Meditation and Alternative Dispute Resolution

Table of Contents

1. Alternative Dispute Resolution Methods

· Overview

· Adjudicative

· Arbitration

· Private Judging

· Fact-Finding

· Evaluative

· Peer Evaluation

2. Mediation - An Introduction

· Overview of Mediation

· Traditional Means of Resolving Disputes

· Defining Mediation

· Mediation vs. Arbitration

· Authority of the Mediator

· Problem Solving Mediation

· Interactive Mediation

· Informal Mediation

· Applications of Mediation

3. Attributes of Mediation

· Stages of Mediation for Mediators

· Introduction of the Process

· Gather Information

· Develop Options

· Build Agreements

· Mediation/Negotiation/Arbitration/Litigation

· Recognizing Constraints on Negotiations

· Dealing with Alternatives to Agreement

4. The Mediation Model

· Proposing Mediation

· Selecting the Mediator

· Ground Rules of Proceeding

· Presentation to the Mediator

· Negotiation of Terms

· Settlement

· Suitability for Mediation

· Roles of Executives and Lawyers

· Role of Neutral Organization

· Confidentiality

5. Preparation for Mediation

· The Mediator’s Preparation

· Types of Preparation

· Parties and Their Representatives

· History of the dispute

· Second Individual Session

· Identification of Issues and Interests

· Restate vs. Reframe

· Setting the Agenda

· Order of Importance

· Contingent Agenda

6. The Negotiation Process

· Common Styles and Tactics

· Problems in Negotiation

· Conducting a “Dance”

7. Finding a Resolution

· Overcoming Reluctance with Problem Solving

· The Caucus

· The Impasse and Getting Beyond it

· The Apology

· Employee vs. Employer Mediation Case

· Types of Apologies

· The Mediator and Alternatives

8. Issues of Confidentiality

· ADR Benefits

· General Considerations

· Exclusions or Privilege

· Privilege Issues

· Confidentiality Agreements

· Court Orders

· Duties to Disclose

· Current Legal Parameters

9. The Mediated Agreement

· Factors to Consider

· Finalizing the Mediated Agreement

10. Mediation Closure

· Concluding the Mediation

· Closure with Formal Mediated Agreement

· Closure without a Formal Agreement

· Post Mediation Follow-Up

· Mediator Ethics

· Current Codes

· Areas for Ethical Consideration

· Ethics for the Advocates and Parties

11. Specialized Mediations

· NASD Mediation

· Introduction

· NASD Mediators

· NASD Mediation Success rate

· Initiating Mediation

· Selecting the Mediator

· Mediator Disclosures

· Scheduling Mediation

· Submissions to the Mediator

· Schools and Universities Mediation

· Disputes Involving Attorneys

· Transactional Matters Mediation

12. Future Trends in Arbitration

· Future Trends Background

· As Time Moves On

· Recent Trends

· On-Line Arbitration

· Current On-Line Issues

· WIPO

· Virtual Magistrate Program

· Arbitration and Electronic Commerce

13. History of Arbitration

· English History

· Development in the United States

· Statutory Development

· The Federal Arbitration Act

· State Statutes

· Supreme Court’s View of Arbitration

14. Arbitration Process

· Voluntary Arbitration

· Elements of Voluntary Arbitration

· Advantages of Voluntary Arbitration over Litigation

· Disadvantages of Arbitration

· Court Required Arbitration

· Not a Voluntary Process

· Provisions Governing Court-Annexed Arbitration

· Similarities with Voluntary Arbitrations

15. Development of Arbitration

· Court Decision Results

· NASD Code of Arbitration Procedure

· Brokerage Firms Out of Business

· Case Results

· Deciding Whether to File

· Matters Eligible for Arbitration

· Arbitration Case Flow

· Dismissal of Proceedings

16. Structured Settlements

· Reality Check and Solution

· Structured Settlement History

· Thalidomide Case

· IRS Rulings

· Structured Settlement Defined

· Advantages of a Structured Settlement

· Other Uses for Structured Settlements

· Funding Structured Settlements

· Annuity Funded Structure

· U.S. Securities Funded Structure

· Structured vs. Lump-Sum Distribution

· Structured Settlement Development Stages

· Structured Settlement Benefits

17. Potential Uses for Structured Settlements

· Insurance Company Settlements and Concerns

· The Annuity Learning Curve

· The New Age

· Background

· Following the Accident

· Structured settlements today

· Great Structured Financial Group

· Peace of Mind Resources

· Economic Approach to Structured Settlements

18. Claims for Structured Settlements

· Type of Case Background

· Auto Liability

· Auto Liability Structured Settlements Endorsement

· Medical Malpractice

· General Liability

· Products Liability

· Serious Nature of Injuries

· Workers Compensation

· Non-Personal Injury Case

19. Important Design Factors

· Life Expectancy of the Injured Party

· Stability of Insurance Companies

· Stability of Trust Funds

· Addressing the Problem of Inflation

· Lost Earnings

· Guaranteed Payments

· Estate and Gift Tax Considerations

· Income Tax Advantage

20. Medical Trusts

· Medical Trust vs. Conventional Lump Sum

· Medical Trust Terminology

· Advantages to the Injured Party

· Criteria for Suitability

· Life Care Plan

· Capital Needs Analysis

· Medical Trust Flow Chart

21. Lump Sum Settlement Problems

· Lump Sum Lottery

· Risks of Squandering Lump Sum Settlements

22. Structured Future Trends

· Uniform Periodic Payment of Judgments Act

· Environmental Impairment

· Defense Costs

· Alternative Dispute Resolution (ADR)

· 54Statutory Trends

· Role of the Claims Examiner

Alternative Dispute Resolution Methods

Chapter 1 1.1 OVERVIEW Alternative Dispute Resolution (ADR) is the term which identifies a group of processes through which disputes, conflicts and cases are resolved outside of formal litigation procedures. These processes were developed as an adjunct to our legal system. At the basis of ADR is the negotiation process. But, for a number of reasons, direct negotiations do not always result in satisfactory settlements. Often, when direct negotiations fail to produce a resolution, a neutral third party can provide assistance in reaching a resolution to a dispute. The following provides a closer look of the more common Alternative Dispute Resolution processes. They can be categorized into three common types; 1. Adjudicative 2. Evaluative 3. Facilitative 1.2 ADJUDICATIVE In Ad judicatory dispute resolution a neutral person adjudicates, or makes a decision. Adjudication is the basis of our current legal system. When a a case is submitted to the court or to a jury, someone other than the parties makes the decision. This process is chosen as some of the parties want or need an outside decision maker. Most similar to formal court proceedings would be arbitration and private adjudication, or private judging. While traditional adjudication such as jury verdicts, court judgments and administrative hearings always results in binding decisions, arbitration and neutral fact finding can vary and non-binding or advisory decisions are even possible. 1.2.1 Arbitration Arbitrations are generally conducted by a single or a panel of arbitrators. The arbitration process consists of arbitrators listening to an adversarial presentation of all sides of a case and thereafter render a decision, usually in the form of an award. Arbitration procedures are generally more formal than the other dispute resolution techniques. Court procedures, rules of evidence and other formal court proceedings rarely occur in arbitrations. While attorneys are often involved, involved parties make the presentations to the arbitrators. Often life witnesses testify, and actual evidence may be submitted. Experts may be involved, and in some cases, the arbitrators may visit the actual site of the dispute such as a construction site. Arbitration awards are generally binding, where the parties have previously contracted for arbitration. The process for appeal from a binding arbitration differs significantly from the normal court appeals process. In most instances they are very limited, statutorily defined rights of appeal. However, if the arbitration award is non-binding or advisory in nature, the parties may disregard it. If the parties in a lawsuit voluntarily agree to participate in arbitration either by contract or stipulation, the award may be binding. When employing the arbitration process the following variables should be considered; • Determination of the rules of procedure • Appropriate time during the life of the dispute for the use of arbitration

• Amount of discovery to be completed prior to the arbitration • Should the arbitrator explain the reward • Whether the parties wish for the arbitrators to make findings of fact and conclusions of law 1.2.1.1 Use of Arbitration

Arbitration may be used before the suit is filed, during discovery as a substitute for a trial or appeal. Most of these decisions may be made by the participants, except for those cases involved in a court attached program. 1.2.1.2 Three Person Arbitration Panel In most cases where the arbitration is conducted by a three person panel, a common practice is for each side to choose one of the arbitrators. The two arbitrators chosen then select the third who usually “chairs” the hearing. 1.2.1.3 Types of Arbitration Examples • High-Low Arbitration: High-low arbitration involves the parties in a monetary dispute minimizing their risk by choosing the parameters of the arbitration award. In advance of the arbitration, two figures are determined, a high number which is automatically awarded if the plaintiff prevails, and a low number for the award if there is a finding for the defendant. • Final Offer Arbitration: In Final Offer Arbitration each party submits in confidence, a final offer to the arbitrators. The final award must be one of the submitted offers. Because of this parties tend to submit reasonable offers. 1.2.1.4 Final Note on Arbitration Arbitration is most effective in cases where the parties cannot agree on the facts or where the dispute is purely monetary. Arbitration is also appropriate where the matter is highly complex or technical and an expert decision is needed. IN many instances, arbitrators, who are not necessarily attorneys, have expertise in the subject matter of the dispute. 1.2.2 Private Judging Private Judging is another distinct Alternative Dispute Resolution type falling within the Ad judicatory domain. Private Judging is also known as special judging. With this option the parties hire a retired or former judge to hear the case and render a decision. In several states, courts can order a referral of a civil or family case to this procedure. (You know, Judge Wopner)

The judge, also called a referee, can either decide all issues or just a portion of the case. So, while private judging resembles traditional litigation, important differences exist such as the expertise of the judge, speed of decision and making rules and procedures for the “hearing”. Essentially, private judging consists of a formal presentation of the case by counsel, utilizing witnesses and documents and generally following the rules of procedure and evidence. The private judge presiding over the process has essentially the same powers as a trial judge. A record of the hearing is kept by a private court reporter, and the decision is entered by the referring court as a judgment of the court. Therefore, rights of appeal are the same as if the judgment had been rendered by the referring court. Several states have statutes outlining the specific procedures to be followed in the use of this process. In some cases, it is mandated that the private judge be a former or retired judge., although other statutes do not require judicial experience. Use of a private judge is probably most useful in cases where a dispute of both law and fact is the impediment to settlement. The parties see a need for the decision maker to possess judicial experience, and therefore select a former judge. 1.2.3 Fact-Finding Neutral Fact-Finding is another form of the Ad judicatory process. In this process, the neutral third-party, gathers information from all interested parties and then makes a determination of the facts gathered. The determination made by the neutral party may be binding or merely advisory. Any recommendations for final resolution of the matter may be included in the fact-finder’s report. Neutral fact-finding may be used on a portion of the matter or to determine the final resolution. Courts have also defined the duties of a neutral fact to include providing sufficient information to a final decision maker, if that decision maker is bound by the result of neutral fact finding. 1.2.3.1 Expert Fact-Finding This is a variation of Fact-Finding. In this process, the parties employ neutrals to render expert opinions on technical, scientific or legal questions. If advisory, however, a court or subsequent adjudicator is free to make a new determination. 1.3 EVALUATIVE Case evaluation may be defined as a process whereby advocates present their version of the case to one or more third party neutrals, who then evaluate the strengths and weaknesses of each. This type of Alternative Dispute Resolution consists of providing the lawyers and the litigants with feedback as to the merits of the case. The primary purpose of neutral case evaluation is to provide an objective, nonbinding, confidential, evaluation of the case. This evaluation may be used by the lawyers and clients in further settlement negotiations. Often parties are unable to reach a settlement in a matter due to unrealistic expectations about the final outcome. Ideally, neutral case evaluation will provide an opportunity to reconsider settlement options. Depending on the dispute and type of evaluation sought, feedback can be provided by peers, professionals, experts, or lay persons. 1.3.1 Peer Evaluation This process, primarily used in Texas with a modified version in Michigan, has a panel consisting of three neutral, experienced attorneys who listen to a presentation consisting of both factual and legal argument by counsel for each of the parties.

