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The Truth about ADR-Do Arbitration and Mediation Really Work? (Corporate Legal Times)

February 2004

By: Michael T. Burr

THE PRACTICES OF mediation and arbitration predate the Magna Carta by several millennia. Yet the American corporate legal community didn’t begin using these processes to resolve commercial disputes until the 1980s. Even then, the results were mixed.

“In the late 1980s, ADR became very trendy and people jumped onto it,” says Gerry Ghikas, an arbitrator and commercial litigation partner with Borden Ladner Gervais in Vancouver. “Unfortunately, out of that first wave came horror stories of arbitrations that went on forever and cost way more than they should have.”

 Back then, the practices, rules and legal frameworks of ADR were still a work in progress. Some jurisdictions were unsure ofhow to treat arbitration outcomes. The U.S. Congress failed to finance state-level initiatives to implement the Dispute Resolution Act of 1980, so state laws lagged behind the federal policy.

“There was a perception in decades past that arbitration was litigation without the benefit of rules or boundaries,” says Edward Stringer,a shareholder with Briggs and Morgan in Minneapolis and a retired innesota Supreme Court justice. “It’s far more sophisticated today than it was 20 years ago. There are lots of boundaries now.”

For example, many industry organizations and regulatory agencies have developed procedures and guidelines for ADR practices, and the ADR community itself has grown and matured. Groups that facilitate ADR have gained experience and refined their lists of expert moderators and arbitrators.

“We are beginning to see the development of a professional cadre of mediators and arbitrators who have a disproportionate amount of the work,” says Tom Stipanowich, president and CEO of the CPR Institute for Dispute Resolution, a New York-based mediation facilitation group.

Also, by virtue of state ADR legislation and dozens of court cases, arbitration awards are now universally recognized as legally binding throughout the United States and Canada. On the international front, ADR has become the standard method of resolving cross-border disputes. Hundreds of countries—from Albania to Zimbabwe— have become signatories to the 1958 New York Convention on the Recognition & Enforcement of Foreign Arbitral Awards.

In short, ADR has come of age. In a recent Corporate Legal Times survey, in-house attorneys indicated that mediation and arbitration processes have become integral tools for resolving many kinds of commercial disputes—especially construction matters,insurance and reinsurance matters,
intellectual property matters and various contracts (see “ADR: The Right Solution,” p. 46). Furthermore, companies find ADR to be just as fair as traditional adjudication procedures, while also being faster and less expensive (see “Arbitration: A Fast And Fair Process,” p. 45).

“I’m in love with ADR. I think it’s fabulous,” says Alan Bloom, senior vice president, secretary and general counsel for Maxicare Health Plans Inc. in Los Angeles. “It’s as fair as a traditional courtroom, but you don’t have to waste a lot of time with discovery. It’s just a much better situation.”


In truth, nobody really loves ADR. Dispute resolution always is a painful process, and the best that can be said about ADR is it generally causes less pain than a jury trial. 

But not always.

In some situations, ADR can bring unintended consequences. Many companies, for example, find that arbitration is a formula for a split-baby outcome, and that it brings costs on the same order as litigation. Others warn against disputants who game the system,using mediation proceedings to air out their opponent’s case and refine their own litigation strategies. Additionally, some companies have found that including standard arbitration language in commercial contracts can raise legal costs.

“Incorporating an arbitration clause actually increased the number of complaints and disputes that arose,” says Christian Na, U.S. associate general counsel for the Canada-based telecom vendor Mitel Networks Corp. “Arbitration is invoked too frequently if it’s made available. Instead we encourage both parties to work it out in the field, so to speak.”

The problem with arbitration, Na says, is that it’s more likely to produce a split-baby outcome than a jury trial. This perception is consistent with the observations of other in-house lawyers (see “Splitting The Baby: ADR’s Achilles Heel,” p. 47).

“You generally end up with a split-baby decision,” says Ray Roth, vice president and general counsel with Lockwood Greene Engineers in Charlotte, N.C. “You are arguing about the middle-third quadrant. Nobody takes away everything.”

Thus litigation might be likened to high-stakes gambling, while arbitration is more like buying futures contracts. Na asserts that this tendency of ADR favors the party raising the dispute.

