Litigation Arbitration Law

Introduction

Classically, the litigation case is seen as the definitive model of the law in action. Party X suspects that party Y has violated the terms of their commercial agreement. Party X contacts party Y, the latter of whom refutes the assertions of the former. Party X, in an effort to recover any losses they perceive as being caused by party Y’s breach of contract, brings the case to court. The case ensues as an inevitable fight to the finish. After a lengthy trial, the judge issues a decision. One winner and one loser emerges, though both parties have suffered significant legal and administrative costs. The details of the dispute, along with any related information, are part of the public record. Depending on the profile of the parties and the nature of the dispute, public relations experts are called in for damage control. The commercial relationship between the former business associates is often irreparable.

Indeed, court action is perhaps all too often the scenario envisaged by two commercial parties confronted with a legal disagreement. Rising legal costs and commercial have, however, caused many to reconsider litigation as the inevitable result of commercial differences of opinion. Contemporary legal scholarship has followed suit, placing increasing emphasis on the viability of alternative dispute resolution (ADR) as a method of resolving disputes. Arbitration, which involves the legally-binding settlement of a dispute outside the legal system by an independent party and mediation, which also involves an independent third that is acting as a facilitator in reaching a consensus are normally the most common forms of ADR.

Arbitration, in particular, can be a more definitive and legally binding way of resolving conflicts and it is the most common form of alternative dispute settlement amongst commercial bodies. Indeed, commercial arbitration is the most common form of arbitration and thus the commercial realm has become an important focus on the viability of ADR in legal disputes. Still, the decision as to whether a disagreement is settled by arbitration or mediation largely depends on the will of the two parties and the legal issues involved. This paper considers the use of mediation and arbitration in commercial disputes and explores the effectiveness of each form of dispute management. In particular, it uses case studies of commercial disagreements to explore the situations in which either arbitration or mediation may be most applicable.

In English law, arbitration was formally codified in the Arbitration Act of 1697. Since this time, the law has seen several changes and codification. The Arbitration Act 1996, for instance, codifies English case law whilst also introducing some new principles to arbitration. In particular, the Act s. 1 (1) states:

The provisions of this part are founded on the following principles and shall be construed accordingly-

(a) The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense:

(b) The parties should be free to agree how their disputes are resolved, subject only to such safeguards as necessary in the public interest:

(c) In matters governed by this part the court should not intervene except as provided by this part.

The above wording of the Act appears to communicate lawmakers’ desire to establish arbitration as a viable alternative to third parties provided that such arbitration takes into account certain principles, such as public interest. Interestingly, it also specifies that courts should not unnecessarily intervene in arbitration matters, a point that undoubtedly lends more credibility and power to the arbitration process.

Sealy and Hooley add that the Arbitration Act is useful primarily in its clearer restatement of previous laws and the fact that it does, indeed, make appealing arbitration rulings more difficult. This theory is supported by the words of Lord Saville, one of the primary contributors to the legislation, who contributes, “This should, and is intended to, make successful applications for leave to appeal from an arbitration award very rare indeed.” Presumably, arbitration and other forms of alternative dispute resolution are attractive to lawmakers and the courts in that they allow parties to settle their disputes outside of the courts, thereby “freeing up” an often overtaxed legal system.

Since this time, commercial parties and other entities have found arbitration to be advantageous for several reasons. Perhaps the most persuasive argument for arbitration in lieu of court action is that the former is often cheaper and less administratively burdensome. Indeed, costs and time are not only important variables for the parties involved, but also for many countries’ legal systems, which also utilise a great deal of time and money in deciding commercial cases. This is particularly true where the issue involved is highly technical or specialised nature.

In such cases, specially chosen arbitrators that have a greater level of knowledge and experience in the given subject may not only save time and money for all parties involved, but their expertise may also result in a more appropriate settlement. Finally, arbitration and other forms of ADR are often preferable to litigation in that they allow the parties to keep the details of the dispute private. On the other hand, court action, particularly when it involves well-known commercial entities, can result in excessive (and perhaps negative) press for the parties involved.

Arbitration does, however, also have its drawbacks. One of the primary caveats is that both parties must, in the first instance, agree to arbitration. Once arbitration is agreed, the parties must also agree on an arbitrator. In many instances, these details are decided beforehand in the parties’ legal contract with on another. In other cases, the rift between the two parties is such that arbitration is not possible simply because the parties can not mutually agree- either to the arbitration in general or the choice in arbitrator. Arbitration can also be invalidated as a viable course of action in cases involving certain types of crime, where the law may prohibit the use of arbitration.