The panel then questions the attorneys as well as the clients who are present throughout the entire process. After deliberation, the panel renders an advisory, confidential evaluation of the strengths and weaknesses of the case and often provides a range for settlement. However, the evaluation is not binding upon the parties. The objective of the evaluation is that it will assist with further settlement negotiations. Neutral Evaluation of Neutral Case Evaluation are the most common evaluative processes used. An attorney serves as the sole evaluator in this process. Neutral case evaluation has been used informally where a magistrate or colleague provides feedback to attorneys about the case. Other states, such as California, now have court programs which provide a more structured process. The attorney evaluator is hand-selected by the court. The process takes place very early in the life of the case, usually upon the filing of the response. The initial goals of the process include the following; • Force the parties to confront their case as well as that of the opponent • Identify the actual matters in dispute • Develop an efficient discovery process • Obtain an assessment of the case In reality the process often becomes a settlement conference. More than one-third of the cases are settled. Many neutral case evaluation procedures in other jurisdictions now have settlement of the case as an explicit and primary goal. A written case evaluation is often provided the parties and if they wish, the neutral will then engage in assisting them in settlement decisions. However, even if a settlement is not reached, the parties will have established a time-line for administration of the case including discovery practices. Discovery practices are effective methods of expediting the resolution of cases. More consistency of this process will occur when evaluators are more educated and trained in the process. 1.3.2 Summary Jury Trial Many litigants want their day in court as they have a right to a trial by a jury of their peers and will not be satisfied with anything less. In order to provide such a trial in a summary method to save time and dollars for the parties and the court the Summary Jury Trial was created. In this process, the attorneys present an abbreviated version of their evidence to an advisory jury usually selected from the regular jury pool of that jurisdiction. Some courts will inform the jurors in advance that their verdict is only advisory while others argue that the Summary Jury Trial (SJT) will be more effective if the jurors return a “real or true” verdict. Each attorney makes an opening statement and then summarizes in a narrative manner what the evidence would show if the case went to trial. In about half the cases the court will permit live testimony. However, testimony is often limited to

one witness per side, usually the primary party to the dispute. These persons are able to tell the jury their “side of the story” in their own words. In most cases, each presentation is limited to one half day in duration. The attorneys also present closing arguments. Generally speaking, all details of the SJT are worked out at a pre-trial conference. After the presentation is complete, the jury usually a panel of six persons, deliberates and returns a non-binding, advisory verdict. The parties and their attorneys may then poll and question the jurors to gain feedback about the case. The information gained from this process can then be used for further settlement negotiations. 1.3.3 Expert Evaluation A retired judge can bring to a case knowledge, experience and temperament which can be quite helpful in assisting the parties reach a settlement. By providing an independent, neutral, expert evaluation of such an issue, a resolution may be achieved in a case which would otherwise take months to try. Alternative Dispute Resolution Methods Examples can include any of the following issues; • Construction • Computer design • Securities • Biomedical technology • Investment advice As long as all the involved parties agree to the selection of the neutral expert, the results are generally accepted as compelling. By the way, expert evaluation can apply to a single issue or to the entire case. This process can and is used in Mediation, another process. Cases are evaluated, in part or in whole, on the opinions of the experts. In the adjudicative model of dispute resolution, the decision maker finds one expert more credible than the other. However, on other instances, the experts, if taken out of their role as witnesses, can provide insight and information which increases the parties” understanding of the problem as well as its creation. Experience has proven that experts prefer collaboration and can often work together to find a workable solution to the dispute. 1.4 FACILITATIVE In this type of process, the neutral does not render a decision or an evaluation. Instead, the neutral provides assistance to the parties so that they may reach an acceptable agreement. The following are the three common facilitative processes; 1. Mediation 2. Conciliation 3. Consensus building Mediation is the process where the third party neutral acts as a facilitator to assist in resolving a dispute between two or more parties. Mediation is the least adversarial approach to conflict resolution and encourages the parties to communicate directly. The role of the mediator includes;

• Facilitating communication between the parties • Assisting in identifying the real issues of the dispute and the interests of the parties • Generating options for settlement. The goal of facilitative processes is that the parties themselves arrive at a mutually acceptable resolution of the dispute. As with other types of Alternative Dispute Resolutions, the mediation process is flexible. Primary variables affecting the process include the type of dispute, the style of the mediator and the relationship of the parties. Most litigation cases are managed by attorney mediators. One of the few exceptions is in the family law area as there are two mediators, an attorney and a therapist used. Mediation is useful in all types of cases, and it is effective even at the appellate level. Mediation is of particular value in those instances where the parties want to maintain the relationship, whether personal or professional, or where there are issues and interests underlying the dispute which need to be identified and explored. Over the years, the terms mediation and conciliation have been used interchangeably, but there are some differences worth noting. Mediation while is an informal process, usually maintains more structure than pure conciliation. As an example, it may be possible to achieve conciliation over the telephone, whereas telephonic mediation is rarely used. In addition, the term conciliation usually means that the disputing parties have been reconciled, and the relationship has been mended. In mediation, although maintenance of the relationship is an important factor, resolution of a case will often occur without an actual reconciliation between the disputants. Consensus building is another process which is facilitative in nature. Consensus building may be thought of as an extended mediation, involving large groups and a number of conflicts. Unlike traditional mediation which is generally a one time, one day intervention, the consensus building process takes place over a more extended period of time. Also, because interested parties may be large groups of people, it is unlikely that everyone attends the process. each group will have representatives who then must obtain ratification of any decision reached at the consensus building session. 1.5 COMBINATION PROCESSES In some instances is possible to design additional Alternative Dispute Resolution procedures by blending processes to create completely new techniques. These are sometimes known as “hybrids”. And, at other times, ADR processes may be used in conjunction with one another. This is known as combined processes. As an example, if the parties are unable to reach a settlement after presentation of the evaluation in a neutral case evaluation, it may be appropriate to utilize a mediator for facilitation, or an arbitrator for a rendering of an award. Or, if, after a summary jury trial the parties agree on liability, but cannot reach an agreement on damages, a mediator or arbitrator can assist with these remaining issues. The most common combined process is known as Med-Arb, which combines the mediation and arbitration processes. In fact, it has been applied in so many instances that modifications have resulted. There are currently at least three different

versions of the Med-Arb Process. As an example, the summary jury trial can be seen as a hybrid of two ore more traditional processes, the jury trial and a settlement conference. 1.5.1 Mini-Trial The Mini-Trial is used primarily in large corporate litigation. It is a hybrid of negotiation, mediation and case evaluation. With a focus on business, the Mini- Trial has its basis on the realization that it may be mutually beneficial for companies to resolve disputes without a long period of expensive litigation. Continued business dealings will enhance each company’s profitability. Therefore, preservation of the business relationship is a key element in the case’s resolution. It is imperative that a high level corporate decision maker attends the process. The attorneys and corporate executives meet with an expert, third party neutral advisor. Then, all sides present their side of the facts of the case being reviewed. After that, direct negotiation by the corporate executives, usually without the attorneys or the neutral present, follows. If unsuccessful after a predetermined amount of time, the expert advisor provides a non-binding opinion or evaluation regarding the merits of the case. Thereafter, the executives, armed with this additional information, negotiate again. If a resolution is not reached, the neutral may act as a mediator. 1.5.2 Jury-Determined Settlement This is a blend of the summary jury trial and arbitration. In the jury determined settlement proceeding, the jury is empanelled, and the trial proceeds similar to a summary jury trial. At the conclusion of the Jury Determined Settlement , however, the jury provides a binding settlement rather than a verdict. The parties are more directly active in the process and set limits of the settlement in advance through the use of a high-low agreement. 1.6 USE OF ALTERNAT I V E DI SPUTE RESOLUTIONS

All the processes described in this Chapter are designed to assist disputing parties in reaching a final resolution of a situation. But each process differs in exactly how that is accomplished. It is not an easy procedure as to which process should be used for each situation. There is no scientific means for choosing the most appropriate process.

Cases, as well as clients, differ, and the exact nature of both is relevant in selecting which method is most advantageous in a given case. What does appear to be true is that there are no bad choices and that the Alternative Dispute Resolution choices are expanding every day to meet the needs of the parties involved. It is likely that an appropriate procedure can either be found or designed. 1.7 PRESUMPTIVE MEDIATION Mediation will most often be the preferred procedure for overcoming the impediments to settlement. It has the greatest likelihood of overcoming all impediments except different views of facts and law, and the desire for the big “score”. A skilled mediator can often obtain a settlement without the necessity of resolving disputed questions of facts or law. Under this approach the mediator would first attempt to resolve the dispute by using customary mediation techniques. In this way the mediator would gain a clearer sense of the parties’ goals and the obstacles to settlement than could be obtained by counsel prior to mediation. If mediation were not successful, the mediator could then make an informed recommendation for a different procedure. As an example, if the parties were so far apart in their views of facts or law that meaningful settlement negotiations could not take place, the mediator might recommend a referral to one of the evaluative procedures to move the parties closer to a common view of the facts and the law. Once that had been accomplished, mediated settlement negotiations would resume. One of the strengths of this approach is that the mediator’s process recommendation might be more readily accepted by both parties than would the suggestion of either of their attorneys. This is because attorney suggestions are generally considered suspect of being based on short -range considerations. Keep in mind that the presumption in favor of mediation would be overcome when the goals of one or both parties could not be satisfied in mediation, or mediation was clearly incapable of overcoming a major hindrance to settlement. The most common situation in which this could occur would be when either party has a strong interest in receiving a neutral opinion, obtaining a precedent, or being vindicated, and is willing to consider any procedure that closes in on the possibility of accomplishing that objective.

Mediation, An Introduction

2.1 OVERVIEW OF MEDIATION Every day people have disputes with other people. But yet, people resolve disputes every day. Some people are better at resolving disputes than others. The process of dispute resolution is virtually ignored. We constantly search for ways to resolve conflict but generally use a “knee jerk” approach instead of a more analytical, process oriented method. Fortunately, many options for conflict resolution exist somewhere between avoidance and fighting.

Mediation as a process of resolving conflict, has been gaining popularity and acceptance in the United States since 1976. Over the years many persons have expressed a disappointment with our judicial system as a means of dispute resolution.

Keep in mind that Alternative Dispute Resolution (ADR) procedures to no ignore the fact that disputes exist. Rather, they focus on new and creative methods to resolve disputes. This approach often includes an examination of the underlying causes of conflict.

2.2 TRADITIONAL MEANS OF RESOLVING DISPUTES • Fighting • Forcing • Coercion • Accommodation • Compromise • Splitting down the middle • Avoidance • Voluntary relinquishing responsibility • Emphasizing outcomes

2.3 DEFINING MEDIATION Mediation is the process by which an impartial third party assists people in a dispute to explore and understand their differences and, if possible, to settle them. One of the important thing to understand about mediation is that the parties involved need to dictate the terms of any agreement, not the mediator. Another way of putting this is to say that mediation is a term that has been used to describe a range of practices designed to help parties in conflict.

2.3.1 More Basic Definitions of Mediation

• The broad term describing the intervention of third parties in the dispute resolution process. • A process in which a third party facilitates and coordinates the negotiation of disputing parties. • Trying to get two people to do that which they least want to do, such as talk to each other. • Intervention into a dispute or the negotiation process by an acceptable impartial and neutral third party who has no authoritative decision-making power. • An informal process in which a neutral third party with no power to impose a resolution helps the disputing parties try to reach a mutually acceptable settlement. • A private, voluntary, informal process where a party-selected neutral assist

disputants to reach a mutually acceptable agreement. • A process i which a neutral third party assists the parties in developing and exploring their underlying interests and legal positions. • A process which promotes the development of options and assists the parties toward settling the case through negotiations. • A process by which a third party neutral acts as a facilitator to assist in the resolving of a dispute between two or more parties. • It is a non-adversarial approach to conflict resolution where the parties communicate directly. • The role of the mediator is to facilitate communications between the parties, assist them on focusing on real issues of the dispute and generate options for settlement. • The goal of the mediation process is to have the parties themselves arrive at a mutually acceptable resolution of the dispute.

2.4 USES FOR MEDIATION Mediation is used in many different types of cases, from minor criminal disputes, small claims disputes and domestic relations cases to complex civil matters.

2.5 MEDIATION VS.ARBITRATION Mediation sharply contrasts with the adversarial processes of arbitration, and, at least theoretically, decreases the hostility that might result from litigation. The purpose of mediation is neither to judge guilt or innocence, nor to decide who is right or wrong.

Rather, its goal is to give the parties the opportunity to; • Vent and diffuse feelings • Clear up any misunderstandings • Determine underlying interests or concerns • Find areas of agreement • Incorporate areas of agreement into solutions devised by the parties themselves

2.6 AUTHORITY OF THE MEDIATOR A mediator, unlike a judge, a hearing examiner, or an arbitrator, has no legal power to render a judgment or award. Nor is a mediator a lawyer acting as an advocate for one side. Rather, a mediator is a neutral third party who helps the parties talk out their problems, unrestrained by court evidentiary rules.

The mediator can help the parties to focus more on the true basis of their dispute and on future remedies than on punishment, revenge, or responsibility for past events. A mediator has neither the power to impose a settlement nor the responsibility to counsel the parties. Thus, a mediator’s approach is entirely different from that of a judge or an arbitrator. The mediator has no robe or gavel, only good sense (hopefully) and power of persuasion.

