Mediation: An Effective Process to Resolve Complex Commercial Disputes

With the continuing rise in litigation costs coupled with the length of time it takes to fully litigate most complex commercial disputes, mediation provides an effective alternative technique for dispute resolution. Whatever the issue involved in a particular commercial dispute, mediation is an Alternative Dispute Resolution ("ADR") technique which should not be overlooked. While many types of ADR (e.g., mediation, arbitration or mini-trials) are available to assist the parties in resolving disputes, mediation offers the most flexibility for the resolution of these disputes.

What is Mediation

In the most general terms, mediation is a voluntary and confidential process through which a third-party neutral or intermediary, usually selected by the parties, or a third-party provider, facilitates a settlement between or among parties to a dispute. Mediation is a form of ADR that is confidential and flexible allowing the parties to have control over the resolution of their dispute. The CPR Institute for Dispute Resolution, which encourages parties to adopt suggested protocols to suit the unique characteristics of their dispute, has established proposed ground rules for mediation that set forth a voluntary format that can be used as a framework for mediating insurance coverage disputes. See Mediation, CPR Model ADR Procedures and Practices ("MAAP") Series (1998). Some of the key ground rules are as follows:

  • the mediation process is non-binding;
  • the process is entirely voluntary and any "party may withdraw at any time after attending the first session, and before execution of a written settlement agreement";
  • "the mediator shall be neutral and impartial";

    "the mediator shall control the procedural aspects of the mediation";

  • "each party will be represented at each mediation conference by a business executive authorized to negotiate a resolution of the dispute, unless excused by the mediator";
  • "the mediator will not transmit information received in confidence from any party to any other party or any third party unless authorized to do so by the party transmitting the information";
  • the mediator "will be disqualified as a witness, consultant or expert in any pending or future investigation, action or proceeding relating to the subject matter of the mediation."

For mediation to be successful, the parties must be ready, willing and able to resolve their differences outside the courtroom. Mediation can save time and money and allows the parties to forego costly and protracted litigation and engage in mediation in an effort to resolve or narrow their differences.

The Voluntary Nature of Mediation

While mediation is generally voluntary, certain courts, like the U.S. District Court for the Eastern District of Pennsylvania in Local Rule 53.2.1, provide for mandatory court-annexed mediation in certain circumstances. Even courts with mandatory protocols frequently will permit the parties to craft the format of the mediation and choose their own mediator. The intent of this article is to focus on voluntary party crafted and directed mediation.

In voluntary mediation, it is the parties to a dispute who decide that they do not wish to continue protracted litigation and risk uncertain results in exchange for a resolution process that they control. Having a commitment to the mediation process is essential to the success of the process. The voluntariness of this form of ADR similarly provides the parties with the option of withdrawing at any time if resolution appears unlikely because the parties are at an impasse. The prospects for resolution will keep the parties engaged in the process.

With the parties in control of the process, they select the mediator, decide on the length of time to mediate the issues and decide the issues to be mediated, issues that may go beyond the litigation process to encompass the terms of an ongoing or new business relationship. This control assists the parties in resolving disputes in ways that may not be possible at trial.

The Confidentiality of the Mediation Process

One of the major advantages of mediation is confidentiality. Confidentiality permits the parties to be candid and forthright with the mediator and with each other without the apprehension that whatever is being said may be used against them at a trial in that case or some related case. The mediation process itself is confidential and considered communication in the course of settlement negotiation subject to the protections of Federal Rules of Evidence 408 and the recently enacted Pennsylvania Rules of Evidence 408. Additionally, some state statutes specifically protect the confidentiality of the mediation process. For example, 42 Pa.C.S.A. § 5949 provides that, except in limited situations (e.g., a threat of bodily injury during mediation may be used in a subsequent criminal matter), "all mediation communications and mediation documents are privileged." It is important to note, however, that particular documents produced during the mediation process may not be protected from later discovery merely because they were first produced during the mediation process. The Pennsylvania statute provides: "[a]ny document which otherwise exists, or existed independent of the mediation and is not otherwise covered by this section, is not subject to this privilege." Without assurances of confidentiality, however, the mediation process cannot work.

There is a second level of confidentiality that the mediation process offers. During the mediation, the mediator generally will conduct private caucuses with each of the parties. For these caucuses to be most effective, the parties must feel free to disclose information that they do not want their adversaries to hear. Accordingly, mediation agreements generally provide that a mediator is not free to disclose confidential information to another party without the express authority of the party disclosing the information. With this added level of confidentiality, and the use of the caucus technique (private meetings between the mediator and one of the parties), the parties can be forthright with the mediator, assisting him to understand each party's concerns, strengths and weaknesses which ultimately may assist in resolving the dispute.

