Over the years, “Alternative Dispute Resolution” (ADR) has become more and more prevelant in both contract drafting as well as litigation. Far from being an “alternative,” most disputes at some point will involve some degree of ADR, whether required by contract, by the courts, or driven by the costs of litigation. Despite the name “alternative,” ADR is very much a key component of the litigation battlefield, and the conduct and outcome of ADR can shape the course of a dispute that ultimately winds up in court.
Even sophisticated businesspeople often fail to fully understand the ADR process and how it relates to litigation. This blog post is intended to explain ADR by outlining the three prevalent forums for ADR: mediation, arbitration, and appraisal, and how they relate to disputes.
Though often thought of as an informal process undertaken by parties to a dispute in lieu of litigating, mediation has increasingly become a formalized process that plays a key role even in cases undergoing active litigation. Increasingly, courts in many states and particularly in the federal system, at both the trial court and appellate levels, require the parties to participate in mediation as part of the litigation process, including potentially engaging through a court-appointed mediation department. Additionally, many commercial contracts which contain mandatory arbitration clauses may require the parties to attempt mediation before commencing arbitration. However, even where required by court orders or rules, or by the terms of a contract, mediation offers the parties the advantage of maintaining the most control over the process and its structure.
In mediation, the parties agree to the selection and appointment of a neutral mediator, and most often split the mediator’s fee between them. Often, mediators in many jurisdictions are retired judges or experienced litigation attorneys. In disputes involving complex or specialized areas of law or business, the parties may select a mediator who is known to have particular experience and expertise in the area, and who can bring an informed perspective to the dispute and the issues involved. While mediation is strictly confidential, and what is revealed to the mediator cannot be disclosed or used in court, a well-chosen mediator will be able to give a realistic and informed perspective, where necessary, as to how the courts or other relevant forums are likely to view and address particular issues and claims. Additionally, the involvement of a respected mediator is often looked upon favorably by courts.
The ideal goal of a mediation will usually be a settlement agreed to between the parties, though even where a complete settlement is not reached, mediation often provides an early opportunity, sometimes the first opportunity, for the parties to set forth their positions as well as hear out the positions of the opposing side. Mediation also may allow resolution of particular issues while reserving other issues for further litigation or may allow the parties to get an idea of the potential value of their dispute in order to determine whether the case is worth further litigation and expense. Even where a settlement is not immediately reached, mediation may be the first step in beginning productive settlement negotiations, and a professional mediator will often offer their assistance in follow up sessions, calls, or other communications between the parties, which might allow a later breakthrough in negotiations.
In contrast to mediation, which is a less-formal, party-driven process in which the parties are not required to reach a resolution, arbitration is a more formal process in which the end result will normally be a binding decision. The arbitrator has the power to hear witness testimony under oath, examine evidence, issue orders and rulings while the proceedings are ongoing, and make final factual and legal determinations, typically called arbitration awards, which are binding on the parties, and which can be confirmed by a court and enforced as a judgment.
Most often, arbitration is provided for by the terms of a contract, and many form contracts used in consumer and commercial transactions contain mandatory arbitration clauses (although there has been a recent trend in several industries towards removing arbitration clauses). Several states, including Washington and Oregon, also have laws providing for mandatory arbitration of disputes originally filed as cases in their court systems that fall under a certain monetary value. Typically, in a court-mandated arbitration system, either party can elect to remove the case to mandatory arbitration.
At the conclusion of court mandatory arbitration, either party has the right to appeal the outcome for reconsideration de novo as a regular court case, though the appealing party is liable for the other side’s litigation costs if they fail to achieve a better outcome than was reached in arbitration. In contrast to court-mandated arbitration however, a contractually mandated arbitration award may be very difficult to challenge, unless there is alleged irregularity or misconduct in the arbitration proceedings.
Most arbitrations follow rules established or inspired by the American Arbitration Association, which has multiple published sets of rules for arbitration of disputes in various subject-matter areas (e.g., commercial, consumer, construction, employment, and international disputes). Typically, each side pays an arbitration fee at the outset of the process. The parties may mutually agree to have the case heard by a particular arbitrator (particularly if the dispute involves unique or complex issues calling for an arbitrator with subject-matter experience). Otherwise, most often, a list of five to ten potential arbitrators, known as a “strike list,” is provided to the parties, who each have a limited number of challenges (strikes) to the names on the list.
An arbitrator is then chosen at random from the remaining names on the list. Arbitrators typically have broad discretion to control the proceedings, with a stated goal of achieving a “fair, efficient, and economical resolution” of the dispute, including making rules for disclosures and discovery of information, setting hearings, and considering evidence (usually without being bound by typical rules of evidence as would apply in court). Arbitrations nonetheless usually otherwise proceed on a similar course to court litigation, with a filing of complaints, answers, and counterclaims, an exchange of information and/or authorized discovery, dispositive motions (including summary judgment), and one or more hearings before the arbitrator at which witnesses may be examined and evidence may be exhibited.
One variation on both mediation and arbitration is sometimes referred to as mediation-arbitration, or “med-arb.” In this case, the parties agree to mediation and, if the dispute is not resolved, agree that the mediator may then serve as an arbitrator over the dispute. The combination of these roles allows the parties to retain the advantages of each type of process: the control over the process that mediation provides, with the certainty and finality of arbitration.
The third common form of ADR, though the one least encountered and least well-understood, is appraisal. Appraisal is used when the dispute involves the monetary amount of potential recoverable claims or damages, rather than the establishment of liability, though an appraisal could be conducted to determine potential damages, with liability being reserved for determination by other proceedings (i.e., litigation). As with arbitration, appraisal is typically provided for by contract, is a binding process, may be invoked by either party, and is most commonly encountered in property insurance claims.
Appraisal typically proceeds by each side selecting and hiring a professional appraiser (who may be retained on a contingency basis in exchange for a percentage of the ultimate appraisal award), who (as with mediators and arbitrators) preferably will have relevant subject-matter experience in the property or claim to be appraised. A third appraiser, known as an umpire, is selected either by agreement of each side’s appraisers or by court order (if the dispute has reached the stage of litigation). The appraisers will evaluate the claim(s), loss, or dispute, conduct inspections, obtain quotes, write estimates, engage third-party experts where necessary, and will each present their respective appraisals of the claim or portions of the claim. Agreement of any two appraisers (either each side’s retained appraisers or one appraiser plus the umpire) is sufficient to enter a binding appraisal award as to the claim.
When facing a dispute in which ADR may play a role, it’s important to consult experienced litigation counsel who can guide you through the process in a cost-effective way that preserves the goal of ADR, namely, to resolve disputes efficiently and economically, while still protecting your interests and options through the process.