A mediator’s effectiveness depends on the parties’ trust. In addition, unlike a counselor, a mediator does not say, “if I were you, I would do this and that.” The mediator rarely even makes recommendations that reveal how he/she feels about a dispute, but operates through indirection, trying to reconcile opposing points of view by searching for common ground.

2.7 MEDIATOR ACTIONS • Make the proceedings manageable

• Help the parties make rational decisions between agreement and pursuing a claim • Develop an atmosphere conducive to problem-solving negotiations • Help the parties narrow the options and move towards agreement • Help the parties to create options • Gather all the information available about the interests of the parties

2.8 ROLES OF A MEDIATOR In the course of a mediation session, a mediator plays a number of different roles, including the following; • Facilitator: The mediator facilitates the mediation process by keeping the discussion moving, by directing conflict so that it becomes an impetus to movement rather than a contribution to hardening positions, and by phrasing and re-phrasing areas of possible agreement. Mediation, An Introduction

• Opener of Communication Channels: When the parties are not talking to each other for one reason or another, the mediator intervenes to re-establish communication.

• Translator and Transmitter of Information: Sometimes the parties are talking but they are not understanding each other. They might be unaware of certain facts, or might have a different perception of the meaning of these facts. Here the mediator can act as a transmitter as well as a translator of information. Both functions are important.

• Creator of Options: The mediator is not always passive. Indeed, as the session progresses, the mediator becomes more involved and at some point may have to propose options to the parties. This is o ne of the most creative aspects of mediation and should not be overlooked. Remember, it is not the mediator’s job to decide on a solution and sell it. The mediator should suggest ideas to the parties, however, as a way of assisting them to resolve the dispute.

• Distinguisher of Positions from Interests: The mediator knows that bargaining positions may be expressions of hurt, anger or a desire to punish, as well as realistic hopes fro concessions. Usually parties cannot settle a dispute without modifying either the form or content of their original demands. The mediator helps them distinguish their true underlying needs, those things that must take place for the dispute to be settled, from their original desires, and modify their bargaining positions accordingly.

• Agent of Reality: The mediator also acts as an agent of reality. This is one of the mediator’s most critical roles. As agreement or its possibility nears, the mediator’s job is to increase each party’s awareness of the other’s needs and to build a realistic framework within which they can access the costs and benefits of continuing or resolving the conflict. In this role, the mediator risks suffering

the fate of the king’s messenger. This is an unavoidable risk but most times the mediator is the only person in a position to take it.

2.9 TYPES OF MEDIAT ION

2.9.1 Problem Solving Mediation Problem solving mediators tend to be active in suggesting and evaluating options. The reasoning behind this is that mediators are generally experienced in dispute settlement, they can think outside the parties’ limits and bring their own experience and knowledge to bear. However, one of the dangers is that this method leaves the door open for mediator power plays, such as a premature closing on issues that become difficult, and a lack of ownership from the parties.

2.9.2 Interactive Mediation Interactive mediators fully involve the parties in generating, evaluating and closing on the issues. This may involve more work, but it leads to improved self-image, as people are brought forward at their own pace, and greater ownership of solutions that are agreed, as they have been reached voluntarily by the parties themselves. Interactive mediation is a way of working that allows problem solving to happen, but even if no tangible movement on practical issues is achieved, the parties are often able to move on in other ways-in their mutual understanding, approach to future communication, or the way they accept inevitably difficult outcomes. These latter benefits are more important than practical solutions, and often more significant in terms of future relationships, than the quick fix or imposed solutions that a purely problem-solving approach can achieve.

2.9.3 Informal Mediation Informal mediation can happen spontaneously, as an example, when a manager interrupts two colleagues arguing in a hallway, or when one person comes to complain about another and the manger thinks, “I could really do with getting these two together fast.” In this setting ground rules and structure are still important. the process provides the safety net that allows people to make the moves they need to resolve disputes both formally and informally.

2.10 APPLICATIONS OF MEDIAION Commercial and publicly funded organizations across the world have used mediation in the workplace for contract disputes, disagreements about customer complaints,

insurance and compensation claims, and large-scale disputes about pay and conditions, planning and development.

Mediation is well established in the international arena and has had many notable successes. Neighbors; family members who are separating or divorcing and disputing over the children, property, assets, and debts; children in playground fights; members of different faiths-these are all groups who for many years have called in mediators to help them sort out their differences constructively. There are very few famous mediators, as they often work confidentially and almost invisibly.

2.11 MEDIATION PROCESS EXPLAINED

2.11.1 What Happens in Mediation • It is a structured step-by-step process • It is confidential and speedy • There are separate meetings, then a joint session if appropriate • Issues are clarified • Options are created • Win/win solutions are sought

2.11.2 What Mediators Do • Remain impartial, without judging • Listen and help people listen to one another • Help people communicate • Create a safe environment • Manage conflict constructively • Help people think more creatively about solutions

2.11.3 What People Get Out of Mediation • Agreements • Understanding and information that can improve future relationships • Better communication if future problems occur • Clarification about misunderstandings • Less stress, more confidence

3.1 STAGES OF MEDIATION FOR MEDIATORS

3.1.1 Introduction of the Process

The following statements, explanations and information is given during this stage of the mediation process: • Purpose of mediation stated • Mediation process explained • Tone for the meeting is set

• Mediator explains his/her role • Introductions of all parties are made • Mediator explains that he/she does NOT have the power to decide the case • The mediator’s job is to help the parties reach their own agreement • Parties are told what to expect during the mediation • Joint and separate sessions can be held with the parties • All discussions are held confidential • All parties have the opportunity to be held • The role of the principals and attorneys are explained

3.1.2 Gather Information • Mediator will elicit general facts and positions of the parties • Mediator will elicit sensitive facts and identify interests in having separate sessions • Mediator will listen carefully • Parties are allowed to vent • Open-ended questions should be asked by the mediator • The mediator should show empathy • It is the job of the mediator to translate and clarify anything said

3.1.3 Develop Options • Options can be developed in joint or separate sessions • Parties should be asked for their ideas first • Options should be created before any evaluations are made • Hypothetical suggestions should be communicated to the parties

3.1.4 Build Agreements • The mediator should be active in this process • Any information should be communicated to all parties • Possible settlements should be communicated hypothetically • Options should be narrow in scope • Possible alternative should be prepared for any potential agreement • Parties stating positions should be questioned • Subtle persuasion should be used by mediator • Stronger techniques should be used by the mediator in case of an impasse

3.1.5 Close • Agreement should be clarified • It should be stated if no agreement has been reached • Any remaining issues in dispute should be clarified • As appropriate, other processes should be considered by the mediator

3.2 MEDIATION / NEGOTIATION/ARBITRATION / LITIGATION Mediation Versus Other Types of Dispute Resolution Issue Mediation Negotiation Arbitration Litigation 3.3 KEY QUALITIES OF MEDIATORS

Interactive mediation requires potential mediators to develop a set of skills, and an approach to conflict, that some people may find easier than others. Some of those qualities are as follows; • Good Listener: A mediator must be prepared to be patient, attentive, and understanding of what other people say. He/she must be able to assume that all the parties are telling the truth as well as silence the internal conversation that many of us have when listening. • Capable of Staying Calm: Responding positively and fairly to difficult behavior, staying focused and unfazed, thinking creatively under pressure. • Open-Minded: Not getting drawn in, offering an opinion, or criticizing even when there is an urge to do so, able to live with “gray areas”, accepting of people’s differences, able to respond constructively to a wide variety of people, ideas and different ways of thinking. • Positive Under Pressure: - Good at getting the best out of other people. - Able to manage other people’s frustration and aggression in a constructive way. - Not taking things personally. - Remaining relentlessly constructive and realistically optimistic. - Being a good communicator, able to encourage, prompt, and be persistent when necessary. • Aware of Issues Associated with Equality - Showing understanding of prejudice and discrimination, harassment and bullying - Working in a way that demonstrates in a practical manner respect for and acceptance of differences • Able to Maintain Confidentiality - Mediator must be prepared to work without disclosing details of disputes, issues, or behavior before, during, or after contact with clients, and able to resist pressure for inappropriate disclosure from individuals or groups within your organization • Organized: Able to work in a structured way, keeping people informed, managing venues and the small amount of paperwork required.

3.4 ENCOURAGING PEOPLE TO MEDIATE While sometimes hard to “sell”, mediation has the following benefits; • It is fast acting • It is private • It treats the parties like adults

• It leaves the parties feeling competent and effective • It doesn’t close other doors if not satisfied • It takes away the conflict in nine out of ten cases

3.5 RESISTANCE TO MEDIATION Resistance to mediation is often rooted in areas such as the following; • Misunderstanding and lack of information: Mediation is still seen as counseling, meditation and compromise. • Fear of conflict: People are brought up to avoid conflict and to be scared of voicing their needs, or they are afraid of being shouted at or criticized. • Skepticism about results: We generally view ourselves as competent communicators, so how can something that calls for only talking and listening really achieve anything different and lasting. • Win/lose psychology: If I have to give something up then I know I have lost. • Transference of responsibility: People are aware of their rights and the organization’s responsibilities and they are reluctant to believe that they must resolve their own disputes. • A culture of blame: This makes people afraid of any type of disclosure or acceptance of personal responsibility.

3.6 HUMAN BEHAVIOR TRUISMS Mediators must keep in mind the following truisms about human behavior; • People will rarely make a decision if there is any way to avoid it • People may agree on the “facts” but disagree violently over the meaning of those facts • People usually act out of self-interest • When two people have a dispute, it cannot be resolved until both parties decide that they really want to resolve it • People do not like to be told what to do • People do not like to apologize • People tend to carry out only those decisions they have helped to formulate • People are more important than disputes. If the parties can agree to live with each other without resolving who did what yesterday, then who did what yesterday is not important. • Disputes are not resolved by dwelling on the negative; they are resolved by discussing areas of agreement between the disputants and by accentuating the positive. • No settlement is entered into without doubt.

3.7 PROBLEM SOLVING NEGOTIAT ION TECHNIQUES Negotiation consists of communications between two or more parties designed to reach agreement. Mediation offers one means of turning acrimonious negotiations into productive, problem-solving sessions. For parties who may deal with one another again in the future, maintaining credibility and trust may be as important as obtaining any particular substantive gain. The maintenance of a working relationship is of particular importance when the disputing parties are neighbors, family members or business associates.

The primary purpose of “problem-solving” negotiation is to maximize the parties’ joint gains. This is known as a “win-win” negotiation. Naturally, all questions cannot be resolved in this way. Yet a surprisingly large number can, particularly if the issues are many and the relationships ongoing. In any negotiation it is useful to determine whether creative solutions are possible before whatever exists to be distributed is divided.

3.7.1 Separating Interests from Positions The most important technique in problem-solving negotiation is to separate interests (or needs) from positions (or desires). To separate interests from positions, it is useful to ask why parties want something and what they see as their most important needs. Generally, each party to a negotiation will have several interests, which can be prioritized. If each of the parties understands his or her own, as well as the other party’s, priorities, it may be possible to devise trade-offs of things that are unimportant to one side but critical to the other. For example, although an employee may come to the mediation with a demand for a promotion, an increase in salary or a change in position may be the employee’s real interest.

3.7.2 Developing Options

The most creative aspect of negotiation is the development of options for meeting the parties’ needs. Sometimes there are options, such as new job assignments, that will resolve single issues satisfactorily to all parties. In other cases, different issues, of different importance to each of the parties, will be linked, thus enabling trade-offs. For example, in a case where an employee was denied a promotion because of poor writing skills, the employer may agree to pay for a writing course to assist the employee in improving those skills. Because of the possibility of trade-offs, multi-issue disputes frequently are easier to resolve than single issues, where there may be less room for accommodation.

3.7.3 Agreeing on Standards If the parties can agree on standards, or principles, to govern the resolution of their dispute, agreement on substance will become easier. It also may seem fairer and less arbitrary. Examples of such standards are bluebook prices for automobiles, market share percentages, established criteria for evaluating employees, statutes, court decisions, or regulations, so long as they are accepted as valid by all parties, and neutral appraisals of property to determine values.

3.7.4 Recognizing Constraints on Negotiations There are a number of constraints on negotiations, which may influence their results. For example, there may be deadlines or time-related costs that are greater for one side than for the other. In general, a person who owes money is in no hurry to determine the precise amount; the opposite is true of the person to whom the money is owed.

The same may be true of a dissatisfied home owner, who wants the contractor to redo work on the house, and the contractor, who is not interested in redoing the work. Whether an agreement must be ratified or approved by parties not at the table (the party’s immediate supervisor, business partners, insurers, or the parties’ attorneys for example) or is dependent on other negotiations or conditions that the parties cannot control, also may affect the result.

