Copyright American Arbitration Association Nov
1999
Combining mediation and arbitration In sequence can
be a fair, efficient and cost-effective process for resolving disputes. Hybrid
"med-arb" proceedings that seek to combine the virtues of medication and
arbitration can offer real advantager to clients, including reduced costs,
certain resolution of the sispute within a reasonable time, nad enhanced client
control over the dispure resolition process. Such combined "med-arb" proceedings
may also pose significant disadvantages for participating clients, and important
ethival issues for the neutral, however, when the proceeding call for the
mediation and the arbitration to be conducted by the same person. This article
reviews these issues.
In recent years, the ADR community has seen
increasing experimentation with "hybrid" proceedings that seek to combine the
virtues of mediation and arbitration. For example, these "medarb" proceedings
are a frequent feature in many mass-tort settlement ADR programs that have been
reviewed and approved by the courts in recent years.1 Similarly, a 1997 survey
of the ADR practices of Fortune 1,000 corporations showed that approximately 40%
of the more than 600 companies that responded to the survey had some experience
with "med-arb" ADR procedures.2 In a breakdown by major industrial groups, 23 %
of that survey's respondents in the service industries, and 13 % in the
transportation, communications, and utilities group, listed "med-arb" as their
preferred ADR procedure.3
Definition of Med-Arb
Med-arb is a generic term that may have many
different meanings. Indeed, one of the recommendations of this article is that
parties who wish to employ a "med-arb" dispute resolution process should spell
out in detail in a written protocol exactly what process they wish to follow
before the proceedings begin. For purposes of this article, we will be using the
term "med-arb" to refer to any ADR procedure combining mediation and arbitration
in sequence.
Advantages of Med-Arb
An increasing number of parties have concluded that
combining mediation and arbitration in sequence can be a fair, efficient, and
cost-effective process for resolving disputes.' Combined med-arb proceedings can
offer parties important dispute-resolution advantages, such as: The parties can
obtain a certain resolution of their dispute within a reasonable time.
The resolution can often be achieved at a reduced
cost and with improved overall efficiency.
A med-arb proceeding may appeal to clients because it
offers them more control over the process than they would have in "pure"
arbitration, by giving the parties the opportunity to pursue a consensual
settlement during the mediation phase, but also promises parties greater
finality than they would have in a "pure" mediation, by assuring them a certain
end to the dispute, if not by agreement then by binding arbitration.
These factors may make med-arb an especially
attractive ADR option in smaller cases, particularly when the combatants are
commercial or contracting parties who may view small disputes as irritants in a
larger relationship-for example, manufacturer-distributor, joint venture,
marketing, and similar commercial relationships-that both sides wish to preserve
and protect. Prior agreement on a med-arb approach to resolving smaller disputes
allows the parties to attempt a consensual resolution first, but also ensures
that the dispute can be "done in a day" if the mediation phase of the process is
unsuccessful. Parties may view the medarb ADR procedure as a diplomatic and
cost-effective method of resolving small disputes, particularly if they regard
protecting a valuable commercial relationship with each other as more important
than the stakes involved in such disputes!
Med-arb also offers other advantages, however, that
may be important to parties embroiled in larger disputes:
A combined proceeding may enable the parties to
narrow their dispute substantially during the mediation phase, often leaving
only a few remaining issues to be arbitrated. By agreeing to arbitrate the
remaining issues, the parties can preserve the fruits of their partial
agreements and prevent the mediation from failing. In particular cases, it may
be important and advantageous to the parties for arbitration of unresolved
issues to take place as soon as possible following the narrowing of the dispute
accomplished during the mediation phase.
Med-arb may also enhance the parties' ability to
select a form of arbitration that maximizes their control over that phase of the
process as well-for example, by limiting the arbitrator's discretion to a choice
between the parties' last best offers, or within the range bounded by those
offers.
As understanding and confidence in the neutral grow
when partial agreements are reached during a mediation, parties may prefer that
the same neutral who helped them reach their partial agreements should decide
the remaining issues. Tf the mediator has earned their confidence, the parties
may prefer to have the mediator decide the remaining issues over any other
neutral.
These are not trivial advantages. In appropriate
cases, the virtues of a med-arb dispute resolution process may be powerfully
appealing to the parties. Med-arb can be a pragmatic, no-nonsense and efficient
approach to resolving disputes. For these reasons, parties may well consider
"med-arb" superior both to traditional litigation-and also to other ADR
procedures.
