Creative lawyers should always be looking for cost-effective ways to avoid expensive litigation for their clients. Alternative dispute resolution is often thought of in this regard, yet such processes are increasingly claimed to be as costly and time consuming as litigating in the courts. One potential “out of the box” variant is “med/arb”, a process in which a mediator later serves as arbitrator to decide the parties’ dispute if they are unable to settle with the neutral’s assistance. Lawyers steeped in conventional American processes reflexively criticize this process, too. But it should not be ignored by parties looking for creative solutions to potentially costly disputes. There are few reported decisions addressing med/arb. A recent California appellate decision did so.
Med/arb is routinely criticized for, among other things, permitting the same mediator who may have received ex parte communications from parties during confidential mediation caucuses – often of information, thoughts or accusations that would be inadmissible in a judicial trial or in an even less formal arbitration — to subsequently decide the dispute as arbitrator “infected” with such knowledge. The med/arb process is much more accepted outside the U.S. in international dispute resolution. And even in the U.S., it is not uncommon for parties who have succeeded in settling their dispute through facilitated mediation to agree that the person who served as their mediator will resolve in some way as arbitrator disputes that may arise out of the settlement agreement in the future. That is itself a variation of this med/arb theme.
The parties’ mutual trust in the particular neutral mediator/arbitrator is critical to a successful med/arb process. Thus this concept will generally not be drafted into a conventional ADR contract clause prior to a dispute arising. Such ADR clauses seldom identify a particular neutral for any ADR purpose, let alone med/arb, in part because of the uncertainty that this neutral will be available when a dispute might arise in the future, or will remain acceptable to both parties at that time.
The med/arb process is, however, potentially quite valuable once a dispute has arisen and parties are searching mutually for ways to resolve it rather engage in expensive litigation. See generally Robert L. Ebe, “A Different Approach to Conducting Med-Arb In Complex Commercial Litigation Matters” (Part 1 of 2), Alternatives Newsletter (International Institute for Conflict Prevention & Resolution), Vol. 29, No. 3 (March 2011) (case study re early neutral evaluation before mediation and, if necessary, baseball arbitration, all by the same neutral), and “Results and Observations: How a Multistep Med-Arb Produced a Fast(er) Settlement,” (Part 2 of 2), Alternatives Newsletter (International Institute for Conflict Prevention & Resolution), Vol. 29, No. 4 (April 2011). In such circumstances, it is critical to reach an agreement which will be enforceable in the courts afterwards.
The recent decision in Bowers v. Raymond J. Lucia Companies, Inc., 206 Cal. App. 4th 724 (4th App. Dist. May 30, 2012), illustrates a well-intended, if awkward effort by two parties to resolve their dispute in this way. Parties in the middle of an arbitration hearing decided to settle. They confirmed their agreement first orally on the record of that hearing, and later in a written settlement agreement, which was modified at the neutral’s request. In essence, they agreed to mediation before a neutral who was empowered, if no mediated settlement occurred, to decide on a binding “baseball” award for the plaintiff between $100,000 and $5 million. The neutral ultimately chose $5 million. Defendant challenged the judgment on the ground that it was a mediation award instead of an arbitration award, among other things. The trial court agreed, and refused to enforce the award as an arbitration award. It did, however, enforce the settlement agreement and mediator’s award under C.C.P. §664.6, which permits a court to enter judgment pursuant to a written settlement agreement. The lower court reasoned that the parties had settled by agreeing to binding mediation rather than a two-step mediation and binding arbitration process.
Defendant/appellant argued on appeal through new counsel that (1) it never agreed to resolve the dispute through binding mediation; (2) a contract for binding mediation is too uncertain to be enforceable; and (3) binding mediation is not a constitutionally or statutorily permissible means to waive jury trial rights. The appellant relied to a substantial extent on the earlier decision in Lindsay v. Lewandowski, 139 Cal. App. 4th 1618 (2006), in which another appellate panel refused to enforce an ambiguous agreement to “binding mediation”. A concurring opinion in Lindsay characterized that term as “oxymoronic” in nature. The majority opinion reviewed the pro’s as well as the con’s of the approach. All justices agreed that the parties’ documents were too imprecise to create an enforceable agreement on such a controversial subject.
The Bowers court reviewed the record in that case and found substantial evidence of a mutual agreement to allow the mediator to select between the parties’ final offers at the end of the mediation without first conducting a separate arbitration proceeding with an evidentiary hearing. The court found nothing in the record to indicate that the parties ever contemplated a failed mediation would be followed by an arbitration with a full evidentiary hearing, or that either party requested such a hearing. Thus the court rejected the first argument.
The court also rejected the appellant’s uncertainty argument by distinguishing the Lindsay decision for the same reasons, and also because the parties in Bowers had elaborated on what they meant by the ADR method they chose. Third, and finally, the Bowers court rejected the jury waiver argument because, though binding mediation is not among the waiver methods listed in C.C.P. §631, a party can always settle its dispute or agree to a method of resolution such as arbitration which does not involve a judicial forum, as here.
Bowers illustrates, if nothing else, the need for parties to be very clear as to the intentions and implications of an agreement, which is by its nature controversial, to blend the concepts of mediation and arbitration for one neutral to resolve a dispute short of an evidentiary hearing. The article cited earlier by this author explains in greater detail some of the important components of such an agreement, many of which were absent in Bowers and seem to have led to the appeal, even if the challenge to the parties’ agreement ultimately proved unsuccessful. As examples, parties should consider for their agreement:
- Do not use the controversial term “binding mediation.”
- Distinguish between the end of mediation and the commencement of arbitration.
- Waive expressly the right to any further (if any at all) evidentiary hearing.
- Waive expressly any objection to a neutral who heard ex parte communications in mediation deciding the arbitration.
- All parties should sign an agreement containing the same terms (unlike Lindsay).