3.7.5 Dealing with Alternatives to Agreement The power of each party to a negotiation depends on the acceptability and attractiveness or his or her alternatives to an agreement. The better the alternative (an outside job offer, for example), the less a party needs to give up in order to secure an agreement. Thus, a live issue during a negotiation is the expectation of each party about what will happen if they do not settle. Each party generally attempts to make his or her alternative seem more attractive than those available to the other party.

Chapter 4: The Mediation Model

4.1 PROPOSING MEDIATION Any party to a business dispute may unilaterally imitate a mediation process by contacting the other party or parties, orally or in writing, and suggesting the use of a neutral mediator to mediate efforts to arrive at a resolution. If the parties have made a contractual commitment to mediate disputes between them, or if they have subscribed to the Corporate Policy Statement on Alternatives to Litigation (CPR), that commitment or policy will be invoked.

4.2 SELECTING THE MEDIATOR Once the parties have agreed in principle to a mediating process, or at least to seriously consider mediation, they will discuss the selection of a mediator. Any party may suggest one or more candidates, or they may request a neutral organization, such as CPR, to propose candidates. The mediator must be selected by agreement of all parties.

Any candidate for the role of mediator shall promptly disclose to the parties any circumstances known to him or her which would cause reasonable doubt regarding the candidate’s impartiality. Each party shall promptly disclose any such circumstances to the other party or parties. These disclosure obligations shall be continuing until the mediation is concluded. If any such circumstances have been disclosed, before or after the individual’s appointment as mediator, the individual shall not serve, unless all parties agree.

The mediator’s compensation rate will be determined before appointment. Such compensation, and any other costs of the process, will be shared equally by the parties, unless they otherwise agree. If a party withdraws but the procedure continues, the withdrawing party will not be responsible for any costs incurred after its withdrawal. Before appointment the mediator will assure the parties of his or her availability to conduct the proceeding expeditiously.

4.3 GROUND RULES OF PROCEEDING

Once a mediator has been selected and has agreed to serve, the representatives of the parties will meet jointly with the mediator to discuss the following ground rules and any different or additional ground rules the mediator or a party wishes to propose as to the manner in which the process is to be conducted;

1. The process is voluntary and non-binding.

2. Each party may withdraw at any time after attending the first session and prior to execution of a written settlement agreement.

3. The mediator shall be neutral and impartial.

4. The mediator controls the procedural aspects of the mediation. The parties will cooperate fully with the mediator.

5. The mediator is free to meet and communicate separately with each party.

6. The mediator will decide when to hold joint meetings with the parties and when to hold separate meetings. The mediator will fix the time and place of each session and the agenda, in consultation with the parties. There shall be no stenographic record of any meeting. Formal rules of evidence will not apply.

7. The mediator may request that there be no direct communication between the parties or between their attorneys without the concurrence of the mediator.

8. Each party may be represented by more than one person, e.g. a business executive and an attorney. Participation of a business executive is to be particularly encouraged. The mediator may limit the number of persons representing each party. At least one representative of each party will be authorized to negotiate a settlement of the dispute.

9. The process will be conducted expeditiously. Each representative will make every effort to be available for meetings.

10. The mediator will not transmit information received from any party to another party or any third party unless authorized to do so by the party transmitting the information.

11. The entire process is confidential. The parties and the mediator will not disclose information regarding the process, including settlement terms, to third parties, unless the parties otherwise agree. The process shall be treated as a compromise negotiation for purposes of the Federal Rules of Evidence and state rules of evidence.

12. The parties will refrain from pursuing administrative and/or judicial remedies during the mediation process, insofar as they can do so without prejudicing their legal rights.

13. Unless all parties and the mediator otherwise agree in writing, (a) the mediator will be disqualified as a witness, consultant or expert in any pending or future investigation, action or proceeding relating to the subject matter of the mediation (including any investigation, action or proceeding which involves persons not party to this mediation) and (b) the mediator and any documents and information in the mediator’s possession will not be subpoenaed in any such investigation, action or proceeding, and all parties will oppose any effort to have the mediator and documents subpoenaed.

14. If the dispute goes into arbitration, the mediator shall not serve as an arbitrator, unless the parties and the mediator otherwise agree in writing.

15. The mediator, if a lawyer, may freely express views to the parties on the legal issues of the dispute.

16. The mediator may obtain assistance and independent expert advice with the agreement of and at the expense of the parties. Any required disclosures shall also apply to independent experts.

17. Neither CPR nor the mediator shall be liable for any act or omission in connection with the mediation.

18. The mediator may withdraw at any time by written notice to the parties (i) for overriding personal reasons, (ii) if the mediator believes that a party is not acting in good faith, or (iii) if the mediator concludes that further mediation efforts would not be useful.

19. At the inception of the mediation process, each party and representative will agree in writing to all provisions of this Model Procedure, as modified by agreement of the parties.

4.4 PRESENTATION TO THE MEDIATOR Upon entering into mediation each party will submit to the mediator a statement summarizing the background and present status of the dispute and such other material and information as it deems necessary to familiarize the mediator with the dispute. Submissions may be made in writing and orally. The parties may agree to submit jointly certain records and other materials.

The mediator may request any party to provide clarification and additional information. The mediator may raise legal questions and arguments and may request any party’s attorney to brief legal issues.

The mediator may request each party, separately or at a joint meeting, to present its case informally to the mediator.

The parties are encouraged to exchange written statements and other materials they submit to the mediator. Such as exchange is likely to further each party’s understanding of the other party’s viewpoint. Except as the parties otherwise agree, the mediator shall keep confidential any submitted written materials or information.

The parties and their representatives are not entitled to receive or review any such materials or information submitted to the mediator by another party or representative, without the concurrence of the latter. At the conclusion of the mediation process, upon request of a party the mediator will return to that party all written materials and information which that party had provided to the mediator.

4.5 EXCHANGE OF INFORMATION If any party has a substantial need for documents or other material in the possession of another party, the parties shall attempt to agree on the exchange of requested documents or other material. Should they fail to agree, either party may

request a joint meeting with the mediator who shall assist the parties in reaching agreement. At the conclusion of the mediation process, upon the request of a party which provided documents or other material to one or more other parties, the recipients shall return the same to the originating party without retaining copies thereof.

4.6 NEGOTIATION OF TERMS The mediator may promote settlement in any manner the mediator believes is appropriate. Once the mediator is familiar with the case, the mediator will hold discussions with the parties’ representatives. The mediator will decide when to hold joint meetings and when to meet or confer separately with each party. The parties are expected to initiate proposals for settlement unless, by prior agreement, they expect the mediator to be the first to propose the terms of settlement. Each party or the mediator shall provide a rationale for any settlement terms proposed.

If the parties fail to develop mutually acceptable settlement terms, before terminating the procedure the mediator may submit to the parties a final settlement proposal which the mediator considers fair and equitable to all parties. The parties will carefully consider the mediator’s proposal and, at the request of the mediator, will discuss the proposal with the mediator. If a party does not accept the final proposal, it shall advi se the mediator of the specific reasons why the proposal is unacceptable.

Efforts to reach a settlement will continue until (a) a written settlement is reached, or (b) the mediator concludes and informs the parties that further efforts would not be useful, or (c) one of the parties or the mediator withdraws from the process; provided that if there are more than two parties, the remaining parties may elect to continue following the withdrawal of a party.

4.7 SETTLEMENT If a settlement is reached, the mediator, or a representative of a party, will draft a written settlement document incorporating all settlement terms, including mutual general releases from all liability which may relate to the subject matter of the dispute. This draft will be circulated among the parties, amended as necessary, and formally executed.

If litigation is pending, the settlement may provide that the parties will arrange for dismissal of the case promptly upon execution of the settlement agreement. The parties also may request the court to enter the settlement agreement as a consent judgment.

4.8 SUITABILITY FOR MEDI ATION Most bona fide disputes are amenable to settlement by negotiation. Mediation is a facilitated form of negotiation. Virtually every case in which negotiation is appropriate but difficult is suitable for facilitated negotiation or mediation, whether or not unassisted negotiations have taken place, and whether or not litigation is pending between the parties regarding the subject matter. Mediation can be particularly helpful when the opportunity exists to structure a creative business solution.

When a dispute involves several or many parties it may not be essential for all to be at the table, but any party crucial to a settlement must be represented. Among the many types of domestic and transnational business disputes that have been successfully mediated are disputes relating to; • Commercial, financial and real estate transactions • Construction • Technology • Product liability • Trademarks and unfair competition • Dealerships or franchises • Private antitrust • Insurance coverage • Partnerships or joint ventures • Mineral extraction • Employee discrimination • Defamation

4.8.1 The Parties The factors favoring mediation are likely to be particularly strong when the parties wish, or are contractually obligated, to continue a business relationship. The settlement then may well take the form of a renegotiated contract or some other business deal.

Where the parties are unevenly matched with respect to business sophistication, economic staying power, or information concerning the underlying facts, the “stronger” party may be able to impose lopsided settlement terms; however, the imbalance may well be offset by the calibre of the person(s) representing the “weaker” party; and that party may have a greater interest in a prompt solution, and in avoiding the high costs and burdens of litigation.

Personality and emotional factors cannot be ignored. The existence of animosity is likely to get in the way of unaided negotiation and to underline the need for skillful mediation. A key function of a mediator is to defuse hostility and distrust and to encourage cooperation, however wary.

Agreement by a party to mediate implies (a) a recognition that a bona fide dispute exists, and (b) confidence that the other party or parties can be trusted to negotiate in good faith.

Bringing about a settlement may be more difficult if there are numerous parties with dissimilar interests; however, mediations involving many parties have been successfully concluded, and courts are not well equipped to handle such cases.

4.8.2 The Case

4.8.2.1 Fact Issues Predominate Cases involving predominately fact issues or mixed questions of fact and

law tend to be well suited for mediation. Certain cases are document intensive, such as claims arising out of a major construction project. When necessary, the production of voluminous documents can be accomplished in a mediation proceeding. if one of the parties perceives a strong need for a judicial determination, it will be disinclined to opt for mediation.

4.8.2.2 Stakes A party for which a vital interest rides on the outcome of a case is likely to favor mediation over the uncertain decision of a judge or arbitrator. If the stakes are moderate, mediation also may well be appealing; for one thing, the cost and burdens of litigation may be disproportionate even for the nominal winner of a lawsuit.

4.8.2.3 Opportunities for Joint Gains Many business disputes are not zero sum games. The issue is not, or need not be solely, whether X owes Y money, and if so, how much. Frequently, there are opportunities for non-cash settlements which a court generally cannot impose. Even if the subject matter is limited to money, there may be differences in the availability and cost of credit to the parties, and delayed payments may be very meaningful to the debtor. Development of “value-creating” solutions requires cooperation between the parties and must come from a consensual resolution mechanism such as mediation.

4.8.2.4 Transaction Costs The direct and indirect costs and burdens of a full-scale litigation are likely to be of a different order of magnitude for each party from those of mediation. Even parties with ample resources are not likely to ignore the potential savings in transaction costs.

4.8.2.5 Confidentiality Parties to a business dispute frequently are anxious to avoid placing the details of their transactions in the public record and exposing them to publicity. The privacy and confidentiality of mediations are likely to be seen as significant advantages.

4.8.2.6 Barriers to Settlement Only 5 -10% of all civil lawsuits are tried. Most settle eventually, unless they are dismissed on motion or abandoned. The primary aim is to facilitate faster, less costly and more productive settlements for the bulk of cases that settle. Common barriers to settlement are outlined below. these barriers should be identified and addressed in a mediation proceeding and often they can be overcome.

Differing Perceptions: • Perceptions can differ about a number of issues relevant to settlement. • Do the parties have different views regarding what the facts are? • Do they disagree about what proposition the facts prove? • Is this disagreement based on each side having access to limited information? • Is disagreement primarily the result of each side’s partisan assessments of the evidence and its implications? • Do the parties have different views as to how the law will be applied or as to the likelihood of success at trial? • Do the parties have different views of what is at stake in the litigation?

• Do they make different assessments concerning the value of those stakes? • It is very common for each party to be unduly optimistic as to its chances of success at trial; particularly so during the early stages of litigation. A mediation proceeding is likely to lead to a much more realistic appraisal and thereby greatly enhance prospects for settlement. Extrinsic Pressures, Linkage • Are there pressures working on one or more parties that cut against prompt settlement? • Do time constraints operate differently on the parties? • Is resolution of this dispute linked to other similar disputes, pending or contemplated? • Does either side have constituencies that would criticize a settlement? • Are there “strategic” considerations to avoid settlement, e.g. to discourage other suits? Process Failures • Communication problems between the parties or their lawyers are a common barrier. • Does the negotiation process afford sufficient opportunities to a devise and explore settlement options? • Do the lawyers or negotiation representatives have different incentives than the parties in interest? Delay Considered Advantageous • A party may believe, rightly or wrongly, that it will benefit from delay. • When a dispute arises while a business relationship is ongoing, both parties have an incentive to put the matter behind them. • Even when there is no continuing relationship there are likely to be advantages to all parties in having the matter resolved.

