a trial. Opening statements are made. Each party presents his case through witnesses who may be cross examined by their opponents. When a party rests, the others are given the opportunity to present their cases. After all of the parties have presented their cases, they are each given the chance to present rebuttal testimony. Finally, the parties are each allowed to make a closing argument.

The rules of evidence applicable in court are not applicable in arbitration. Arbitrators usually admit most of the evidence that is offered and determine later what weight, if any, should be given to that evidence. A decision is generally rendered within 30 days. Reasons for the decision are usually not given. The arbitrators simply note whether the claimant prevailed, and if so, the amount of the award. The costs of the arbitration may be awarded by the arbitrators to the prevailing party as well. This will depend on the provisions to that effect in the arbitration agreement or the rules of the board that is administering the arbitration. There is no right to appeal an arbitration decision. Except for cases involving fraud, corruption, bias, or a manifest disregard for the law, there is no judicial means for setting aside an arbitration award. Generally, courts will only set aside an arbitration award under the most egregious circumstances.

Most arbitration arises from agreements that contain an arbitration clause that provides for arbitration to resolve future disputes. Each arbitration body provides the parties with a list of potential arbitrators and gives them the opportunity to strike names from the list. Depending on the organization and the nature of the dispute, the proposed arbitrators may have some expertise in the area in question. In certain instances, the parties may be given the opportunity to request a mixed panel consisting of arbitrators both from within and without the industry from which the dispute arises. If the arbitration body is unable to form a panel from the remaining names, it is authorized to make appointments from a larger panel of arbitrators. The parties are then allowed to object to the appointed arbitrators on grounds of bias or prejudice only.

Generally, it takes less than a year to complete an arbitration case. Because of the simplified nature of the proceeding, the cost of arbitration is substantially less than litigation.

Hybrid Forms of Alternative Dispute Resolution

Mediation/Arbitration. From time to time, parties will agree to mediate their dispute and, if they are unable to reach a settlement, submit the matter to arbitration. This method of dispute resolution is known informally as "Med/Arb." Med/Arb provides an additional incentive to reach a settlement during the mediation phase of Med/Arb. The parties realize that if they are unable to settle the case, they will be forced to submit the matter to arbitration immediately after the mediation phase is concluded.

While it may be difficult to convince an opposing party to mediate a dispute, it is a great deal more difficult to convince an opponent to mediate a dispute and then arbitrate it if the mediation is unsuccessful. There is a tendency for an opponent to preserve his options and determine whether arbitration would be desirable after the mediation has been completed. This, of course, does not occur when the parties have entered into an agreement that provides for Med/Arb as the means for resolving future disputes. Although the good faith of the participants is essential for a successful mediation, the motivation to take it seriously is much greater when the parties realize that an arbitration panel will be deciding their fate in the near future if a settlement is not reached.

Baseball Arbitration. The world of professional sports has popularized a form of dispute resolution known commonly as "baseball arbitration." While it has been used primarily to resolve salary disputes it may be utilized in other areas as well. After an evidentiary hearing, each party recommends a figure to the arbitrator for resolution of the dispute. The arbitrator may only choose one of the figures proposed by the parties. This method of arbitration is only appropriate when one party agrees that some amount is owed to the other. It is just the amount that is in dispute. A party tends to moderate his or her recommendation to the arbitrator out of fear that the arbitrator will find his opponent's recommendation more reasonable than his or her own. For this reason, baseball arbitration tends to reduce the parties' differences and often produces a settlement. By contrast, in litigation and all other forms of dispute resolution there is a tendency for plaintiffs to overstate their claims and for defendants to understate them. Obviously, such tendencies do not establish a climate for settlement.

Agreements Concerning the Amount of Damages. While a claimant to a standard arbitration proceeding will tend to inflate his claims and a respondent will tend to understate them, the parties often find it useful to agree upon certain parameters for the damage award. For instance, a claimant may agree to a damage ceiling, notwithstanding the size of the arbitrators' award in exchange for a minimum award or damage floor. Damage ceilings often provide a strong inducement for a respondent to arbitrate a dispute.

Minitrials. The federal courts have been experimenting with minitrials to settle disputes. Minitrials are only conducted in federal court after a lawsuit has been filed. However, various private organizations will conduct a minitrial either before or after a lawsuit has been filed. Like its name implies, a minitrial is an abbreviated trial that is held before a judge or a magistrate in court and a former judge in private settings. Only the essential witnesses are permitted to testify and only the most relevant evidence is presented. After closing arguments have been made, the judge or magistrate renders an advisory decision. The advisory decision injects a realistic tone to the parties' settlement negotiations by providing a preview of what is likely to occur. Minitrials often result in a settlement without the expense of a full- blown trial. Nonetheless, the costs of a minitrial can be substantial. Therefore, it is only appropriate for large cases where the possibility of a second and more substantial trial can be justified when a minitrial has not produced a settlement.

Some courts have adopted non-binding arbitration programs to encourage settlements. They are like minitrials but they are conducted before an arbitrator or panel of arbitrators. While the rules of evidence are applied in minitrials, they are not applied in non-binding arbitration hearings. Unfortunately, many of these programs are compulsory and the parties often fail to take them seriously because they feel that they simply have to go through the process to satisfy a court order or a rule of procedure. Yet, when they are taken seriously, they can provide the same realistic tone to settlement discussions that minitrials provide.

More Hybrids

The concepts that underlie mediation, arbitration, med/arb, baseball arbitration, and minitrials invite further creativity. For instance, there is no reason why baseball arbitration could not be used in tandem with mediation where the parties are committed to med/arb as a method for resolving their dispute. Similarly, there is no reason why mediation cannot be combined with non-binding arbitration or a minitrial where the mediator observes the hearing in advance of the mediation or after a round of mediation that has not produced a settlement.

Peter J. Berman, Esq., practices law in Chicago, Illinois, where he represents clients in the mediation, arbitration, and litigation of business disputes.

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