Vol. 78, No. 3, March 2005

Deciding When to Mediate Business Disputes

by John R. Dawson

hether a business dispute can or should be resolved through mediation depends on several factors.

This article discusses factors to consider when trying to find where on the "mediate - don't mediate" continuum a particular dispute lies. The presumption is that the dispute lies toward the "mediate" end of the spectrum if the structured negotiation of mediation is more likely than not to produce a resolution that is:

• successful (meaning to the satisfaction of each party);
• more acceptable, or at least less unacceptable, than the likely result of arbitration or litigation;
• cost efficient; and
• consistent with your client's objectives.

If mediation is not likely to satisfy these requirements, then it is a waste of time for you, your client, and the mediator.

There are several vantage points from which to assess the utility of mediation in a particular dispute: from the standpoint of the parties and the nature of their relationship; from the standpoint of the interests of concern to each of the parties; and from the standpoint of the issues involved in the dispute and the nature and range of outcomes desired, or feared, by the parties.

The Parties and Their Relationship

Prospective Relationship. Mediation clearly is the preferred method of dispute resolution if the parties have, and particularly if they hope to continue, an ongoing business relationship. Common situations in which this factor predominates are disputes between a manufacturer and a dealer or a franchisor and a franchisee, for example. Not only does mediation diminish the hostility inevitable in any adversarial process, but also the parties' control over, and the diversity of, negotiated resolutions available through mediation fosters the parties' ongoing relationship.

Participation of Decisionmakers. There is no point in conducting a mediation if the ultimate decisionmakers do not participate personally. The absence of the person in charge invariably is viewed as suspect by the opposing party. That absence also eliminates the possibility of a negotiation in which both sides safely may rely on the "finality" and the "authority" of whatever the other side says. Such a negotiation is doomed to fail - always. This means that a decision to propose mediation should be accompanied by counsels' insistence that previously uninvolved, "distant" senior manager(s) of both parties participate.

Previous Involvement of Decisionmakers. Mediations tend to be more successful if the impasse that prompts the process has not involved the senior decisionmakers on both sides. If the senior managers are themselves responsible for the dispute or its lack of resolution, the chances of having a successful mediation are reduced. Likewise, if they already have staked out positions from which it will be difficult for them personally to move, the chances of having a successful mediation are reduced. In contrast, if the dispute arose or remains unresolved principally because of the actions of mid-level managers, and if senior managers approach the mediation unfettered by previous commitments or positions, the chances of a successful mediation are improved.

Unrealistic Assessment of Positions. Frequently the case most likely to be resolved through mediation is the one in which at least one of the parties has an unrealistic appraisal of the strength or value of its side of the case. Whether the cause of this false optimism is the party itself or its counsel, it can be quite beneficial to have each party consider the strength of the other's position in the informal setting of a mediated negotiation. Usually the expression of that position by the party itself, rather than by counsel, demonstrates the depth of conviction of the "other side" and can interject into the negotiation process a more realistic self-assessment. If it does, settlement becomes more achievable.

Emotionally Driven Disputes. Every lawyer has represented clients in disputes that objectively should be settled but that simply cannot be because one or both of the parties are emotionally unable to bring themselves to settle. These cases are particularly susceptible to successful mediation. They typically involve personal wrongdoing or tortious conduct causing emotional harm, invasion of privacy, infliction of emotional distress, purposeful interference with contract, or unfair competition, for example. The erosion of an emotional impediment to resolution can best occur through a principled, civilized, and quiet dialogue, perhaps over many hours or even days, during which both sides have the chance to "vent" and to make certain the other side knows just how upset they are and how justified they are in feeling that way. Once a party is satisfied that the other side "gets it," the party no longer needs to hold out and litigate just to prove a point or to vindicate a position in which there is a significant emotional component.

Relative Sophistication of the Parties. A dispute is more readily mediated if the parties are of relatively equal sophistication and have similar financial resources. When there is an imbalance in either respect, preparation by counsel and the careful selection of the mediator assume a greater than normal importance. In such cases, the mediator's reputation for neutrality, lack of bias, and impartiality is particularly important.

Number of Disputants. Finally, the number of parties involved in a dispute can affect the likelihood that mediation will lead to a more acceptable result than will an adversary proceeding. Multi-party disputes may include claims against multiple insurers, cross-claims, and third-party claims. The flexibility of mediation is particularly advantageous in such multi-party disputes. Also, the avoidance of the cost, heightened uncertainty, and complexity of multi-party litigation argues strongly in favor of mediation. As in litigation, however, multi-party mediation often requires particular skill and patience and an elevated level of logistical organization, and the mediator should be selected with these factors in mind.

The Parties' Interests

Mediation is the preferred method of dispute resolution when the parties have certain identifiable interests.