4.9 THE MEDIATION PROCESS The human dimension of conflict is most significant. Once a dispute has erupted, anger, combativeness, a need to win or “get even” easily become barriers to a solution in the best interests of both parties. Typically, both believe they are in the right. Even the objectivity of an experienced lawyer can become impaired when acting as an advocate.

A critical even tin the mediation process is the first step - getting agreement to use it. At that point the parties’ attitude usually begins to shift toward problem solving and cooperation. A skillful mediator will reinforce this change in attitude and will defuse hostility. In the mediation process psychology works for settlement. The party representatives and the mediator are challenged to be creative, to brainstorm, to “invent” new solutions. The dynamics of mediation lead toward settlement. Settlement equals success.

There is no one right way to conduct a mediation.

The following represents an approach which appears logical and has proven effective in numerous cases;

4.9.1 Phase I: Initial Meeting with Mediator The initial meeting of the parties with the mediator serves several purposes: • The meeting gives the parties an opportunity to meet and size up the mediator. If one or more parties do not gain a favorable impression, a substitution

may be proposed. • The mediator will discuss the entire mediation process, including the ground rules, with the parties. They may agree on modifications. A meeting schedule also may be discussed. • The parties will discuss with the mediator the role(s) they expect the mediator to play. • The parties will begin to familiarize the mediator with the dispute. • The mediator can confirm that the parties have a genuine interest in resolving their dispute through the mediation process. • The parties’ representatives will begin to talk to each other in a manner appropriate to their joint goal of reaching an accommodation. • There will be a discussion of who will represent the parties at future sessions, and the extent of their authority. If the stakes are large, it may not be possible for the negotiators to have complete authority to sign a settlement, and the authority of the negotiators should be comparable. The exchange of certain documents also may be discussed, as well as a form of mini-discovery if necessary. • If litigation is pending between the parties regarding the subject matter of the mediation, the parties and the mediator will discuss the suspension or curtailment of discovery and other pre-trial activities. They also will discuss whether the court should be informed of the mediation, and whether court approval of suspension of pre-trial activities is required.

4.9.2 Phase II: Familiarizing the Mediator with the Case Next, the mediator must be familiarized with the dispute, and the parties must be given an opportunity to state their case. The mediator will ask the parties to submit on an agreed time schedule such written materials as they consider necessary or advisable.

A statement summarizing the background and status of the dispute is likely to be the principal document. If litigation is pending, court documents such as pleadings and briefs may be submitted. If an exchange of certain documents between the parties has been agreed upon, that exchange also should occur during this phase of the proceeding.

Following submission of these materials, a second joint session is likely to be scheduled, at which the parties’ representatives will state their views orally in an informal manner and will rebut the conflicting views of other parties. Each party should present its position in what it considers the most effective manner. Rules of evidence will not apply and the presentations will not be transcribed. The mediator will prescribe the sequence of presentations, may impose time limits and is likely to ask clarifying questions.

Following the joint session, the mediator is likely to meet with each party. The parties tend to be more candid in such a private meeting. The mediator may well elicit in confidence information not disclosed at the joint session. The mediator may explore certain aspects of the party’s presentation and may request additional materials or the briefing of certain legal issues. the mediator must understand the case fully from each side’s perspective.

The mediator should then assure that each side better understands how the case looks from the other side’s viewpoint. The mediator should avoid expressing views on legal or other issues until fully familiar with the case. Some believe that if the mediator does not spend comparable

time meeting with each party, an appearance of partiality may be created. The mediator, to be effective, must keep fully informed of all developments and must be able to control dialogue between the parties. The mediator may conclude at a given stage that it is preferable to keep the parties apart. The mediator may request that the parties and their attorneys do not communicate with each other directly without the mediator’s concurrence.

4.9.3 Phase III: Determining the Facts Even when there are no issues of credibility, the “facts” relevant to a dispute can be elusive. The party submissions to the mediator or statements made in meetings may well indicate that the parties see the facts differently, or draw different conclusions from them. At times, it will be useful for the mediator to address any such differences and seek to bring about agreement on the facts and the issues of the dispute. At other times, focusing on the facts may be counterproductive if it will encourage the parties to focus on past disputes, rather than on reaching an arrangement that will enable them to better deal with each other in the future. No generalizations are possible. This is a case-by-case decision for the mediator.

4.9.4 Phase IV: Negotiation of Settlement Terms Negotiation is most productive when the parties focus on their underlying interests and concerns, avoiding fixed positions which often obscure what a party really wants. The mediator can help the parties adopt a problem solving perspective, crystallize their own interests and understand each other’s interests; defuse adversarial stances and develop a cooperative, problem solving approach.

The mediator can narrow the range of issues, pinpoint the most serious concerns of each party, and generate new ideas for settlement. The legal rights of the parties and how their dispute is likely to be decided in court are considerations which need not be ignored.

Professionals debate whether the parties should be urged to make initial settlement proposals or whether the mediator, following a meeting with each party, should take the initiative in that regard. Again, there is no single “correct” approach. If one of the parties wishes to put forward to the other(s) a concrete proposal previously discussed with the mediator, the mediator probably would not intervene unless he or she believes that the proposal is ill-conceived or ill-timed. A mediator proposal is likely to be founded on in-depth exploration of the parties’ interests and an exchange of views as to their realistic expectations. If the proceeding involves many parties, it becomes a virtual necessity for the mediator to propose settlement terms.

The first settlement proposal, by whomever made, is not likely to be the last. Hopefully, it will be “in the ballpark” and provide a basis for negotiation. At this juncture, some experienced mediators usually will engage in “shuttle diplomacy,” i.e. meet with the parties individually to try to bridge a gap or develop a more acceptable solution; other mediators are likely to conduct joint sessions to bring the parties together. On rare occasions, the mediator may consider it advisable to meet with the principals of the parties, separately or together, outside the presence of counsel. Certain mediators favor a “one-text” approach. They will prepare a first draft of a settlement agreement, seek the parties’ comments, and prepare successive drafts until all parties are in agreement.

Some controversies hinge on key factual issues which often can be resolved by an independent expert, operating under ground rules on which the parties have agreed. Does the machine perform in accordance with contractual specifications? Is the former executive using information proprietary to the former employer? Were the soil conditions as represented to the contractor, and if not, h ow much additional expense was incurred? Once critical questions such as the above have been answered by a neutral expert, the controversy may, as a practical matter, resolve itself. In appropriate cases, the parties and the mediator should consider retaining an independent expert.

Once agreement is reached on settlement terms, by whatever technique, a settlement agreement if drafted by the mediator or a party representative, circulated, edited as necessary and executed.

4.10 LENGTH OF A MEDIATION The length of a mediation depends on factors such as the complexity of the case, the number and availability of the parties, the urgency, and the difficulty of reaching agreement on the facts and on settlement terms. In any event, length will be measured in months, weeks or even days, not in years.

During the initial meeting, the mediator should give the parties an estimate of the length of time required for each phase of the proceeding. Moreover, even during the early phases of the procedure the party representatives will develop a sense of the likelihood of success and of the approximate length of time which will be required. Under Rule C-2 of the CPR Model Procedure any party may withdraw from the mediation at any time after attending the first session.

It is not uncommon for parties to agree to mediation on the expressed condition that a party will be permitted to commence litigation or arbitration if the mediation is not concluded within a specified period. Presumably, that option will not be exercised if, when the deadline is reached, the prospective plaintiff is optimistic as to the outcome of the mediation.

4.11 THE MEDIATOR The selection of a highly capable mediator is vital. A mediator is not vested with the legal authority of a judge or arbitrator but must rely on his or her own resources.

To effectively mediate a major, complex business dispute a mediator must possess a rare combination of qualifications. The mediator must; • Be absolutely impartial and fair and so perceived • Inspire trust and motivate people to confide in him or her • Be able to size up people, understand their motivations, relate easily to them • Set a tone of civility and consideration in dealings with others • Be a good listener • Be capable of understanding thoroughly the law and facts of a dispute, including surrounding circumstances

• Quickly analyze complex problems and get to the core • Know when to intervene, and when to stay out of the way • Be creative, imaginative and ingenious in developing proposals that will “fly” and know when to make such proposals • Be a problem solver • Be articulate and persuasive • Be flexible • Possess a thorough understanding of the negotiating process • Be patient, persistent and “upbeat” in the face of difficulties • Be an energetic leader, a person who can stimulate others and make things happen • Have a personal stature that commands respect • Have experience as a mediator The size and complexity of the case will influence the selection of the mediator. IN a major case, the mediator might be a former judge, a senior executive, a leading attorney, the dean or a professor of a law school or business school, or a skilled conflict resolution professional.

When legal issues are critical, there are significant advantages to selecting a lawyer or legal academic as the mediator. When the subject matter is technical, it may be desirable to select a person who has an understanding of the technology, but lack of subject matter expertise is rarely a serious problem. The parties will often welcome the opportunity to educate the mediator, who brings no preconceived notions or views about the subject matter underlying the dispute.

In most cases a single mediator will be used; however, in complex cases the mediator is likely to need assistance, and it is helpful for the mediator to be able to discuss issues or possible solutions with another neutral person familiar with the case. Occasionally, using two mediators may have advantages. They could represent different disciplines relevant to the dispute, e.g. science and law; and by conferring with each other they may develop additional settlement options.

The mediator’s role can run the gamut from that of a facilitator who arranges meetings in a conducive setting, to that of an activist who will early on announce settlement terms and will urge the parties to accept those terms.

There is a continuum in terms of how large a role mediators play; • Urging the parties to agree to talk • Helping parties understand the mediation process • Providing a suitable environment for negotiation • Helping parties agree on an agenda • Setting an agenda • Maintaining order and civility • Helping the participants understand the problem(s) • Helping the participants to ascertain the facts and to “face the facts” • Helping the participants develop their own proposals • Carrying messages between parties • Helping the participants negotiate • Suggesting solutions • Persuading participants to accept a particular settlement When entering into mediation the parties should reach an understanding as to the

roles they expect the mediator to play and should communicate that understanding to the mediator. Indeed, the parties’ expectations on this score are likely to influence the selection of the mediator.

What a mediator will do also will depend on the mediator’s personality, experience, judgment and intuition; on the nature of the dispute, on the kind and number of parties involved, and on their relationship with each other and with the mediator.

Generally speaking, a mediator will most likely succeed by; • “Taking charge” early on; by setting the agenda • By setting the agenda • By guiding the process with a combination of firmness and diplomacy • By playing an active role in the development of solutions • By persuading the parties to accept a specific settlement, if need be. The greater the number of parties, the stronger the case for this style of mediation.

The mediator’s fee and other expenses of a mediation are normally shared equally. However, ti is not uncommon for a party proposing mediation to offer to bear the expense of the early phase or phases of the procedure in order to induce the other party or parties to try the process. There also may be reasons not to allocate expenses on a per capita basis.

The mediator may well need administrative assistance, legal research, or other forms of assistance. It is desirable for the mediator and the parties to discuss early on the types of assistance likely to be needed and the mediator’s resources for obtaining the same.

4.12 ROLES OF EXECUTIVES AND LAWYERS Executives are accustomed to turning dispute management over to their attorneys. In an important intercorporate mediation the company’s interests are likely to be represented most effectively by a team consisting of a senior executive and senior attorney who are in sync and supplement each other. In-house attorneys frequently participate.

Understanding is best promoted when executives explain their positions directly to their counterparts, rather than communicating indirectly through surrogates. Executives have the best understanding of their company’s interests, of what is truly important. They have business oriented settlement options not available to adjudicators or attorneys and are the most likely to develop creative, mutually advantageous solutions.

It is preferable for a company to be represented by an executive who does not feel a need to defend past actions and who relates well to his opposite number. Each executive should be a decision maker authorized to negotiate a settlement, subject to board of directors approval if need be.

Some attorneys feel uneasy at the prospect of letting the client speak. The executive representing the company in a mediation should be an experienced negotiator, and success in negotiation, as at trial, depends on thorough preparation on the part of each participant, including discussion between executive and attorney. The should agree on who will be the principal spokesperson in presenting the company’s views in the early phases of the mediation. When it comes to discussing terms of settlement, the executive should be “front and center”.

Even if an executive assumes an active role, there remain essential functions for the attorney, who may be an in-house or outside lawyer.