Disadvantages of Med--Arb
Combined med-arb proceedings may also pose
significant disadvantages for participating parties, and important ethical
issues for the neutral, however, when the mediation and the arbitration are to
be conducted by the same person.' The American Arbitration Association, for
example, recommends that the same neutral not serve as both mediator and
arbitrator in the same proceedings. The disadvantages of using only one neutral
include the following:
The parties' willingness to share information
candidly with the neutral during the mediation phase of the proceeding may be
inhibited. Will parties discuss issues candidly in private sessions with a
mediator if they know that, failing agreement, the mediator will later become
their arbitrator, Will trust and open communication between the parties and the
mediator be compromised? Since candid and honest private communications with the
mediator are generally considered essential to successful mediation, this
disadvantage of med-arb may be critically important in particular cases.
The mediator's conduct of the mediation phase may be
inhibited. If a mediator knows that he or she must become an arbitrator to
resolve the parties' dispute if there is no agreement, will the mediator be
deterred from conducting the mediation phase with his or her usual Vigor?7
Events may occur during the mediation phase that
could cause the parties later to question the fairness of the arbitration part
of the process. For example, if the mediator employs an evaluative "settlement
judge" approach during the mediation, will the parties believe that subsequent
arbitration by the same person is fair?
Information disclosed during the mediation phase of
the process might tempt the neutral into questionable conduct during the
arbitration phase. For example, could a mediator-turned-arbitrator properly
conduct questioning during the arbitration phase of a med-arb proceeding
directed at information disclosed during earlier private sessions of the
mediation?
Confidential information obtained during the
mediation phase may be used by, or influence, the neutral during Iiis or her
deliberations as the arbitrator. Most rules governing the conduct of mediations
impose stringent limitations on the information that may be shared subsequently
with an. arbitrator or court concerning what went on at the mediation
(concessions made, offers, counter-offers, etc.).8 Conversely, most ethical
rules governing arbitrations expressly forbid unilateral ex parte contacts with
a neutral arbitrator by fewer than all of the parties to the case.9 In a medarb
proceeding, unless a "no caucus" approach is used, the neutral inevitably will
hold private caucuses with each party during which confidential information will
be communicated no the neutral outside the presence of the other parties. Why is
it permissible for such information to be possessed by a med-arb arbitrator but
not by any other arbitrator or by a court?
These are significant disadvantages that parties, and
neutrals, should consider carefully before entering into a medarb proceeding.
Indeed, these issues are so serious that some neutrals take the position that
they would never agree to arbitrate a case in which they have previously served
as the mediator.
Assessment
In our view, the disadvantages and risks of med-arb
are not insuperable in all cases and do not warrant an across-the-board
rejection of med-arb as a useful ADR tool-especially where the disputants are
commercial parties who choose med-arb with their eyes open to its risks and
possible shortcomings. Sophisticated commercial parties may well conclude that,
in appropriate cases, the real advantages of med-arb outweigh its equally real
disadvantages. As discussed above, commercial parties linked to one another in a
valuable long-term business relationship might rationally decide that med-arb is
an appealing approach to resolving the periodic smaller disputes that inevitably
arise in the course of such a relationship. Indeed, even parties who are not
linked to one another in such a continuing relationship might well conclude that
med-arb is an appealing procedure for resolving smaller disputes. In addition,
sophisticated commercial parties, and their counsel, might decide that a medarb
approach is an appropriate ADR tool to use in a particular case where the
parties desire to retain as much control as possible over the dispute resolution
process in a dispute they cannot entirely settle on their own.
In our view, when consenting adults make such
judgments with an informed understanding of the advantages and possible
disadvantages of the medarb process, they should be free to contract for the
dispute resolution process that seems best to them. Recent decisions construing
the Federal Arbitration Act and comparable state statutes apparently make such
agreements fully enforceable."'
Obtaining Informed Consent
Both fairness and eventual client satisfaction with
the med-arb process require, however, that med-arb agreements be made based on
the genuine informed consent of the parties. To this end, it is desirable that
the parties, their counsel, and particularly the neutrals all take steps to
ensure that parties do not embark upon med-arb proceedings without a clear
understanding of its advantages and possible disadvantages, and without a clear
written agreement in place describing the process to be employed. Once that has
been accomplished, the neutrals must strictly adhere to the process agreed upon
by the parties.
We recommend these specific steps:
1. Counsel for parties interested in med-arb should
counsel their clients concerning both the advantages and the disadvantages and
risks of the procedure.
2. Parties who wish to employ the med-arb procedure
following such counseling should enter into a written pre-dispute agreement
negotiated and agreed to by the parties providing for possible use of med-arb
proceedings before any disputes have arisen. (A suggested pre-dispute ADR clause
appears below.)