“If we weren’t confident [in a case] we’d definitely look to ADR,” he says. “But if we feel we are not in the wrong, and we cannot otherwise satisfy a complaint, then a split outcome wouldn’t be in our favor, and
we’d prefer to litigate.”

In general, however, companies have many good reasons for preferring ADR to the regular courtroom. The biggest issues involve time and cost.

“The savings are huge,” says Drew Byers,who runs the ADR program for The Toro Co. in Bloomington, Minn. “It’s phenomenal the amount of money and time we’ve saved [by using ADR] over the past 12 years.”

A big part of the cost savings is attributable to quicker resolutions through ADR (see “Arbitration: A Fast And Fair Process”), and the fact that arbitration decisions are rarely overturned on appeal. 

“The ability to appeal the decision of an arbitrator is restrictive,” says Martin Beirne, a partner with Beirne, Maynard & Parsons in Houston. “Once a case is arbitrated, it’s supposed to be final. But limited appeal rights may provide the parties with fewer sleepless nights.”

Almost as importantly, ADR is a flexible process that companies can morph to suit their needs. For example,arbitrators and mediators have greater flexibility to use creative approaches. “I’ve seen cases where the neutral asked the executives from each side to go out for a walk together, and they came back with a resolution,” Roth says.

In such situations, the involvement of executives is invaluable, but ADR also can serve to minimize the amount of management attention required to resolve a dispute. Disputants can decide in advance, for instance, to forego depositions and instead submit declarations in writing. In this way, managers and executives need not endure endless interrogatories. Further, by virtue of its faster time to resolution and its limited appeal provisions, arbitration shortens the life span of conflicts that might otherwise occupy management’s attention for months or years.

Another major benefit of ADR is that it effectively eliminates punitive damages awards.

“The one thing that should keep every GC awake at night is punitive damages,” Bloom says. “In a courtroom, you never know when someone might pull a punitive damages award on you, but in an arbitration or mediation setting you can be pretty sure they won’t.”

Such benefits make ADR increasingly attractive for corporations. But mediation processes in particular are being used more frequently and are delivering high rates of success (see “Mediation; The Best Solution?” p. 47). For example, mediation is a voluntary process, which minimizes stress for everyone involved. “Both sides can walk out if they want to, which is not something you can do with a jury,” Byers says. “This helps us to maintain relationships with customers and business partners.”

Mediation also gives disputants an opportunity to obtain feedback from a neutral party, which can help a company assess its position more objectively.

“It’s very helpful to have someone who can listen to the arguments of the opposing parties and say ‘bullshit!’ to one or the other,” says George Koeck, general counsel and corporate secretary with Otter Tail Corp., a diversified utility, industrial and services company in Fargo, N.D. “It’s helpful to have someone on the outside give you advice.”

Additionally, mediation results aren’t publicly recorded the way court verdicts and arbitration awards usually are, which helps companies avoid bad publicity.

Companies also enjoy logistical benefits from ADR. Rather than depending on a court docket, for example, they can schedule ADR hearings to suit their own convenience and availability.

“In court, you can sit around all day waiting for the judge,” Bloom says. “But an arbitrator will be ready to go when you show up.”

The setting of an ADR hearing is less formal and more accommodating than a courtroom, Bloom explains. “It’s the basic things: The parking is easier;” he says. “You aren’t prevented from using a wireless phone or reading a newspaper; and if a session is going well, you can get sandwiches and keep going over the lunch hour. In court, at noon the judge goes to lunch.”

ADR isn’t suitable for all types of disputes,but companies are finding that—as part of a comprehensive strategy for handling legal conflicts—ADR can yield dividends. Such a strategic approach challenges companies to craft their processes carefully.

“I see companies becoming more programmatic and systematic about conflict management,” says Stipanowich of CPR. “A number of companies are taking deliberate approaches to resolving commercial disputes, not simply relying on the same old boilerplate or waiting for a court to order mediation.”