These include; • Counseling on the advisability of settlement and mediation • Persuading the adversary to agree to the process • Educating the executive to the legal issues • Drafting statements for submission to the mediator and otherwise preparing for effective presentation • Serving as a sounding board for the executive and discussing settlement options as the mediation progresses • Assuring confidentiality of the proceeding and avoiding compromising the company’s litigation position, should the mediation fail • Drafting the settlement agreement and assuring its enforceability • Dealing with the court if litigation is pending The attorney should appreciate that in mediation the primary focus is on finding a solution rather than debating legal issues, that a mediation session is not a trial and that being argumentative usually is unproductive.

4.13 ROLE OF NEUTRAL ORGANIZATION

“Mediation services” are being offered by an increasing number of national, regional and local organizations.

Essentially, three types of services may be provided; 1. Help bring parties to the table, i.e. secure their agreement to participate in the process. 2. Identify candidates well qualified to serve as mediator in the particular dispute, secure the agreement of all parties to the retention of one of the candidates, recruit that person and make compensation arrangements. 3. Administer the proceeding

Once an adversarial relationship has developed, a party which wishes to engage in mediation may be reluctant to take the lead in “selling” mediation to its adversaries or may have difficulty persuading them to mediate. A neutral organization can play a useful role in explaining the mediation process and its advantages to parties whose agreement to participate is being sought. CPR has successfully played that role in cases involving few and very large numbers of parties.

Selection of a well qualified mediator in whom all parties have confidence is the most critical step in assuring the success of the mediation. Parties often need the assistance of a neutral organization in the selection process. CPR’s panels of neutrals include persons having the highest qualifications, and CPR regularly assists parties in selecting the “right” mediator.

Given the highly informal and voluntary nature of mediation, CPR believes that once the mediator is in place, the parties and the mediator usually have little need for the services of a neutral organization as an “administrator” of the process; however number of organizations also offer that service.

4.14 ROLE OF INSURERS In certain cases one or more insurers are direct parties to the dispute, as in a coverage dispute with a policyholder or in an allocation dispute among insurers. Obviously, these insurers must be at the table.

In other cases, the immediate parties are not insurers, but one or more insurers are expected to bear all or part of the liability of a party, and any settlement will be subject to their approval. Under these circumstances, it appears essential for the policyholder to assure in advance that the insurers do not object to the insured’s participation in the mediation. It will be desirable for the insurers to agree infor- mally in advance to the parameters of a settlement, and for the insured to keep the insurers informed as the mediation progresses.

Representation of the insurers in the mediation, or in certain phases, can be considered. Before agreeing to a settlement the policyholder would need to assure that the terms are acceptable to the insurers. Reaching an agreement with the other side, subject to uncertain insurer approval, is not a desirable solution.

If the insurers are denying coverage to which the policyholder believes it is entitled, or if differences exist among two or more insurers as to allocation of coverage among them, a second mediation may be in order, entirely separate from mediation of the underlying dispute or meshed with it.

4.15 WHY MEDIATION WORKS The record is overflowing with mediation successes: Cases in which a settlement of a business dispute was forged in a mediation proceeding.

Since mediation of business disputes is normally private, there are no statistics on numbers of non-administered cases or results. Even if settlement does not occur during the proceeding, the greatly enhanced mutual understanding substantially improves the prospects for a later settlement.

What are the reasons for the dramatic success of the process? There is of course no single explanation, and each case has unique aspects, but the following factors are common; • Just as the imminence of a trial often induces litigants to stop posturing and to seriously seek a settlement, commitment of the parties to a mediation is likely to motivate them to “bite the bullet” rather than to postpone unpleasant decisions. The mediator will reinforce this motivation. Indeed, this is why the parties agree to mediate in the first place - a desire to resolve the dispute without resorting to costly, time-consuming litigation. • Even disputes nominally between corporations involve human beings endowed with emotions. When the adversaries face each other at the conference table in the presence of the mediator any antagonism is likely to subside. Direct discussions tend to reduce misunderstandings. Real concerns, not just legal issues, are discussed. The process becomes a challenge to resolve problems. The momentum of mediation leads to accommodation. Settlement represents success. • The mediator can establish ground rules designed to maximize the chances of success. • The mediator typically will first urge discussion of subjects which are noncontroversial or as to which agreement is readily achieved, postponing consideration of difficult issues. These early discussions build a spirit of cooperation. • In meeting with each party, the mediator will diplomatically impel that party to face facts and will dispel unrealistic expectations. For instance, overoptimism by both sides regarding their chances of prevailing in court is common, especially early in litigation. The mediator, if a lawyer, can point to the weaknesses of each party’s case, as well as to the costs and burdens of prolonged litigation. • Once the mediator understands the true interests of each party, what is important and what is not, what they can “live with”, the mediator is well positioned to propose solutions which accommodate those interests. • The mediator may well see and point out opportunities for common gains. Many business disputes are resolved through new business arrangements, rather than by one party’s agreeing to pay “damages” to another.

4.16 SELLING MEDIATION TO OTHER PARTIES Proposing mediation is not a sign of weakness. Other parties may well have to be “sold” on mediation, especially if they lack prior experience. A pro forma proposal may not suffice.

The advantages of mediation for both sides should be carefully explained.

The proposer should emphasize that; • The procedure is voluntary, nonbinding and confidential • The parties retain control over the outcome • A party may withdraw at any time after the first session • The mediator must be acceptable to all parties

• The ground rules must be acceptable to all parties • Time limits may be established • The cost of the procedure is likely to be modest • Experience shows that the chances of success are very high, but little is lost and something will be gained through better mutual understanding even if the procedure should not succeed • By its nature the case is well suited to mediation • The proposer will negotiate in good faith and trusts the other party/parties to do likewise.

The initiating party may offer to bear more than its share of the cost of the procedure. In some instances the proposer has offered to bear the mediator’s fees for the early phase of the procedure - familiarizing the mediator with the case. The initiating party may invite the other party to propose candidates for the mediator role, or may do so itself.

If the parties have a contractual relationship and the contract calls for Alternative Dispute Resolution, of course the relevant clause should be invoked. if the initiating party has subscribed to a CPR policy on Alternative Dispute Resolution, the policy should be invoked, even if the other party is not a subscriber. Consideration should be given to who should approach whom. Who is most likely to be receptive to early settlement and ADR? Who has had prior ADR experience? Who appears to be the principal decision maker on the issue? Success will depend in part on the persuasiveness of the proposer.

4.17 CONFIDENTIALITY Parties entering into mediation typically are anxious to protect statements made and documents generated during the process against disclosure to outsiders. use of the materials and statements in litigation between the parties, should mediation fail, are particular concerns. A combination of legal, contractual and practical approaches can give the parties a high level of protection, although not an absolute guaranty, against disclosure.

4.18 COURT RELATED MEDIATION Trial judges have been urging litigants to mediate certain cases and have appointed mediators to conduct the process. This practice is likely to become more common as federal courts develop and implement “expense and delay reduction plans”.

The court also may have its own ground rules, or the judge or mediator may establish procedures considered suitable for the particular case. Even if a court suggests or orders mediation, the parties may well be in a position to select their own mediator.

4.19 CONTRACT CLAUSES The best time by far to agree on a sensible way to resolve a business dispute is before any dispute has arisen. Once one has erupted, it is much more difficult for parties to agree about anything. CPR strongly encourages the inclusion of multistep

ADR clauses in business agreements. Arbitration clauses are, of course, common.

CPR favors clauses calling for the following steps. with appropriate time limits on steps 1 and 2. 1. Negotiation between executives 2. Mediation or a Minitrial 3. Arbitration or Litigation

Based on a few early decisions, it is likely but not certain that agreements to negotiate or conduct a non-binding ADR proceeding are legally enforceable, but perhaps not through summary enforcement proceedings as in arbitration. The CPR Model Mediation and Mini-trial Procedures permit either party to withdraw. In any event, such pre-dispute agreements between responsible companies should carry considerable weight and should substantially increase the likelihood of a consensual resolution. Whether or not the parties’ business agreement provides for mediation, they may enter in a submission agreement once a dispute has arisen and they have agreed to engage in mediation.

Chapter 5:Preparation for Mediation

5.1 OVERVIEW The time period and events leading up to a mediation can have a very significant impact on what happens during the mediation session. The process consists primarily of interpersonal communication which is generally spontaneous. Even so, preparation for a mediation is crucial. All participants, including the mediator, the parties and their representatives must prepare carefully for the upcoming session. As mediation becomes more and more popular, the importance of preparation is realized and greater consideration will be paid to preliminary matters.

5.2 THE MEDIATOR’S PREPARATION What type of preparation and to what extent preparation is needed is usually determined by the nature of the case and the method of its referral. As an example, if the mediator is taken on a pro bono basis, the mediator will probably have little time to prepare as the case is received very close to the scheduled meeting. This type of quick preparation usually the case when a person mediates community- based programs and at dispute resolution centers. Typically in those situations the mediator receives the case upon arrival with very little time to prepare. Generally, pre-mediation work is usually handled by staff persons who have the responsibility of putting the case facts together for the mediator that will be hearing the case

5.2.1 Types of Preparation

Preparation is both mechanical and mental. Mechanical preparation involves logistics, housekeeping and administrative details. What is of utmost importance is arranging for the mediation case to be held in a neutral location. A neutral location is not the office of one of the parties or a party’s counsel. In a lot of cases, the neutral location will be the mediator’s office. In some cases, because of the number of parties involved the location will be a hotel room, conference center or even at another mediator’s office.

How the room is decorated is also an important part of the mediation session. As the mediation profession grows additional attention should be given to the mediation environment. Even the way the meeting room is arranged can affect the communication as well as the behavior of the parties. As an example, seats at an end of a table often indicate a leadership and task orientation, while a center position suggests a more participatory role. Also, most communication is directed across a table, rather than around it. So, seating arrangements, especially in multi-party cases, must be given close scrutiny by the mediator.

After the location is identified, the time for the mediation should be determined. If a court is involved, the date for the mediation is sometimes specifically set in the court’s order. Typically however, the date and time is usually left for the participants of the mediation to choose. If there is a dispute as to these issues the mediator, through conference calls, can work out the details with all the concerned parties.

A major problem for mediators is the cancelling or postponement of scheduled sessions. Most mediators usually block out an entire day for a mediation. When and if a cancellation occurs the mediator is left with a lot of down time and no income to show for it. For protection purposes some mediators require a nonrefundable deposit at the time the mediation is scheduled. Other mediators charger a cancellation fee to cover their down time.

The mediator’s fee should be discussed with the parties and determined in advance of the actual mediation. Fees can vary significantly and is currently not subject to any regulation. Some mediators charge an hourly rate while others

charge a daily rate. Whatever the arrangement, it is important to have total disclosure with the parties up-front with the final terms indicated in a pre-mediation letter of agreement to the involved parties and their representatives.

Another important issue for Mediators to make is what type and how much mediation education should be conveyed to the involved parties. There are a number of schools of thought on this issue. On one end of the scale there is belief that the involved parties need not have any education about the mediation process while at the other end of the scale others believe that the involved parties should have a thorough education on the mediation process prior to the first meeting. Most mediation cases fall in between the extremes noted. Mediators want the participants to know something about the process and what to expect, but they also believe that a detailed study of it by the participants is not necessary or appropriate.

5.3 PARTIES AND THEIR REPRESENTATIVES The degree of preparation should be appropriate to the likelihood of concluding the case. Afterall, in a large percentage of mediation cases settlement is reached, which is often the final stage of the matters.

Before the mediation, each side of the dispute should gather its representatives, decision makers, and legal counsel for a strategic planning session. At the planning session, each side should; • Review the factual dispute • Create a condensed description of the issues • Outline the manner of presentation • Identify options for settlement

5.3.1 History of the dispute When preparing a presentation of the history of the dispute, participants should remember that no-one is making a factual determination of right or wrong. One of the most important factors to remember from a participant’s view is the difference between mediation and the courthouse. Unlike a trial where a decision based on past events is made, mediation is future oriented. Mediation’s focus is on how the matter will be resolved. This resolution will entail some action by the parties which will take place in the future.

Most mediations provide time for uninterrupted opening remarks by each side, and this should be prepared by the participants in advance. This opening statement should at least be outlined and its duration kept reasonable. Most mediators do not put time limits on the opening statements, but less than an hour is normally appropriate.

Parties to the mediation should consider the use of any other documentation such as charts, graphs or video tapes in advance. The mediator should be advised so that proper equipment, such as an overhead projector or other visual aid equipment is available.

Also as part of the preparation, the parties should determine what their underlying interests and issues really are as well as their ultimate goals such as money, interests or other non-monetary needs.

An often overlooked part of preparation for the participants is to consider the goals, objectives and interests of the other side. While most disputing parties hope to go to mediation and obtain the best they can for themselves, the process is promised upon give and take. Without that exchange, no progress will be made. Some thought should be given to the possible interests and goals of the other side. If possible, areas of mutual interest should also be identified. Where the primary focus is on a monetary settlement, it is important to have a basic idea of a range of settlement, keeping in mind that all of the information has not been exchanged.