3. The pre-dispute ADR clause should provide that
med-arb cannot be required unless both parties still agree to use the procedure
after the dispute has arisen. In short, the clause should provide for agreed
submission of a known dispute to med-arb rather than simply require a med-arb
process on a blanket basis in a pre-dispute agreement. By making this
recommendation we do not mean to suggest that limiting use of med-arb to
post-dispute submission agreements is necessary in order to ensure that
agreements to use med-arb will be enforceable under the FAA and analogous state
statutes. Rather, this step is recommended as good practice intended to enhance
the likelihood that the procedure will be employed only in cases where the
parties clearly understand and agree that the procedure is appropriate for the
particular dispute at issue.
4. After the dispute has arisen, and if the parties
still agree that med-arb is their preferred ADR procedure, they should execute a
detailed written protocol specifying how the process is to be conducted. (A
suggested protocol appears below.)
5. When invited to serve as a med-arb neutral, the
neutral or neutrals should take reasonable steps to ascertain that the parties
understand the possible advantages and disadvantages of the procedure. This
could be accomplished, for example, by requiring the parties to execute a
retention agreement that plainly summarizes the possible risks and disadvantages
of the med-arb procedure. If the parties agree in writing to retain the neutral
or neutrals following such disclosures, there can be little doubt of their
informed consent to employ the med-arb process. Indeed, if the parties have
followed the other recommendations to ensure informed consent to med-arb
execution of such a retention agreement, it would be the third time the parties
would have agreed in writing to employ the procedure before it began-once in the
pre-dispute ADR clause, once in the written protocol to submit a known dispute
to med-arb and, finally, in executing the neutral's retention agreement. Parties
who are this clear about the procedure they wish to employ to resolve their
dispute should be free to commit to the med-arb procedure.
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| [Photograph] |
| Parties interested in the med-arb procedure should be
made aware of both the advantages and the risks involved.
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6. Once the process begins, the neutral or neutrals
must strictly adhere to the written protocol negotiated and agreed to by the
parties.
Ethical Issues for Neutrals
Although the subject of ethical rules for neutrals is
beyond the scope of this article, it should be apparent from our discussion of
med-arb that we do not favor adoption of codes of ethics for mediators and
arbitrators containing provisions-e.g., confidentiality provisions-that would
preclude a neutral from serving as a medarb neutral where the parties have
carefully and repeatedly documented their informed consent to use the procedure
as recommended above." In our view, the appropriate ethical focus for a neutral
asked to serve in such a role is twofold: to confirm that the parties' consent
is informed with an understanding of the possible risks and disadvantages of the
procedure, and to conduct the proceeding in a manner that faithfully adheres to
the process agreed upon by the parties.
Drafting Recommendations
We recommend that parties wishing to employ a med-arb
dispute resolution procedure expressly provide for this possibility, but do not
mandate it as a required procedure, in a pre-dispute ADR clause. The bracketed
language in the following paragraph illustrates a "starting point" draft of such
a provision. (Please note that the following provision is not intended as a "one
size fits all" or "cookie-cutter" provision, and should not be used or relied
upon by parties, or counsel, as a substitute for case-by-case critical analysis
of the many particular issues parties should consider when drafting ADR clauses
in particular contractual negotiations.)
Any controversy or claim arising out of or relating
to this Agreement will be resolved by the following process: The parties shall
negotiate in good faith for a period of fifteen (15) days following written
notice ofa dispute. If the dispute is not resolved within the fifteen (15) day
period, either party may demand arbitration by filing a Demand for Arbitration
with the American Arbitration Association. The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of the American Arbitration
Association; provided, however, that not less than sixty (60) days before the
arbitration hearing date, the parties shall participate, in good faith, in a
mediation conducted pursuant to the Commercial Mediation Rules of the American
Arbitration Association. [If the parties so agree before the mediation begins,
the mediation and the arbitration may be conducted in immediate sequence by the
same neutral pursuant to a written protocol agreed to in advance by the parties
and the neutral. In such a proceeding, the Commercial Arbitration Rules and
Commercial Mediation Rules of the AAA shall be subject to and applied in
accordance with the parties' agreement to employ such procedure, and nothing in
such Rules shall prevent the neutral from providing the services agreed upon by
the parties.] 12 judgment on the arbitration award may be entered by any court
having jurisdiction thereof.
Once a known dispute has arisen that the parties,
based on appropriate counseling as discussed above, have agreed to submit to
med-arb for resolution, we recommend that they enter into a detailed
Mediation-Arbitration Protocol describing the specific process to be followed.