Developing a proactive internal system for fielding disputes can allow companies to address a large share of disputes quickly and cheaply. Toro, for example, uses a staff of paralegals to address its disputes,which mostly involve product-liability claims. Sending only nonlawyers to the initial meeting helps to defuse the confrontational conditions that arise when two lawyers face off against each other, according to Byers. It also allows the opposing attorney to think he or she has the upper hand in the negotiation. But because Toro’s paralegals are highly trained and experienced, they are unlikely to compromise the company’s interests.

“Our paralegals dispose about two-thirds of our claims on their own,” Byers says. Those that remain are turned over to Byers—who is not a lawyer—and the company’s national mediation counsel, an outside attorney that Toro retains to lead the company’s formal mediation proceedings.

The key, Byers says, is early intervention. “As soon as we hear about something, we get right on it—before the facts can change, before a lot of money has been spent and people get entrenched, and before a lot of animosity has built up.”

Another strategy that companies are taking is to escalate disputes in a stair-stepped process. Toro’s practice of using paralegals to address initial complaints exemplifies such an approach. “Parties agree that they’ll start with some level of management—usually a lower level—to resolve issues,” Beirne says. “If that doesn’t work, they move to senior management, in hopes that cooler heads will prevail.”

The next steps, if necessary, are generally mediation and finally binding arbitration. “We are seeing this approach in large commercial contracts involving ventures between sophisticated companies,” Beirne adds.

Such an approach allows the greatest opportunity to settle disputes amicably and quickly, while also providing arbitration as a binding endgame that encourages the parties to reach an agreement in less formal processes.

Third, astute companies use mediation processes as a sort of minitrial. This can help the company to view its own position objectively, and it also can provide an opportunity to prepare for an unavoidable arbitration proceeding or jury trial.

“That’s a wonderful thing about mediation: You can use it for free discovery,” says Roth of Lockwood Greene. “You get to hear the other side’s arguments and get a neutral’s insight into whether they are valid or not.”

Bloom of Maxicare agrees. “A good mediator is like a mock jury,” he says.

This feature, however, poses a dilemma. Companies in mediation are expected to negotiate in good faith, and a fine line separates good-faith discovery from abuse of the process. Thus disputants are often justifiably wary of their counterparts’ intentions.

“We put our best foot forward in mediation,” Byers says. “We don’t hold anything back. We don’t come to a mediation with a plan to go to trial, but to settle the dispute.” To remove any doubt,Byers says the company sometimes gives the other party contact information for Toro’s last five mediation counterparties in the region.

Finally, companies are refining their methods for selecting neutrals and mediators. The system works best when mediators or arbitrators see their primary responsibility as achieving a fair and legally valid outcome, but companies are naturally inclined to select sympathetic moderators.

 “The best situation is when both sides agree on one neutral,” Bloom says. More dangerous, he says, is an arbitration panel of three—comprised of two arbitrators selected by each side, and one neutral selected cooperatively. “You pick your lawyer as your arbitrator, for all intents and purposes. If the other side is more clever about selecting the neutral, you are dead.”

Indeed, for this and other reasons, inhouse counsel strongly prefer a single arbitrator approach (see “Rating the Neutrals,” p. 46). Retired judges seem to be the favored type of neutral, although lawyers, subject-matter experts and mediation/arbitration professionals are also popular choices (see “Rating The Neutrals,” p. 46). Many companies develop shortlists of people who have a strong legal background as well as an understanding of their particular industry.

“If you get the right arbitrator, you get a reasonable result,” Bloom says.

However, picking the wrong arbitrator can be disastrous—and the same can be  said of ADR in general.

For all of ADR’s advantages, flexibility and strategic potential, its effectiveness ultimately depends on the way companies implement it. ADR can take many forms and follow many procedural paths. As a result, in-house counsel are challenged to tailor ADR systems and tactics as part of a comprehensive conflict-management strategy. In this way they can capitalize on the benefits that ADR promises, while ensuring they have the right tools in place to address their unique dispute-resolution needs.

“When you use this process, you have picked your poison,” says Koeck of Otter Tail. “You have selected your Solomon, and if you don’t like what he or she does at the end of the day, you have only yourself to blame.”

Michael T. Burr is a Corporate Legal Times contributing editor, a freelance writer and principal of InterSection LLC, a marketing/communications consultancy based in Chicago and Minnesota. E-mail him at

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