Probably the most important aspect of mediation preparation from the standpoint of the parties and their representatives is for everyone to be prepared to listen. It is critical to a mediation that all participants listen to other views expressed at the table. It is only through the exchange of information that all parties are able to determine exactly what the main issues and interests are. Information exchange will also assist in identifying areas of mutual interest.

5.4 INDIVIDUAL SESSIONS Private sessions often are the only way to explore the parties’ real interests, priorities, and negotiating constraints. A person may be more willing to reveal interests and priorities so long as there is no risk of the other party’s learning what it might be willing to give up.

5.4.1 First Individual Session The mediator’s primary goal during this session will be to assess realistically each side’s demands and the likelihood of a proposed agreement. The mediator also needs to test each party on the positions taken in the prior joint session.

5.4.2 Second Individual Session If the mediator met with the party who initiated the mediation the next session will be a separate session with the other party. If there are more than two parties, it would be necessary to meet separately with each of them. It not be assumed that the mediator now understands the parties and their dispute. It is important for the mediator to provide the other party the same opportunity to relate his/her story. It is important to test the positions taken in the joint session before assuming that the parties so called “wish list” is complete and accurate.

These second sessions represent a turning point in the mediation. At a certain point the mediator will have gathered most of the important information needed to understand the dispute. Then the mediator will begin to take a more active role in the session. During the second separate session, there is a transition from simply gathering information to structuring and guiding the discussion and transmitting information from one party to another. This turning point is crucial and can determine not only the length of the mediation session, but the eventual outcome as well.

5.5 IDENTI FICATION OF ISSUES AND INTERESTS

Once the mediator is certain that sufficient information has been gathered about the dispute or case identification of primary issues should be paramount. During this phase, the mediator should also simultaneously attempt to identify the underlying interests of each party. These are often not the same as the issues which have been publicly stated.

Issues are identified as those items which both sides are willing to openly discuss as the predominant points of contention, and about which the negotiation has been initiated. Parties take and defend their positions based upon those items. In most cases, each party also has certain underlying issues or interests. These matters are not likely to have been disclosed or identified at this stage of the process. Therefore, the mediator should initially focus on the identification and restatement of the main or apparent issues. The mediator should keep in mind, however, that there may be other matters which should be discussed before a final resolution can be reached.

If the parties are not hostile it may be a good idea to bring all the parties together. When identifying the issues, there should be mutual agreement on what they are, or at a minimum, an acknowledged agreement to disagree. If the mediator is gathering information in private meetings and in the process identifies issues with each party separately, there is a significant risk that there will be misunderstanding or disagreement on specifically what the issues are. If the parties are not forthcoming with information, the mediator may need to meet privately with each party early on in the process. The problem with this approach, however, is that what may be an issue for one party is not an issue for the other.

Once the issues are identified, the mediator should then restate and reframe them in such a manner that will leave the parties open to a variety of potential solutions. The mediator should utilize his/her listening skills to determine any issue and interest overlap or areas of potential agreement.

After the mediator has obtained the parties’ agreement on the specific issues, the

mediator should determine an agenda for the mediation. The agenda will dictate the order of discussion of issues for the remainder of the session.

5.6 IDENTIFYING, REFRAMING AND / OR RESTATING ISSUES As parties describe the dispute or conflict the mediator begins to identify the primary issues of contention. The way these issues are described is considered to be how they are framed. The mediator may then restate the issue or reframe the problem. Restatement of what a party has said and reframing the way a party has related a problem, are two of the most effective tools the mediator uses.

5.6.1 Restate vs. Reframe • Restate suggests stating a few sentences in a way that reflects what the speaker said, but with a slight change of focus, or removing offensive languate. • Reframing suggests, on the other hand, a statement about the problem or issues and is used to help the parties to view the problem or concern in a different light.

By using more neutral language, the mediator urges the parties to approach the dispute in a more neutral and positive manner. This technique is often effective in de-polarizing the parties. By restating, the mediator also begins to refocus the language used by the participants. After they hear statements made in a slightly different way, the parties may subsequently choose more precise words to explain themselves.

Positive reinforcement is a powerful motivator for most individuals. The mediator should not overlook the use of pointing out the positive aspects which he/she sees in the dispute. Because the mediator sits in an objective chair, it is more likely that the mediator is much more likely than any of the parties to see some middle ground, to observe that there is not as much disagreement as each side may initially perceive, and to identify areas of overlapping interests.

The mediator, in gathering information and identifying the issues, will usually be able to determine which issues are linked and which are not. The more difficult task for the mediator is to decide whether he/she will attempt to link otherwise unlinked issues or in the converse, unlink linked issues.

5.7 SETTING THE AGENDA When and how each of the issues is approached for discussion and resolution will influence the progression of the mediation. Conflicts can be defined so as to magnify or minimize the dispute. The mediator should approach agenda setting and the discussion of issues in a way which can minimize preventing destructive conflict. There are various approaches to agenda setting, each with its benefits and drawbacks. The mediator should weigh each method in light of the specific situation, considering both the subject matter of the dispute and the personalities of the parties. Of course, agenda setting is always subject to modification.

Different approaches to agenda setting are as follows; • Ad hoc • Simple agenda • Alternating choices by the parties

• Principled Agenda • Less difficult first • Most difficult first • Order of importance • Contingent agenda • Trade-off

5.7.1 Ad Hoc The mediator proposes examination of an issue as it is discussed. The parties analyze it thoroughly until they reach a resolution. The mediator moves through all issues in this manner, taking them in the order in which they were placed on the table. This may allow the more vocal party to exert control over the agenda and can be confusing.

5.7.2 Simple Agenda In this similar approach, there is one main issue taken for discussion. Even if there has been some division of issues or smaller issues arise, the primary item is dealt with and settled before discussion of others is commenced. This process works well in simple disputes where there is very little overt conflict. It is not applicable where there are a number of issues with varying importance.

5.7.3 Alternate Choices This method provides the parties more control of the process. Choosing who goes first, however, can be problematic. The non-choosing party may refuse to participate in the discussion. This approach works well when the negotiators are experienced and the level of conflict is minimal.

5.7.4 Principled Agenda The mediator, with the assistance of the parties, establishes general principles that form the framework for settlement. This procedure requires that the parties be willing and able to negotiate at a fairly high level of generalization. It is also appropriate where there is a strong desire for settlement by all parties.

5.7.5 Less Difficult Issues The mediator identifies those issues where probability of agreement is high. Reaching the agreement should not take a long time. Issues which appear to be less difficult are often less important matters and the parties move quickly to resolution.

5.7.6 Agenda This is very closely related to the following approach of order of importance, particularly where there is agreement on the most important item. if agreement is reached on the most difficult agenda item, then it is likely the other issues will fall into place. On the other hand, beginning with the most difficult can result in an early termination of the session if agreement is not attained.

5.7.7 Order of Importance The parties, with the mediator’s assistance, choose the most important item for each of them. These issues are then placed first on the agenda. The assumption is that if these items can be agreed upon, the remainder of the less important items will follow suit. This procedure depends upon the parties’ ability to agree on the most important issues and the order in which they will be handled.

5.7.8 Contingent Agenda The mediator identifies issues which must be dealt with first because they provide

the groundwork or foundation for later discussions. In essence, the remainder of any agreement will be contingent upon the answer to the primary question. This approach become fairly complicated. The parties must clearly express and understand the contingent nature of the issues.

5.7.9 Trade-off Parties unwilling to move on a single issue will often use combinations of issues. Offers are made in return for concessions. The mediator orchestrates this exchange. Issues may be traded one for another in such a way that mutual bargaining results. Trading can also be conducted on an issue-by-issue basis so that all issues are eventually resolved.

Chapter 6:The Negotiation Process

6.1 OVERVIEW As the use of alternative dispute resolution process has increased, so has the awareness of the negotiation process. It is imperative that the mediator be ultimately familiar with the negotiation process.

In fact, negotiation is at the heart of all settlements. ADR processes differ from negotiation in the existence of an intervention by one or more third party neutrals. Traditional negotiation, on the other hand, involves only the parties to the dispute and, if represented, their lawyers or other agents.

Informal negotiations take place all the time as we go about our everyday routines. An example of everyday negotiations would be purchasing items on sale or family members deciding which television show to watch or where to order a pizza from. When there is a successful negotiation, there is no longer a dispute. Unsuccessful negotiations result in continued disputes.

Like other processes, negotiation is composed of various stages. How the parties

in a negotiation pass through these states may differ. There are a variety of ways to label the stages of negotiation.

One example is the six stage model: 1. Planning and preparation 2. Establishing initial relationship between negotiators 3. Opening offers or initial proposals 4. Informational exchange 5. Narrowing of differences 6. Closure

More Detailed Model • Preparation and planning • Ice breaking • Agenda control • Information bargaining • Proposals, offers, demands • Persuasions/justifications • Concessions/reformulations • Crisis: resolution or deadlock • Closing • Memorialization

6.2 COMMON STYLES AND TACTICS Within the various negotiation types and styles the negotiator may vary his or her style. Negotiator’s styles have often been described as competitive, adversarial, cooperative, problem solving or even collaborative.

Some scholars have stated that both the cooperative and competitive styles are integral to the negotiation process. Some of the more common strategies used by negotiators are as follows; 1. Use of additional individuals on the negotiating team 2. Making an initial large demand or low offer 3. Negotiating with limited authority 4. Displays of real or feigned anger or intimidation 5. Making false demands 6. Proposing “Take it or leave it” 7. Creating or inducing guilt 8. Acting like Mutt and Jeff 9. Claiming alleged expertise or even putting on a snow job

6.3 PROBLEMS I N NEGOTIAION

One of the primary problems for the negotiator is the lack of knowledge or skill about the process. Unfortunately, many negotiations in the business as well as the legal community take a “seat of the pants” approach. Very often, legal negotiations are often like rolling the dice, not thought through at all.

The lack of preparation and planning for negotiation contributes to a very haphazard approach to the process during mediation. The mediator must therefore encourage the participants to prepare in advance of the mediation. Another very common problem in the negotiation process is the parties’ lack of specific focus or ability to keep on track. Things tend to get muddled, people become disagreeable and are not able to stay focused on the main issues. Parties in a negotiation may have failed or refused to exchange information. without information, informed decisions cannot be made.

Another problem in the negotiation process is the inability of some parties to take responsibility for finding a solution. Some people mistakenly believe that there is a single “right” answer to any dispute or problem. Hence, the parties are not compelled to negotiate. They remain closed to proposals presented by the other side. The mediator can help the parties “own” the dispute, share responsibility and therefore determine its resolution.

6.4 CONDUCTING A “DANCE” Negotiation can be seen as a dance. It takes two to tango and to negotiate. Like two dancers, negotiators may proceed very quickly and deliberately, certain of their direction and steps. In other instances they may hesitate or step on each other’s toes.

The mediator has a role in the dance, namely, to keep it going. The mediator may have to introduce the music as well as explain the steps to novice dancers. In this way, the mediator facilities the negotiation process.

The specific tactics the mediator uses to assist negotiation will vary, depending upon the variables of the dance in progress, if any. In many instances, the role of the mediator may be only to bring the dance partners together and begin playing the appropriate music. Thereafter, the disputants may be able to progress on their own until the process is completed.

In cases in which the parties have not made any movement, the mediator’s first task will be to facilitate an information exchange.

Mediation also provides an environment in which an offer is not only acceptable, but also expected. This removes the negative stigma that unfortunately has been attached to making the first move. The mediator’s role in this regard is to not only to encourage movement by the parties, but also to encourage the parties to negotiate more reasonably.

In a neutral, objective role, the mediator is more able to recognize alternatives or options as possible solutions which might be likely to satisfy all the parties at the table. often, the parties may reject these ideas and refuse to continue dancing.

Chapter 7:Finding a Resolution

7.1 OVERVIEW Once the mediator has identified the primary issues of the case and obtained confirmation from the parties, the mediator should begin to guide the parties toward identifying and generating a variety of options and alternatives which may lead to a final resolution.

One of the benefits of the mediation process is that participants are able to fi nd and agree to alternative solutions. These solutions are generally more satisfactory to the disputants because they are crafted in a way that accomplishes the goals of both parties.

7.2 OVERCOMING RELUCTANCE WITH PROBLEM SOLVING

Disputes exist because two or more people have different feelings, views, perspectives and needs. And, when each individual looks at the problem, each has his own idea for its solution. Collaboration in developing options does not come naturally to most people, particularly those involved in the conflict. The mediator’s task therefore is to move disputing parties from their search for a single “right” answer and to broaden their perspectives. The mediator should begin the transition by restating the disputed issues in broad terms.