Selecting the Proper Mediator

Once the decision has been reached to mediate a dispute, it is important to select the proper mediator. The parties must decide whether they prefer a mediator with expertise in the subject matter of the dispute, expertise in the mediation process or someone with both subject matter knowledge and mediation experience and expertise. The style of the mediator is also important to consider. In this vein, the mediator can be either a person who offers the parties his or her evaluation of the merits of their position (an "evaluator") or one who acts solely or primarily as a facilitator in bringing the parties together to work out their dispute (a "facilitator"). L. Riskin, Mediator Orientations, Strategies and Techniques, Alternatives, Vol. 12, No. 9 (Sept. 1994). The nature of the dispute, the stage of settlement negotiations and the relationship of the parties may be some issues to consider in making a determination as to which type of mediation skill (subject matter expertise vs. process expertise) and which style (evaluative or facilitative) will best suit the particular dispute. A mediator with some general experience with the subject matter with a track record of successfully resolving similar disputes will frequently be the best choice to resolve these complex disputes.

As evaluator, the mediator may predict rulings that the court will make with regard to certain issues and give an opinion as to the strengths and weaknesses of each party's positions. Id. To the extent the parties desire to utilize an evaluative mediator, it may be to their benefit to select one with some experience in resolving the particular type of dispute involved. This will lend credibility to the mediator's views in the eyes of the participants.

In contrast to the evaluator, the mediator as facilitator does not make any outcome predictions or share his or her opinions about the merits of each party's case. Rather, he or she uses methods to assist the parties in understanding their own positions as well as the positions of their adversaries. One method by which this is achieved is through questions posed by the mediator. The questions are likely designed to elicit the parties' own evaluations of the issues presented in the hopes that the parties will come to a resolution on their own. Id. For the mediator as facilitator, it is more important for him or her to understand the mediation process and the dynamics of the relationship of the parties rather than be an expert in the subject matter involved.

Once the decision about the appropriate type of mediator is made, there are multiple third-party providers that can provide mediation services and/or can assist in selecting a mediator or developing a mediation protocol. The organizations offering ADR services differ in their strategies and level of participation. For example, the CPR Institute for Dispute Resolution is a facilitative organization that develops procedures and protocols for ADR processes but which encourages the use of self-administered mediation in which the parties control the process, select the mediator from a list provided by CPR or otherwise and choose the location of the mediation without unrequested intervention from CPR. More information about CPR and self-administered mediation can be found on its web site at www.cpradr.org. Other organizations, like the American Arbitration Association ("AAA"), conduct administered mediation and arbitration. In this administered format, AAA controls more of the process, including formulating the procedure that will be followed for a particular dispute and selecting the forum for the mediation. More information may be obtained about AAA by contacting its web site located at www.adr.org.

Some of the Advantages of Mediating Commercial Disputes

While mediation may not be appropriate for disputes where the primary goal of one or more of the parties is to seek a definitive ruling on the law of a particular issue or issues to guide their actions in the future, in many cases the issues are far too complex for one definitive ruling to resolve all disputes that complex cases raise. Through mediation, the parties can assess their respective litigation risks and costs and arrive at a voluntary resolution. Mediation can streamline the case by narrowing the issues in dispute and can offer the parties creative settlement alternatives not available by way of a trial.

Disputes can arise between parties that have an existing relationship. Mediation may preserve that relationship which could otherwise be destroyed in a traditional litigation forum. Unlike at trial where there is a winner and a loser, mediation results in a compromise in which both parties have a stake in the result they helped achieve. Resolving a dispute in that way can help to reduce some animosity and preserve an existing business relationship.

Another advantage of mediation over litigation is it empowers the parties to fashion creative settlements or resolve certain issues while others remain disputed. For example, in complex insurance coverage disputes, the carrier and policyholder may be able to devise some mechanism to resolve the underlying dispute while certain coverage issues, like ultimate allocation, remain unresolved. In such a situation, the carriers may agree to fund a settlement of the underlying action while preserving coverage defenses with a full right of recoupment from other carriers or the policyholder depending upon the existence or non-existence of coverage. Accordingly, a carrier can have an input in valuing the underlying dispute and assist the policyholder in resolving that dispute while simultaneously evaluating its own exposure. Where some underlying disputes have been resolved but others remain or will be forthcoming, as in long-term exposure or environmental cases, a carrier may be able to pay a lump sum for past claims while having a coverage in place agreement in which the carrier will pay a certain percentage of indemnity related to future claims up to a specified cap. Additionally, where not all carriers consent to mediation, the parties may be able to identify the critical carriers that are necessary to resolve a portion of the coverage dispute and agree on a mechanism for dealing with any monetary shortfall left by the absent carriers. These are just examples of the many ways in which mediation can be designed by the parties involved to fit the unique issues that may be presented.

Before initiating (or continuing existing) litigation, parties should consider ADR techniques in general and mediation specifically to help them resolve or narrow the areas of their dispute. With adequate assurances of confidentiality and the ability to achieve a resolution that all participants had a part in creating, mediation provides an effective mechanism by which parties can avoid the rising costs associated with protracted complex litigation.

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