Speed of Resolution. Mediation is quicker than arbitration and litigation. The matter is resolved sooner, more efficiently, and with less disruption of the parties' businesses.

Avoidance of Publicity. Sometimes parties desire not only confidentiality but the avoidance of any publicity. While arbitration also offers this benefit, mediation offers the additional benefit of avoiding the creation of any record, exhibit, testimony, and so on, to which the other side, or outsiders, might somehow gain access. Parties to a properly managed mediation should agree in advance that nothing said or used during the mediation may be used for any purpose outside the mediation. They also should agree that the mediator is absolutely not to be called on to testify to any event that occurs during the mediation. Mediation is the most private dispute resolution technique.

Cost of Resolution. Mediation should be the process of choice when, as often happens, the cost of proceeding with a case is disproportionate to the value of winning the case or the cost of losing the case. This simple truism is intuitively obvious. However, it often is ignored until the costs have risen to the point that to not forge ahead is seen by the client as a waste of all that has preceded.

Variability and Complexity of Desired or Possible Solutions. This factor is probably the most important single factor in assessing the utility of mediating a case. In both arbitration and litigation, the result frequently is "winner take all" and "loser lose all," and the "all" is almost always expressed monetarily. Such results do not consider any solution other than one expressed in dollars. Mediation offers the significant advantage of being able to tailor the result to the parties' real, long-term business interests. Examples of the kind of arrangements that can be implemented in a mediated resolution that cannot be mandated or included in an arbitral award or judicial decision include:

• settlement contract modification or amendment,
• the addition or deletion of participants in a business deal,
• mutually acceptable exchanges of property or consideration of any nature, and
• commitments for or against future conduct.

If imagination and creativity offer a chance to better accommodate the parties' actual interests, mediation should be the process of choice.

The Issues in Dispute and Potential Outcomes

The Legitimacy of the Claims and Defenses. Any mediator will confirm that the most difficult case to mediate is a frivolous case. Few attorneys, and fewer clients, want to negotiate with an opponent whom they consider to be pursuing a claim frivolously or in bad faith. So, one should consider mediation with respect only to cases in which the claims and the defenses to them are legitimate and are asserted, even if wrongly, in apparent good faith.

The Technical Complexity of the Case. Cases in which the factual issues are highly technical or unusually complex tend to lead to the greatest disappointment at trial. The recently mediated resolution of the Miller Park/Mitsubishi/Travelers Insurance dispute in Milwaukee is an example of such a case. The ability of juries to understand and work with concepts or sciences that were previously foreign to them is always uncertain, at best. These are cases that lend themselves well to mediation.

The Sensitivity and Proprietary Nature of the Underlying Facts. Both arbitration and litigation require each party to demonstrate evidence supportive of its position to a third-party fact-finder. Occasionally the disclosure of that evidence, even in the relatively safe confines of an arbitration or under the safe harbor of a protective order in litigation, can be more damaging to a party's long-term interests than even the adverse consequences of an adversarial proceeding. For example, disclosure to the other side of prospective business customers' names, the fact of "secret" business ventures or arrangements, cost-saving manufacturing processes, or the nature of products still in development, even if disclosed under the most restrictive of nondisclosure agreements or judicial orders, can cause irreparable damage or the fear of such damage. In such cases, a mediated negotiation that can avoid the disclosure of such evidence offers particular advantage over both arbitration and litigation.

Factual or Legal Disputes and the Credibility of Witnesses. Experience shows that the disputes least susceptible to mediation are those in which the primary impediment to settlement is a legitimate disagreement over the applicable law. In those instances, both sides tend to view the dispute as a chance to win everything, if only they are right on the law (and in these circumstances, the parties, or their lawyers, tend to think they are right on the law). In such cases, usually one side or both anticipate a quick and relatively inexpensive resolution to litigation by motion. In those cases there is less inclination, at least initially, to avoid the costs and uncertainty of litigation.

In contrast, when the basis of a dispute is disagreement over the facts of the case, settlement through mediation is more likely - even if the dispute is heart-felt and each side is wedded to its version of the facts. In those cases, the result of a trial is less predictable and the advantages of avoiding that uncertainty tend to be clearer. This is particularly true in cases in which witness credibility is not in issue. If neither side is able to predict comfortably whether the other side's witnesses will be believed, it is easier to reach common ground and to do so in a cooperative, nonadversarial manner. These factors weigh heavily in favor of the utility of mediation.

Control and Modification of Outcomes. As a corollary to a point noted above, not only does mediation offer greater flexibility than arbitration or litigation, it also affords both sides the freedom to modify or alter the settlement agreement as conditions change. This factor looms particularly large in cases in which the parties have, or can envision having, an ongoing relationship. It also becomes an important consideration in anticipation of changes in circumstances not presently apparent that might warrant revision of the reached agreement. When the ultimate value of a resolution necessarily depends on identifiable variables, such as technological developments, economic conditions, or management stability, a negotiated agreement taking such variables into account is far more likely to protect the parties' long-term interests than is a judicial order or an arbitral award.