There will be many specific issues and matters for the parties to negotiate and
decide in each particular case, but the following language illustrates a general
type of protocol agreement for use in cases involving a single neutral. Again,
this should not be used or relied upon as a substitute for case-bycase analysis
of particular issues parties should consider when drafting ADR clauses.
The parties hereby appoint to serve as the neutral to
conduct a mediation-- arbitration to resolve the dispute between them.
On or before - [e.g., 20 days before the
mediation-arbitration], each party shall submit to the neutral and serve on the
other side, a memorandum outlining the parties' position as to liability and
damages, together with declarations as to any contested facts. On or before
[e.g., 5 days before the mediation-- arbitration], each party may submit to the
neutral and serve on the other side, a reply memorandum, together with rebuttal
declarations. In addition, on or before [e.g., one day before the
mediation-arbitration], each party may submit to the neutral only a confidential
letter describing the settlement discussions to date and any impediments to
settlement.
On [the mediation-arbitration
date], the neutral, acting as mediator, shall conduct
a mediation for up to five (5) hours or until all parties and the mediator agree
that an impasse has been reached, whichever is earlier. When the mediation has
ended, if no settlement has been agreed upon, the same neutral, acting as
arbitrator, shall conduct an arbitration hearing for up to three (3) hours,
receiving such additional evidence as the neutral and the parties deem
appropriate. At the conclusion of the arbitration hearing, each party shall
submit to the neutral and to the other side its final and best offer to resolve
the dispute, together with information from each party to justify the
reasonableness of each party's final and best offer. The arbitration shall then
be closed.
On or before [e.g., three business days after the
mediation-arbitration], the neutral, acting as arbitrator, shall render a final
and binding award, which shall be in an amount and on terms within the range
established by the parties' final and best offers.
In real life, parties and counsel drafting such a
protocol may wish to depart from the above illustration to consider a number of
additional issues. These may include the qualifications of and choice of the
neutral; discovery and other pre-meeting procedural issues; confidentiality
provisions; provisions addressing the scope of the neutral's authority if the
dispute does end up going to arbitration for final resolution (e.g., last final
offer or so-called "baseball arbitration"); and, perhaps, another express waiver
(see the suggested pre-dispute ADR clause that appears above) of otherwise
applicable procedural rules to the extent that these may be inconsistent with
the parties' agreement.
Conclusion
Combining mediation and arbitration in sequence can
be a fair, efficient and cost-effective process for resolving disputes. Hybrid
med-arb proceedings that seek to combine the virtues of mediation and
arbitration can offer real advantages to clients, including reduced costs,
certain resolution of the dispute within a reasonable time, and enhanced client
control over the dispute resolution process. Such combined med-arb proceedings
may also pose significant disadvantages for participating clients, and important
ethical issues for the neutral, however, when the proceeding calls for the
mediation and the arbitration to be conducted by the same person. In particular
types of commercial relationships, and in particular cases, the advantages of
med-arb may outweigh its disadvantages. If parties give their informed consent
to using med-arb to resolve particular disputes, such agreements should be
enforced. The best way to assure that such consent is informed involves active
client counseling, by both counsel and again by the designated neutral or
neutrals combined with written agreements by the parties, in their predispute
ADR clause, and in a written post-dispute protocol, specifying their commitment
to employ the specific med-arb procedure agreed upon by the parties for their
particular dispute.
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| A Perfect Fit: Parties involved in commercial
relationships may find med-arb to be the most costeffective, diplomatic,
and suitable means of dispute resolution. |
| [Footnote] |
| 1 See, for example, In re The Prudential Insurance
Company of America Sales Practices Litigation, 962 F.Supp. 450, 488-93
(D.Nj. 1997), affd in part, vacated and remanded in part, 148 F.3d 283,
289, 295-96 (3rd Cir. 1998). ("The alternative dispute resolution process
is sensible and provides adequate safeguards for individual treatment of
claims..... ) The District Court's fairness opinion noted that the
Prudential settlement's individualized ADR program had evolved from
previous settlements approved by the New York courts in two earlier cases,
both of which had provided for analogous ADR programs that had received
the praise of "[c]ourts, academic and industry experts, and various
independent organizations." Id., 962 F.Supp. at 535. |
| 2 David B. Lipsky and Ronald L. Seeber, "The
Appropriate Resolution of Corporate Disputes," |
| [Footnote] |
| Cornell/PERC Institute on Conflict Resolution (1998),
at 9 and Table 2. See also at 12 and Table 7 (more than 40% of the
respondents in each industry group surveyed, except non-durable
manufacturing, had some experience with "med-arb"). |
| Id. at 12 and Table 8. |
| See, for example, Richard P. Flake, "Nuances of
Med/Arb-A Neutral's Perspective," ADR Currents, Vol. 3, No. 2, 8 (1998).