Generally speaking, mediation is a more flexible route than arbitration. Where the representatives of both parties are present during arbitration, mediation normally involves an independent party that speaks to each party in isolation. Although the mediator seeks to find common ground amongst the parties in order to bring them to a place of agreement, the decisions reached by the parties is not necessarily binding. Often, mediation is useful in situations where the relationship between the parties has not yet been fully established- for example, in coming to an agreement before a contractual relationship has begun. In such scenarios, mediation is often described as a form of dispute prevention. Like arbitration, mediation is cheaper than litigation and is also normally a cheaper course of action than arbitration.

Mediation can also help maintain privacy between the two parties- both from the pubic and from each other as mediators meet with each party in private. Mediation is often considered one of the least adversarial means of settling disputes and is particularly useful in opening up communication between parties and leading parties to a conclusion that is fair and mutually beneficial. Because mediation is more highly dependent on the cooperation of both parties, however, it can be a lengthy and frustrating process. Despite this, it has recently become a more popular form of dispute settlements as commercial entities and policymakers search for alternatives to traditional dispute settlement.

Critics of alternative dispute resolution methods question the very premises upon which ADR is based. In a Yale Law Journal article, Owen Fiss argues that the legal community has embraced ADR has a viable option simply because it has viewed disputes as “[a quarrel] between neigbors who had reached an impasse and turned to a stranger for help.” Fiss suggests that, in this framework, the court plays the role of the stranger and ADR is the process by which the stranger administers justice. The process is fundamentally flawed, Fiss argues, as it presupposes that the “neighbours” will be able to come to an agreement despite the fact that the relationship between the two parties has broken down enough that a stranger would need to become involved.

Aside from this, Fiss points out that ADR methods assume that both parties are equal. While this is more likely to apply in the case of commercial disputes, Fiss illustrates that in many kinds of disputes- between employer and employee, for example- there is an imbalance of power that threatens the premise of equality and leaves room for exploitation. In cases where the power is imbalanced, one party may have greater access to information or wield so much more influence than the other so as to question the fairness of the ADR process. In this sense, Fiss’ criticisms may perhaps be most applicable to commercial disputes that involve one party that is a great deal more established or reputable than another.

Fiss further reasons that ADR processes also lends both parties open to exploitation by their lawyers. In such scenarios, lawyers may agree to settlements that are in their interests but not necessarily in the best interests of their clients. In a final blow to ADR, Fiss suggest that while ADR processes may alleviate courts of their administrative burdens and ease quarrelling among parties, society on a whole is probably best served when individuals seek justice, rather than peace.

Although critics of ADR techniques remain, the time and cost savings associated with ADR techniques have led many commercial parties to include recourse to mediation and/or arbitration into their contracts with one another. Less hostile dispute management procedures often allow the parties to settle disagreements whilst maintaining their commercial relationship. The question is: when should parties resort to arbitration and in which instances would mediation be a more option? In some cases, the decision as to whether parties will seek arbitration or mediation will be a highly subjective process informed by the parties’ personalities or perception of the problem.

In other cases, it will be a highly structured process in which the parties will have the order of particular recourses either outlined by law or by their contracts with one another for them. Still, a look into some of the characteristics of cases in which each of these forms of dispute management may be most applicable is useful in steering those parties who seek recourse outside of the legal system towards the most appropriate remedy for their situation.

Literature Review

The literature on arbitration and mediation is, as might be expected given the popularity of the topics, vast. This review identifies the key trends emerging in the topics, particularly in regards to dispute resolution within the commercial realm.

First, it is useful to point out that case law has largely reflected the move toward ADR over litigation. In Egan v Motor Services (Bath) Ltd [2007] EWCA Civ 1002, a customer purchased a car with a defect. While the Motor company attempted to correct the defect on numerous occasions, the case eventually proceeded to court with both parties become increasingly entrenched in their respective sides. While the original dispute was around £6,000, the parties eventually spent nearly £100,000 pursuing the case in court. The judges deciding the case hailed that it was one “screaming for mediation” as both parties could have settled the matter out of court for far less than they eventually paid for court proceedings. Although one of the parties in the above case was not a commercial entity, this case along with he aforementioned changes in the Arbitration Act illustrate the court’s increasingly receptive attitude toward ADR in general.

