(This article first appeared in the April 2021 issue of the Pennsylvania Bar Association ADR Newsletter).
Justice may be blind, but it is not always just. An order in a child custody battle may not serve the interests of the children and likely does not promote harmony between warring parents who must negotiate lifelong relationships with each other because of those children. An order in a will contest will settle the distribution of the estate, but will likely harm the willingness of children of the deceased to have anything to do with each other – a loss to those children and to their children who will never enjoy the closeness of cousins. An order distributing partnership assets is both the death knell for the partnership and the death knell for any chance of a continuing relationship between business partners who may have spent years pursuing mutually inspired dreams and goals.
If one starts as an attorney and segues into service as a mediator or an arbitrator, you experience fluid borders. When you serve as an advocate, you may well see avenues for settlement that risk analysis dictates your client should travel. When you sit as an arbitrator, it may pain you to render an award that is far less perfect than a mediated settlement would produce. And when you serve as a mediator, you may ponder the wisdom of a settlement when you know a party could have done much better in arbitration. When you channel one of your skills, you do not shutter the perspectives your other skill sets provide. The challenge is to use these skill sets to complement each other and not allow them to conflict.
When you sit as an arbitrator, you cannot relate to the parties as if you were their mediator. An arbitrator fills a judicial function – a decider of facts and law. The arbitrator does not go behind the scenes of the dispute and explore the interests or needs of the parties. The arbitrator who foresees the outcome of arbitration as Armageddon may suggest that the parties consider mediation, but the arbitrator is not the parties’ mediator. If wise, the parties will take the heartfelt suggestion of the arbitrator and try mediation. An example:
The Arbitration (That Should Have Been a Mediation)
Three partners in an architecture firm involved in the restoration of historic buildings had a many decades’ long and happy business relationship. The oldest partner – also the founding partner – experienced a series of business bumps in the road. He completed a job that cost the firm money and lost a major client. He seemed depressed and began to spend more time away from the firm. His partners began to discuss asking him to retire, but were hesitant to do so. Finally, they broached the subject and were relieved to learn that their partner was amendable. Then the senior partner proposed his terms for retirement – a payout of $1.95million. The terms were unacceptable. The junior partners rejected them, and the senior partner refused to retire. The junior partners then fired him, and all hell broke loose. Accusatory and vituperative letters flew back and forth. The senior partner filed a Demand for Arbitration. The facts of the arbitration were: although the junior partners had terminated the senior partner’s employment in November 2019, they only got around to giving him the formal notice required by the Shareholders’ Agreement in May 2020. The Agreement pegged buy-out to the value of the firm at the end of year prior to termination. The junior partners argued that because they terminated the senior in 2019, the value of his shares was pegged at the value of the partnership on December 31, 2018. The senior partner argued that because the legally effective date of his termination was in 2020, he was owed his percentage of partnership valuation as of December 31, 2019. The partnership had had a bumper crop year in 2019, all generated by the two younger partners. The difference between the firm’s value at the end of 2018 and 2019 was $9million. Stated differently, the firm’s value had more than doubled from seven million dollars to $15million. The senior partner owned a third of the total value. If valued as of December 31, 2018 his ownership interest would be $2.31million; if valued as of December 31, 2019 – $5million. And he would be entitled to interest at 6% and attorneys’ fees of $500,000. An award in his favor at the 2019 price tag plus interest and fees would effectively shut down the firm he helped found. Given that his first demand was $1.95 million, and given that an arbitration award would all but destroy the firm, this case should have been mediated. To the parties’ credit – and to the arbitrators’ great relief – just before the third week of hearing commenced, the case settled. Object lesson: even with a win in sight, parties with long-standing relationships are not always out for blood. There was also the possibility that the firm could declare bankruptcy to avoid the buy-out obligation.
The Mediation (That Should Have Been an Arbitration)
A graduate student working on a Ph. D. in chemistry, faced with being terminated from her program for failing to complete her degree in the allotted 5-year period, accused her professor of stalking her and making unwanted sexual suggestions. She also alleged that her professor had “hit on” other female students and suggested that he attempted to rape a student. She identified twelve witnesses to various events she described. The university immediately placed the accused professor on administrative leave, launched a Title IX investigation and interviewed the twelve named witnesses. None of the witness corroborated the graduate student’s allegations. The graduate student sent the university a draft complaint for sexual harassment. The university requested mediation. In mediation, it was disclosed that the student suffered from schizophrenia and multiple-personality disorder. The burden of proof in a civil action is the preponderance of the evidence. Applying this evidentiary standard, the student would not prevail in an arbitration. But the university chose to mediate and settled for more than nuisance value. Why asked the mediator? The university feared the negative publicity an even frivolous lawsuit would generate and the possibility that negative publicity would result in loss of federal grant money that might exceed the cost of settlement. The mediator could not fault the university’s option for mediation, even though he believed there was no realistic likelihood that it could lose the case.
In another mediation, an employee had a viable and significant case against his employer. He had been encouraged by his employer to be truthful about race relations in the manufacturing plant and was then fired for being so. The employer offered a pittance in mediation. The employee accepted. As an advocate, the mediator suggested that the employee’s case had much greater value. The employee did not disagree. He simply said he could not take the stress of being a litigant. The employee’s need for resolution trumped the mediator’s advocacy instinct.
Applying Arbitral Skills in Mediation
Retired-judges-turned-mediators often just tell parties in mediation what they should settle for. Facilitative mediators take deep dives into interests and needs and move methodically towards settlement. The best mediation melds the knowledge of an experienced judge/arbitrator with the negotiation skills of a mediator. Parties in mediation do not want to be told what their case is worth – unless, of course, they hire a retired judge for that very purpose. Nor do parties in mediation wish to have their mediator endlessly convey back-and-forth settlement numbers ad nauseum until the case settles or reaches impasse. There is no reason to hire a mediator as a butler. The best mediator – my opinion – starts in a facilitative, open inquiry way to color the dispute and the parties’ various stakes in it. It is an open-ended, fact-finding inquiry, informed by the parties’ interpretations of those facts. With guidance, the parties and counsel adjust their perceptions and understandings along the way. They can then engage in risk analysis, and the mediator can coach them into a more evaluative phase of the process. The risk analysis turns in part on what will happen at trial, and the experienced mediator uses her advocacy experience to assess risk and make predictions.
Occasionally mediation arrives at impasse because a decision on a point of law is required, and whichever way that decision goes materially influences risk, e.g., is the exclusion of consequential damages in a contract enforceable? “Yes” or “no” materially alters the cost of settlement. May the mediator opine? Might the mediator send the parties to an arbitrator for the decision on this single issue, then to return to mediation with modified risk outlines? Whether mediator or arbitrator, advocacy skills trump mediation skills when a point of law is an obstacle creating impasse.
Summing up: mediation informs arbitration; arbitration/litigation might produce a better outcome than mediation; and advocacy/arbitral/judicial skills may be required in mediation.
*The views expressed are those of the author and do not necessarily reflect the views of CCA or any other organization.