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Even though arbitration, mediation, and other forms of alternative dispute resolution (ADR) have been used for many years, ADR has developed into a hot topic and almost a cottage industry in the last five to eight years, according to litigation attorney Kent Harbison, of Fredrikson & Byron in Minneapolis, Minn.

There are several reasons for this increased interest in using alternatives to the court system for resolving disputes. Perhaps the most common explanation is the costly, time-consuming, and contentious nature of civil litigation. Many lawyers and their clients believe that, by using ADR, they can eliminate or resolve their disputes more quickly and with less expense — and with the same or better results than could be obtained through traditional litigation.

According to Harbison, two of the most popular forms of alternative dispute resolution are:

1. Arbitration, which entails the review of evidence and testimony, and in which the decision can be legally binding. Good arbitrators may have a strong legal background and experience.

2. Mediation, which entails a facilitated compromise designed to help the parties resolve their differences amicably. Good mediators are tenacious problem solvers who can bring opposing parties to a mutual decision.

With arbitration, a neutral third party reviews the evidence in a dispute, and then issues an order in the form of an arbitration award. In many respects, an arbitration hearing is similar to a trial before a judge without a jury. Evidence is presented and witnesses testify before an arbitrator, who subsequently issues an order indicating which of the disputing parties prevails. In many cases, the arbitration award is final and binding, meaning that it can be enforced by a court order with relative ease. In fact, it is extremely difficult to overturn an arbitration award, since courts are quite reluctant to second-guess the decision of an arbitrator.

Mediation, on the other hand, is a process conducted by a neutral third party who has no authority to decide which party “wins” or “loses.” The primary function of a mediator is to help the disputing parties reach a settlement or other compromise that ends their dispute, which avoids the risk, delay, expense, and effort of a trial. The mediator does not issue an order or decision.

While the most common forms of ADR are mediation and arbitration, there are several variations on these methods, including moderated settlement conferences, summary jury trials, mediation-arbitration, neutral fact-finder, and so on.

The recent growth in popularity of ADR has led many businesses to incorporate mandatory ADR clauses into their contracts, states Harbison. “An increasing number of business contracts now require that all disputes be resolved either through arbitration, or mediation, or both,” he explains. “In fact, some companies have begun to use ADR clauses in employment agreements. The effect of these ADR clauses is that disputes under the contracts cannot be resolved through the judicial system, and courts are generally enforcing such clauses.”

Why consider ADR?

Using Minnesota as an example, Harbison notes that court cases can last two or three years before they ever come to trial or are settled. In the meantime, there are likely to be numerous depositions, interrogatories, and a variety of miscellaneous pretrial motions and court hearings. Although pretrial discovery rules were intended to expedite the litigation process and help inform both parties of all relevant evidence before going to trial, many lawyers and judges believe this process has become far too time-consuming, acrimonious, and costly.

In the minds of many experienced attorneys and judges, ADR may not be a panacea, but it is sometimes better than litigation for resolving a conflict.

Businesses considering using an alternative dispute process have a range of options, and several factors should be considered. Typically arbitration is conducted by one or three arbitrators. Some attorneys believe that a single arbitrator is best, primarily because this format is cheaper and usually does not result in a decision different from one that would be reached by three arbitrators. Other experts believe, however, that three arbitrators increase the likelihood that the “correct” decision will be reached. The parties rarely select an even number of arbitrators to avoid a split decision.

Arbitration can be binding or nonbinding. Binding arbitration esentially means that the arbitrators’ decision is “nonappealable” and has virtually the same effect as a court judgment. In fact, courts defer to arbitration so much that it is nearly impossible to overturn an arbitration award, Harbison says. The grounds for overturning an arbitration award are extremely limited (such as proof of fraud or similar misconduct by an arbitrator, proof that the arbitrator understood the law but intentionally ignored it in an arbitrary manner, and so forth.)

Many observers feel that nonbinding arbitration has little value because the arbitrator’s decision can’t be enforced. The parties can, of course, agree to accept the arbitrators’ decision after it has been issued, but typically the party who loses an arbitration refuses to make it binding.

Binding arbitration can be useful to businesses seeking a decision on a single dispute without having that decision serve as a precedent for all future cases involving similar disputes. Conversely, a company that desires to establish a binding principle to govern all future disputes of a similar nature would be better served using the normal litigation process.

Arbitration, mediation, and other forms of ADR are often touted as better than the current litigation system, because ADR moves more quickly, is far less expensive, and is usually less adversarial. The latter factor may be particularly important among businesses wanting to resolve disputes with other business in a manner that will not permanently destroy a business or professional relationship.