The use of mandatory ADR has also been a hot topic for discussion. While some cases necessitate that arbitration is used in the first instance, the courts have also found that parties can be denied damages on the basis that they initially refused ADR. In Halsey v Milton Keynes General NHS Trust and Steel v Joy and another, for instance, resistance to ADR resulted in the successful parties not being awarded any damages. In this case the court ruled that

In deciding whether to deprive a successful party of some or all of is costs on the grounds that he has refused to agree to alternative dispute resolution (ADR), it must be borne in mind that such an order is an exception to the general rule that costs should follow the event. The fundamental principle is that such departure is not justified unless it is shown (the burden being on the unsuccessful party) that the successful party aced unreasonably in refusing to agree to ADR…[however] there is no presumption in favour of mediation.

While such findings establish powerful precedence in favour of companies pursuing ADR, it also provides an important caveat. In cases where parties are refused damages on the grounds that they were unreceptive to ADR therefore, the burden of proof is on the losing party that ADR was a reasonable course of action in the first instance. In doing so, the parties must consider whether the mediation would have been successful, the costs involved, whether the parties have made other attempts are reconciliation and the nature of the dispute. While neither case was a commercial dispute, they set the precedence that entities should first consider recourse to arbitration and mediation means where viable. A report by the Commercial Court Committee Working Part on ADR chimed in on such decisions noting that

there are many cases within the range of Commercial Court work which do not lend themselves to ADR procedures. The most obvious kind is where the parties with the court to determine issues of law or construction which may be essential to the future trading relations of the parties.

Thus, while the fundamental question of this paper is that of mediation as compared to arbitration, it is certainly the case that there are instances where neither remedy is applicable as well as those instances where either or both methods may be exhausted prior to litigation. Still, in the same report, the Committee has held “most cases are not by their very nature unsuitable for ADR.” Cases such as these also evidence the serious extent to which courts are considering ADR methods as a viable alternative to court action.

Despite this and the several aforementioned benefits of ADR methods such as arbitration and mediation over litigation, it remains that the vast majority of commercial disputes are settled in court. Several researchers have argued, however that ADR should at least be used prior to litigation in several instances, such as in the resolution of intellectual property disagreements. Once ADR has been considered as a course of action, however, there remains the question of what type of ADR to consider. Effron suggest that parties must take several factors into account including: whether or not the parties wish to preserve their relationship, the reason behind the disagreements and what kind of ADR is likely to resolve the said dispute. Effron concludes that, in essence, the answer to these questions will allow parties to determine the level of “intrusiveness” they would like in their dispute. By selecting the degree of intrusiveness, Effron argues that the parties are essentially choosing a form of ADR.

If parties would like to preserve their relationship, for instance, mediation might prove a more viable option as it is less adversarial than arbitration. In mediation, the third party simply acts as a “go-between” between the clashing entities and thus does little in the way of actual decision-making. The reasoning behind the agreement is also key factor in determining whether arbitration or mediation may be the best solution. If the parties are in a highly charged dispute, mediation may or may not help as it simply increases the information that both parties have about one another.

While the increase in information may help ease tensions, arbitration may be more effective in simply allowing an objective third party to hear the facts of the case and determine an optimal solution. Effron suggests that in many cases the level of intrusiveness desired by the parties will already be determined by their current relationship with one another. It is unlikely that a party with a warm relationship will suddenly shift to unnecessarily adversarial means of solving a dispute, though the size and nature of the matter in dispute may also be a significant factor in such cases.

Undoubtedly most literature examining ADR focuses on arbitration, most likely because it is one of the most popular forms of ADR. However Brown & Ayres analyse the situations in which mediation might be most beneficial. They argue that mediation is unique in that mediators hold meetings with each party in private while arbitration, for instance, requires that both parties meet together. Mediators are therefore in a unique position to gather and disseminate information between the parties. Mediators have the liberty to do so at their discretion and therefore, as Brown & Ayres point out, essentially control the flow of information.

In their view mediation reduces the inefficiencies associated with two problems within commercial disputes: adverse selection and moral hazard. Both involve parties not having enough information about each other- either intentionally or unintentionally- that result in inefficiencies in the negotiation process. By manipulating the flow of information between the two parties, mediators can add value to the negotiation and dispute resolution process. In this way, mediators add “noise” to the communication between the two parties and exercise their influence to find common ground.