|
| [Footnote] |
| ' Id. ("Prior experience as a general counsel has
convinced me that while the ultimate outcome of a particular ADR process
is important to users, almost equal in importance is the ability to bring
finality to the situation in a relatively inexpensive and time-efficient
manner.") |
| ' See, for example, D. Van Duch, "Do 'Hybrids'
Compromise ADR Benefits?," National Law ournal (March 2, 1998). |
| 7 Supra note 4, at 10 ("After acting as the neutral in
numerous med-arb proceedings, I believe it is not appropriate for the
neutral to opine on particular issues during the mediation, and as a
result I have become less probative and opinionated during the mediation
phase of med-arb.") |
| I See, for example, the AAA's Commercial Mediation
Rules, as amended and effective on January 1, 1999, M-12 (confidential
information disclosed to a mediator shall not be disclosed by the mediator
or parties "in any arbi |
| [Footnote] |
| tral, judicial or other proceeding......) |
| ' See, for example, the AAA's Commerical Arbitration
Rules, as amended and effective on January 1, 1999, R-20(a)("No party and
no one acting on behalf of any party shall communicate unilaterally
concerning the arbitration with a neutral arbitrator or a candidate for
neutral arbitrator.") |
| " The Federal Arbitration Act (FAA) provides:
|
| [Footnote] |
| A written provision in... a contract evidencing a
transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction, or the refusal to
perform the whole or any part thereof, or an agreement in writing to
submit to arbitration an existing controversy arising out of such a
contract, transaction, or refusal, shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract. |
| 9 U.S.C. 2. The FAA expresses Congress's intent "to
mandate enforcement of all covered arbitration agreements." Moses H. Cone
Memorial Hosp. v. Mercury Constr. Co., 460 U.S. 1, 24, 26 n.34 (1981).
Most state arbitration statutes have comparable provisions. See, RCW
7.04.010. Regardless of possible variations in state statutes, however,
both federal and state courts are required to enforce arbitration
agreements within the scope of the Federal |
| [Footnote] |
| Act. Soutbland Corp. v. Keating, 465 U.S. 1, 15
(1984). Since Congress legislated to the limit of its constitutional
authority in enacting the Federal Act, Allied-Bruce Terminix Cos., Inc. V.
Dobson, 513 U.S. 265, 273-75 (1995), few arbitration agreements will be
outside the enforceability provision of the federal statute. It appears to
us that provisions such as 2 of the FAA would mandate enforcement of a
written agreement by parties requiring arbitration of their dispute, and
requiring the arbitration to be conducted pursuant to a @Med-arb" process.
|
| [Footnote] |
| " Indeed, since both federal and most state statutes
apparently confirm the enforceability of such agreements, see supra, note
10, we believe that attempts to derogate from or constrain such agreements
are at the least unenforceable, and at the worst confusing and pernicious.
We believe, for example, that the AAA mediation and arbitration rules
referenced above would be superseded by a clear agreement of the parties
to proceed pursuant to a detailed "med-arb" protocol. (Confusion would
certainly arise, however, if the parties' agreement also contained a
blanket incorporation of "AAA Rules.") |
| 11 This bracketed language would be used in cases
where the parties desire to have the same neutral serve as both mediator
and arbitrator. As previously discussed, this is a practice the AAA does
not recommend. |
| [Author Affiliation] |
| Thomas J. Brewer is a partner in the Seattle and
Alaska firm of Wickwire Greene Crosby Brewer & Seward. He has 25
years' experience representing clients in judicial, agency, and ADR
proceedings as a commercial litigator, and has also maintained an active
practice as a neutral arbitrator and mediator Of commercial and other
cases for the past 15 years. He is a member of the AAAs National
Commercial Panel, and is also a member of the AAA's Northwest Region Large
Complex Case and Mediation Panels. |
| [Author Affiliation] |
| Lawrence R. Mills is the managing principal of the
Seattle law fin Mills Meyers Swartling. For over 2 5 years, be has
practiced business law and commercial litigation. During the past 15
years, he has devoted a significant portion of his practice to serving as
a neutral dispute resolver in a wide variety of contexts. He is an AAA
arbitrator and a member of the AAA Mediation Panel in the Northwest
Region. He has served as a neutral in "med-arb " proceedings on numerous
occasions. |
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