For example, some ADR cases have been resolved through arbitration, or mediation, within a few days or a few weeks after the disputes have arisen. Very little or no “discovery” (depositions, interrogatories, production of documents, and so on) is used for arbitration or mediation.

However, ADR isn’t always quick and inexpensive. On more than a few occasions, the combined cost of an arbitration for both parties has exceeded $200,000, and it has taken nearly two years to conclude. Even though it is extremely difficult to obtain a court judgment overturning an arbitration award, the losing party in arbitration has the legal right to make the effort. A party who loses an arbitration may bring a motion in state or federal court asking the judge to set aside the award and, if that motion is denied, also appeal that decision to the next higher appellate court. The appeal process itself can be costly and may take another nine to 12 months after the arbitration award is issued.

Selecting a Neutral “Judge”

The selection of a mediator, or arbitrator, is a critical stage of the ADR process, according to Harbison. A good arbitrator must be someone with a good judicial approach to problem-solving, and a basic understanding of the legal principles involved. It does not matter whether an arbitrator has good interpersonal skills, or powers of persuasion (like a mediator), since the arbitrator’s primary duty is to review and analyze the evidence and testimony carefully and to issue a wise decision based on the evidence.

Harbison says the three most important characteristics of an arbitrator are:

1. The intelligence and ability to reach a decision that is well-grounded in the evidence and the law;

2. Familiarity with arbitration procedures; and

3. Some reasonable degree of familiarity with the substantive subject matter of the dispute (e.g., employment law, securities law, and so on).

Many people believe an arbitrator’s basic intellect and decisiveness can be much more important than knowledge of the substantive issue in dispute,” Harbison states. “Nevertheless, it is less than ideal to submit a complex dispute over the use of a chemical formula, to an arbitrator whose career has been devoted primarily to probate, securities, or other unrelated experiences.”

One of the oldest and most widely known sources of arbitrators is the American Arbitration Association (AAA). It has offices nationwide and offers arbitrators with expertise in a wide variety of subjects. In fact, many arbitration agreements, or contract clauses, provide that the arbitrator will be selected from the AAA list and the arbitration process will be in accordance with the AAA rules.

Over the years, this method of arbitrating and selecting arbitrators has worked relatively well, but more recently, parties are choosing their own rules of arbitration procedure and their own method of selecting an arbitrator. One disadvantage of selecting an arbitrator from the AAA or any other similar organization is that the parties limit their choices.

To assist companies in selecting a mediator, several mediation organizations have been established. For example, in Minnesota these include The Mediation Center, U.S. Arbitration & Mediation Inc., Americord Inc., and other groups offering similar services. Such organizations have arrangements with numerous mediators throughout the state who can help settle disputes in areas within their expertise. Mediation will not work unless both parties agree on the mediator. Thus, if the list of candidates provided by one of the mediation organizations is not acceptable to both parties, an additional list can be considered. Alternatively, the parties may nominate mediator candidates independently to find one that is mutually acceptable.

The qualities of a good mediator differ from those of a good arbitrator. According to Harbison, a mediator must be effective at facilitating open and productive negotiations between disputing parties and facilitating their efforts at reaching a settlement. This can be quite challenging in cases where the parties’ emotions are strong or where the issues in dispute are extremely complicated or costly. A good mediator is much more than a “nice guy” who gets along well with people. The best mediators are those who are creative problem-solvers, and who are persistent, tenacious, and assertive.

Since mediators conduct alternating private discussions with the parties and their counsel, the mediator needs to be able to help each party see the strengths and weaknesses of their respective cases and to focus on nonlegal issues so that they will be more likely to compromise.

Although most parties who enter a mediation session expect to convince both the mediator and the opposing party that the law is on their side, the most productive mediation sessions usually involve very little discussion of legal issues.

Given the different functions and characteristics of arbitrators and mediators, a good arbitrator may not necessarily be a good mediator. The opposite is true also. Individuals who are former judges are often considered good arbitrators; they are accustomed to conducting trials, reviewing evidence and issuing orders. These same characteristics, however, do not necessarily qualify them as good mediators.

“ADR in some form is here to stay indefinitely, even though it is not a panacea and is not always as efficient as promised,” Harbison claims. “Like any other process involving human beings, ADR is not a cure-all for the perceived defects in the current litigation system. In fact, the litigation system may be the best method of resolving some kinds of disputes; but many businesses believe some type of ADR is a better way to go in many cases.”

Kent Harbison is a litigation attorney for the Minneapolis, Minn. law firm of Fredrikson & Byron. For more information, call (612)347-7000.