The Importance of Establishing Legal Precedent. Another consideration in assessing the utility of mediation in a given case is whether either side has an interest in establishing a legal precedent for future use. If either does, then mediation may not be the preferred mechanism for resolution. However, like all issues, the importance or consequences of establishing precedent is itself subject to discussion and, perhaps, negotiation.

The Necessity of Interim Relief. The desire for interim judicial intervention and relief is not inconsistent with an overall strategy of submitting the dispute ultimately to mediation. Once the status quo is preserved, or a request for an injunction granted or denied, the parties are free to resolve the matter in any way they choose, including by mediated negotiation. In fact, if the dispute is one in which injunctive relief is appropriate as an interim measure, the chances are good that the greater flexibility of possible outcomes and increased control over the ultimate resolution afforded by mediation will weigh even more heavily in support of mediation. However, the dynamics of mediation are altered significantly if one of the parties has either obtained interim judicial relief or tried and failed in the attempt. In those instances, the interim "prevailing" party often will presume it has dominant leverage. This presumption might not accurately reflect the real strengths of the parties' positions. This can frustrate the mediator's efforts to foster a balanced and realistic discussion.

The Uncertainty of Litigation. There are cases in which not only is the result of litigation unpredictable, but even the monetary award range is unclear. Avoiding that uncertainty and the attendant risk can be important factors to both sides in considering mediation.

Conclusion

The assessment of each of the factors discussed above is always in itself ambiguous and uncertain, and the conclusion one draws from the collective assessment of all the factors certainly is no less so. However, a disciplined examination of each factor provides a helpful analysis of the likely suitability of mediation as a dispute resolution process. This structured approach enables counsel to more confidently recommend (or not) the process to his or her client and to more credibly discuss with opposing counsel the merit, or lack of merit, to trying to mediate a particular dispute.

Choosing the "Right" Mediator

Mediation is simply a structured, facilitated negotiation. The mediator's principal objectives include to:

• provide focus on the issues;
• enable the parties to realize their actual interests and goals (as opposed to their mutual desire to "win" the case);
• diffuse (or, occasionally, use to advantage) the tension and antagonism that invariably accompany significant disputes;
• assist the parties in making realistic assessments of their own positions and their opponent's positions;
• offer, when appropriate, alternative settlement possibilities for mutual exploration; and
• ensure absolute fairness in the process.

Unless the parties expressly request the mediator's evaluation of the competing positions, most mediators favor and provide the best service by confining themselves to facilitating the negotiation, not evaluating it.

Selecting the right mediator can mean the difference between a successful negotiation that produces a result acceptable to all involved and a failed negotiation that is little more than a waste of time. The parties must agree on the mediator, not just as a matter of process but as a matter of shared conviction in the soundness of the selection. Qualities of a mediator generally considered among the most important, as reliably predictive of a successful effort, include:

• absolute impartiality and neutrality,
• integrity and trustworthiness,
• excellent listening skills,
• ability and experience in understanding the law and factual applications in a variety of circumstances,
• mediation training or experience, or both,
• negotiation experience and skills, and
• demonstrated people skills accompanied by an appropriate sense of humor.

State Bar Business Dispute Resolution Program Helps Solve Problems Quickly and Easily

Almost all business-oriented legal disputes are ultimately resolved out of court. Mediation and arbitration are among the best ways to resolve such disputes, because they can generate reliable results effectively, efficiently, and economically.

Mediators help people clarify issues, identify interests and needs, explore settlement options, and focus on acceptable solutions. Mediation can also help preserve important business relationships and create long-term business strategies for preventing or resolving possible future disputes between the parties. When a settlement is reached in mediation, the parties sign a written settlement agreement which is enforceable in court.

Arbitrators review evidence submitted by all parties and render an arbitration award based on the evidence and the applicable law. Awards are final and binding on all parties and can be appealed only under very limited circumstances.

If you or your client has a business dispute, turn to the State Bar Business Dispute Resolution Program. Parties can select an arbitrator or mediator from a roster maintained by the State Bar of Wisconsin. All arbitrators and mediators on the program's roster are Wisconsin lawyers experienced in business matters and are members of the State Bar's Alternative Dispute Resolution (ADR) Section.

There is no filing fee for cases submitted to the Business Dispute Resolution Program. This program is cosponsored by the Business Law and the Alternative Dispute Resolution sections. More information about the Business Dispute Resolution Program is available online at www.wisbar.org/bar/bdrp, or phone the program administrator at (800) 444-9404, ext. 6169. To learn more about the ADR Section, go to www.wisbar.org/sections/adr.

Wisconsin Lawyer