In 2002, the Lord Chancellor issued a report entitled “Alternative Dispute Resolution in Commercial Cases.” The UK’s Commercial Court has a voluntary mediation scheme whereby parties can elect to engage in mediation rather than allow the case to go to trial. The study reports that approximately 5% of cases that engaged in mediation were subsequently sent to trial and only a small minority of parties indicating that the mediation prevented settlement. The findings of this report highlight the idea that mediation is becoming a more popular form of dispute settlement, particular as compared to litigation. While, as previously mentioned, most commercial entities still look toward arbitration, mediation is also becoming a more popular method as it perhaps even more cost and time effective than arbitration.

In the United States, the Pennsylvania Bar answers the question “What Kind of Dispute is Appropriate for Mediation?” with the answer: Any dispute where parties want to avoid court or a formal litigation process…it can be very effective in transactions where parties are attempting to strike a bargain or put together a deal but are stuck on one or more issues.

The Pennsylvania Bar’s assessment of the suitability of mediation therefore is not limited to its role in the settlement of disputes once a contract is already in place between two parties, but also in those instances where the parties have yet to establish a contractual relationship. Mediation may, therefore, be used to help parties come to an agreement or settle on a negotiation where the level of tensions between the parties is not particularly high or the relationship between the two parties is not sufficiently developed to be adversarial.

Arbitration, in contrast, is most commonly use in those instances where there has already been a contractual relationship established between the two parties. It may also be used, as The Bar Association comments, “In addition those maters that must by law be arbitrated, almost any kind of dispute where the parties want to avoid a formal court trial is appropriate [except those] that may decide constitutional rights or challenge or advance an important legal precedent.

Again here the Bar alludes to the boundaries of arbitration in regards to litigation but states that almost any matter can be arbitrated. The flexibility of arbitration, along with the fact that arbitrated decisions are usually legally binding may account for the popularity of arbitration in commercial concerns. While arbitration allows parties to keep their commercial relationship intact, it is perhaps firm enough to keep both parties from seeking recourse elsewhere, i.e. through appeal.

Walter Semple of the International Chamber of Commerce argues that there are fundamental differences between arbitration and mediation. First, by most accounts, mediation is the quickest and cheaper of the two alternatives. Still, he notes, “ It is easy to say that mediation is quicker and cheaper. This is true if the arties can be persuaded to use it and pursue it to the end..” Semple’s statement suggests that while arbitration and mediation may be beneficial and cheaper, this will only be the case where the parties are dedicated to reaching agreement by these means. This will not be the case, surely, where parties are perhaps forced into either or both remedy with real intentions of taking the matters into court. He notes that arbitration and mediation have their place in “The Escalation Game.” While mediation may be the first resort pursued by a party, the intensity of the matter may cause the parties to disagree until the matter is finally escalated through arbitration and ultimately, litigation.

Atkinson suggests that arbitration has more in common with litigation, making it a very questionable form of ADR. He suggests that in both litigation and arbitration, the parties are adversaries and where necessary, legal action can force the parties to comply with the findings of the decision maker. In addition, he notes that both processes normally involve hearings and that generally there will be a winning and losing side. Often, arbitration can be slow, costly and adversarial like litigation, though perhaps not nearly to the same extent.

Atkinson also points out that arbitration, while private, can also be risky as one party will ultimately lose and there is also the risk that new information will be uncovered and revealed to the other party throughout the process. This is also true in litigation cases and Atkinson argues that arbitration and litigation fundamentally have more in common with each other than either has with mediation. Mediation, in contrast to litigation and arbitration, my allow a third party to express a particular viewpoint but that viewpoint is not binding. In facilitative mediation, the most common form of mediation, the mediator is the catalyst for change the process is really one of negotiation.

In this view, both parties are interested in finding a mutually beneficial solution to a disagreement. In mediation, mediators perhaps induce the parties to think “outside of the box” at fresh alternatives and ideas that can suit the needs of both parties. In this way, mediation is not simply a decision-making process but also an exploratory one that allows both parties to consider a range of options without being legally bound in the process. Mediation resists the categorisations of one side being the winner and the other side being the loser. Still, mediation may not provide the certainty and decisive decision required by some commercial cases and may not even be possible in others. Indeed, where arbitration simply requires that both parties agree to the arbitration, mediation requires considerably more ongoing effort by both parties to reach an agreement.

Other studies also place arbitration and mediation on a continuum and argue that negotiation, mediation and arbitration are all part of a process. Goltsman et. al.’s research has indicated that mediation is useful for when the intensity of conflict is high as well as when it is low though negotiations may be most useful when conflict is low and “arbitration always performs better than….mediation.” Glotsman et. al’s finding would certainly explain the prevalence of arbitration in commercial disputes. It presents an interesting insight into the debate of arbitration versus mediation however. If it is the case that arbitration is always better than mediation, should all parties always then seek arbitration? Of course, if mediation is cheaper and less costly, it would be prudent to identify those circumstances in which mediation may be a sufficient remedy. Even if there is a hierarchy of ADR alternatives, it may be that mediation may be optimal in certain circumstances.

Methodology

This paper will use qualitative analysis to compare mediation to arbitration. In particular it will engage secondary sources to uncover cases where either arbitration or mediation was employed instead of, or prior to, litigation. In addition, it will critically analyse input from legal scholars and professionals regarding the applicability of these ADR methods to certain types of legal disputes. The research will also consider the advantages and disadvantages of mediation and arbitration and attempt to identify those scenarios where one method might be more suitable than the other. Where necessary, the paper will also consider circumstances where both arbitration and mediation might both be suitable avenues to exhaust prior to litigation. Indeed, it is somewhat presumptuous to assume that the two methods are necessarily mutually exclusive.

In 1989, John Wesser investigated the more systematic methods of assessing ADR. While Wesser criticises the frameworks used in many of the more quantitative studies and, in particular, notes the several definitional consistencies in engaging in quantitative analyses of ADR concepts, he notes that there are several factors to consider when assessing ADR methods, including: the relationship between the parties (whether there has been a breakdown in communication), the nature of the disagreement, the amount in dispute, the speed of processing, the costs involved and finally, the power relationship between the parties.” Wesser also suggests that while the ADR literature varies widely in its assessments:

A review of the existing evaluations literature shows some agreement on seven outcomes of interest. AN effective dispute processing program will minimise the cost of processing disputes, minimise the time it takes to process a dispute, maximise the permanence of the resolution obtained, provide a dispute resolution process which is more fair, provide greater party satisfaction in the process, process disputes in a more equitable manner, and will insure that dispute processing and the resolutions it produces contribute to the strengthening of community.

While this analysis does not attempt a systematic approach of ADR cases, it will utilise the criteria quoted in Esser as a means of discussing whether or not the form of ADR used in the case was “successful” or not. Of course, some aspects of Esser’s analysis, such as considering whether either party was satisfied with the decision, will be more difficult to analyse than others but where there is evidence to that effect, it will be used.

Note: Of course, in the final paper, all sections -in particular the literature review- will be tightened up and organised and the footnotes will be complete.

Sources

Boyd, S.C., and M.J. Mustill. The Law and Practice of Commercial Arbitration in England. Second Edition. London: Butterworths, 1989

Brown, J.G. & I. Ayres. “Economic Rationales for Mediation.” Virginia Law Review. 80. 323-402, 1994

Continuing Legal Education Society of B.C. (CLE). Commercial Arbitration: Advanced Practice Materials. Vancouver, BC: CLE, 1991.

Dore, Isaak I. Theory and Practice of Multiparty Commercial Arbitration. London, UK, 1990

Effron, J. “Alternatives to Litigation: Factors in Choosing.” The Modern Law Review. 52.4. 480-497, 1989

Hill, Jonathon. The Law Relating to International Commercial Disputes. London, UK: Lloyds of London Press, 1994

Ingleby, R. “Court Sponsored Mediation: The Case against Mandatory Participation.” Modern Law Review 56 (1993): 441-51

Martin, J. “Arbitrating in the Alps Rather Than Litigating in Los Angeles: The Advantges of International Intellectual Property-Specific Alternative Dispute Resolution.” Stanford Law Review. 49.4.917-970, 1997

Nelle, Andreas. “Making Mediation Mandatory: A Proposed Framework.” Journal on Dispute Resolution 7(2) (1992): 287-313.

van den Berg, Albert Jan. Yearbook Commercial Arbitration Vol. XVII-1992. Accord, MA: Kluwer Law and Taxation, 1993