The mediator’s must get the parties to recognize that mediation is a problem solving process which uses collaboration and that each person must share the responsibility for the process. The mediator should try to convince the parties that fixing blame for a past event is far less important than finding a solution that will work for both sides.

While it is important in the first few stages of the process to let the parties fully express their frustration and talk about the dispute, the mediator must then focus them on the future. One technique that is helpful in this endeavor is for the mediator to explain the differences between trial and mediation.

7.3 THE CAUCUS The caucus describes that portion of the mediation session where the mediator meets privately with each party or combination of parties. As individuals involved in a dispute do not typically feel comfortable being completely candid in front of all the participants, the mediator may need to meet separately with the parties. The mediator can also confront a difficult party and make forthright inquiries without causing the party to lose face. The parties may be more wiling to open up and share secrets with the mediator in private. The mediator can also use the private session to educate the participants in negotiation, skills and assist the parties.

In many cases, it is important that the parties engage in joint problem-solving. joint problem-solving involves interaction of the disputants. By contrast, in a caucus, the mediator and each party engage in joint problem solving. It appears that where disputants are hostile and unable to generate options, the caucus is quite effective in overcoming these barriers.

Private sessions with the parties are also used by mediators as times where certain conduct of the mediator, seen as inappropriate in a joint session, is necessary for the process. This conduct includes strategies such as; • Assisting the parties in evaluation of the case • Urging the participants to take a realistic look at their objectives • Urging the participants to take a realistic look at their objectives • Educating the parties about the negotiation process

7.4 THE IMPASSE AND GET TING BEYOND IT While the impasse or stalemate is generally not encountered during a mediation it does occur and can be extremely frustrating for the mediator. It is best for the mediator NOT to make an impasse the subject of all mediations. Mediators should never assume that once the parties have declared their “bottom line” they are unwilling to move. Afterall, these statements are usually part of the individuals’ negotiating strategy.

When encountering an impasse there are some methods that the mediator may employ. Some of these strategies can change the dynamics of the process and as such can be used alone and others are to be used in combination with each other.

7.4.0.1 Some of these sample strategies are; • Start over and ask the parties to make another opening statement with a different focus. • Change the focus or topic. If the parties get bogged down on one issue move to another. Remember, the mediator controls the process and the agenda. • Bring in snacks. If parties have to be kept separate, this is a good way to reconvene the group. • Take a break. Often after a relaxing break parties see things a little differently. • Divide or break down the issues. • Be silent. Complete silence in a mediation tends to motivate a part to say something new. • Use words of encouragement if any progress at all has been made. This can go a long way in motivating further movement. • Come back together. If involved in a “shuttle” negotiation (going back and forth in a caucus), bringing the parties back together often initiates productive discussions. • See if a partial agreement can be reached. • Use humor when possible. Appropriate humor can often ease tension. • Turn to outside experts as a neutral person can move parties away form their stalemated positions. • Call it quits. Sometimes if the parties are told that the mediation is being terminated, they move off their positions. But, the mediator must be prepared to end the session if it doesn’t work.

7.5 ALTERNATIVES Most individuals in a dispute hesitate to advance ideas for resolution. There’s a fear that ideas will be criticized and not accepted. The emotional aspects of the conflict often impair their willingness to hear or trust the content of any option or alternative suggested by the other party. When this happens the mediator needs to created an environment where the parties are no longer reluctant to generate or identify a variety of options for settlement.

The parties must be provided sufficient time during the process to overcome their frustration or other emotion, and to develop a collaborative working environment, not only with the mediator, but also, in many situations with each other.

7.6 NUMBER OF OPTIONS With the problem solving process, most people usually gravitate to one idea or option and disagree or argue over the validity of that option. Very often there can be a variety of alternatives that might be suitable. So, before rushing to judgment the parties should explore a number of alternatives.

It’s up to the mediator to facilitate this process, and stress that the parties should understand that any alternative, in whole or in part, may provide a workable solution to the problem. It is important that the parties be open-minded to the broad range of possible solutions.

Because the parties should consider a number of solutions, the mediator must be

cautious not to ask for specific solutions or options too early in the process. By generating creative alternatives during the negotiation, the parties are better able to fashion a resolution with which they are truly satisfied because they have had a direct hand in creating it. Such a process increases the probability that disputants will find solutions that will meet the needs of everyone at the table simultaneously.

During this stage the mediator should emphasize to the parties that the creation or identification of options and alternatives is separate from the actual selection process. The parties, directed by the mediator, engage in a brainstorming session, after which they will begin to select the alternatives which are most likely to resolve the issue.

7.7 THE APOLOGY

A separate caucus to generate settlement options can be a benefit for the process. The parties are more likely to disclose their true interests, and thereby bring out options which are workable and acceptable.

The selection of ideas and alternatives for discussion and evaluation is also part of the mediator’s role. The amount of input he has in that process is influenced in part by the degree of directiveness that the parties need from the mediator. One somewhat common non-monetary interest that arises in disputing is the need for an apology. This need, and the potential positive effects that result from its use is becoming more commonly recognized.

7.7.1 Employee vs. Employer Mediation Case

7.7.1.1 Facts of case • Employer and former employee, hoping to avoid a costly legal battle over the employee’s discharge ask for mediation. • First Morning: Parties state their positions in joint session • Mediator then separates them and “shuttles” back and forth between them • Lunch: By lunch time the parties are $300,000 apart in their settlement offers. • Mediator is frustrated • So, mediator takes the employer to lunch and makes his proposal. • Mediator suggests to the employer that an apology for the way he fired the employee would probably get the employee to agree to the employer’s monetary offer. • Employer agrees to apologize and privately expresses his remorse to the employee • When the parties reconvene, the employee wipes away tears and both parties cooperate to reach a solution Apologies can help alleviate tension that lie at the core of public disputes and eliminate the fiction of translating emotional pain to dollars.

7.7.2 Types of Apologies 1. Tactical Apology: This is probably the most common of all apologies. Both the plaintiff’s attorney and the defendant’s attorney include apologies in their opening statements. This is basically an attempt to build a relationship in order to influence an opponent’s bargaining behavior. These tactics are generally competitive, not cooperative. The tactical apology attempts to create an atmosphere of trust and good feeling in which an opponent is likely to make concessions without a lot of time consuming negotiating.

2. Explanation Apology: This type of apology employees a mock regret to rebuff an accusation and then generates an account to defend past behavior. As an example, a husband in a divorce mediation in an apology says, “I’m sorry I’ve been slaving away, but I haven’t been able to figure out how else to put food on the table”. In other words, “my unavailability to my family should be excused because working was not an effort to avoid home but to provide for the family’s comfort.” This type of sarcastic apology, like the tactical apology, avoids implicating the speaker in wrongdoing. Interestingly enough, this type of apology is often accepted because the hearer credits the speaker’s explanation not for any implications.

3. Formalistic Apology: This type of apology occurs when an accused offender gives in to the demand of an authority figure by pronouncing required words. As an example, a teacher “chews out” a student by saying, “Bill, say you’re sorry for pulling Diana’s hair.” Bill groans and says “I’m sorry,” thus submitting to the teacher and returning to the teacher’s good graces without conveying heartfelt remorse.

4. Happy Ending Apology: This is a rare apology and generally results in the sort of tearful reconciliation that signals the happy ending apology. This type of apology requires that the apologizer identify personally with the offensive conduct and the injury it caused. Acceptance of the apology depends not on the apologizer’s uttering of specific words, but on the injured person’s impression of the apologizer’s state of mind

7.8 THE MEDIATOR AND ALTERNATIVES • Role of mediator in this phase is to assist the parties in examining each of the proposed alternatives. • There is no specific format for this process. • Unrealistic alternatives must be identified and discarded. • There may be a partial acceptance of an alternative. • The mediator can go down a list of options and have the parties discuss the pros and cons of each alternative. • Once the parties have generated a number of alternatives, the analysis or evaluation phase will usually proceed naturally. • The completion of details is often a problem. • If an option appears to be accepted by all parties, then the mediator must review it to ensure that all elements have been clarified and completed. • The mediator must make certain that everyone has the same understanding about specific components of the agreement

Chapter 8:Issues of Confidentiality

8.1 ADR BENEFITS One of the major benefits of the use of the ADR process is the confidentially surrounding the proceedings. While trials and arbitrations take place in the public or open hearings, mediation has always been considered a confidential process. However, the issue of confidentiality in mediation has grown somewhat confusing. This is true because in today’s mediation climate not all things are confidential. A mediator, as an example, may have a duty to disclose certain matters discussed in mediation.

8.2 GENERAL CONS IDERAT IONS The law surrounding confidentiality in mediation is uncertain and constantly subject to change. Trust is an element of mediation which is closely related to confidentiality. Because of the existence of a dispute, participants, participants in a mediation often distrust one another and are generally unwilling to share information. Even though this is generally true, mediators attempt to establish a trusting and safe environment assuring participants of confidentiality which assists in this task.

Many mediators contend that the parties will be willing to make disclosures and openly discuss their underlying interests, needs and wants only if the process is confidential and the items discussed are protected.

Keep in mind that parties may be hesitant to engage in settlement negotiations if something stated could be used against them in a subsequent trial. So, with the assurance of confidentiality, parties and lawyers are more willing to openly discuss all matters and propose settlements.

Another consideration which favors confidentiality of the mediation process is tied to the concept of mediator neutrality. The mediator is there to facilitate a negotiation as a neutral third party. If the mediator is either able or required to convey information to a decision maker, whether it be an agency or a court, the mediator may need to compromise a neutral role.

Despite all of the benefits afforded to the mediation process by confidentiality,. problems can arise. with the increased use of mediation, occasions for concern over misuse have become more apparent.

There may be instances in which the preservation of confidentiality may not be in the best interests of society as a whole, such as; • May be no check on the mediator’s conduct • Matters adversely affecting the environment • Many states have Open Records Acts which allow the public access to governmental records • Concerns for confidentiality are deemed less critical than the need to disclose information • Duty to report child abuse • Disclosure in an effort to seek advice • Mediation education and research

8.3 EXCLUSIONS OR PRIVILEGE Lawyers are likely to understand confidentiality to have at least two distinct meanings:

one bearing an exclusion and one on privilege. Unfortunately, many mediators and courts fail to distinguish between the two. When confidentiality is mentioned, it is often not made clear whether the discussion is in the context of an evidentiary exclusion, which may prohibit certain evidence from the mediation from being admitted at trial, or whether it is a mediation privilege which would prevent disclosure for other purposes.

8.3.1 Scope and Limits of Exclusions The rules of evidence determine what can be admitted as evidence at a trial. Federal Rule of Evidence provides an evidentiary exclusion for settlement discussions. However these rules generally remain silent about whether information disclosed in a compromise discussion could be discussed with other entities, including the press. The exclusion pertains only to the courthouse.

However, a trend to extend the protection to all statements during a compromise has been noted. An evidentiary exclusion only limits admissibility of information at a trial. Exclusions, however, do prohibit all parties from testifying. The information is excluded, regardless of whose testimony is sought, that of the mediator, an attorney or a party.

A privilege, on the other hand, may cover a greater number of situations but can be limited to prohibiting a specific individual from disclosure.

8.3.2 Privilege Issues Privileges involve parties in a relationship and generally prohibit the disclosure by one party of information revealed by the other. A privilege may prevent disclosure for any purpose, and in the mediation context this may even include the files and records of a mediation program. Privileges are created by law in recognition of the sanctity of certain relationships which are built upon trust and the need for protected disclosure.

In most states, common and statutory law has established privileged relationships between doctor and patient, and lawyer and client as example. In determining a claim of privilege against disclosure, courts have employed a four-part test, commonly known as the “Wigmore Test”. In the case of the mediation, if a mediator claims a disputant-mediator privilege, it is possible that the court would employ the Wigmore Test. The Wigmore Test requires that: • The communications must originate in confidence that they will not be disclosed • This element of confidentiality must be essential to the full and satisfactory maintenance of the relations between the parties • The relation must be one which in the opinion of the community ought to be sedulously fostered • The injury that would result by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation

8.3.2.1 Mediation Analysis of the Wigmore Test • In most instances the mediator describes the mediation as confidential. Therefore, the first part of the test is met. • Most mediation proponents would contend that the second and third elements of the test are clearly established by the nature of the mediation process. Therefore, debate and discussion in the courts will likely center around the fourth element of the test. • The fourth element requires a balancing test between the need for the “privileged”

information in order to correctly decide the litigation and the need to protect the confidential status of the mediation process. • This type of balancing has been performed by courts in the majority of the reported cases dealing with the issue of confidentiality in mediation.

8.3.2.2 The “Dilemma” Where a mediation privi lege is recognized, it is essential to determine the holder of the privilege. In other relationships which enjoy privileged communications such as the doctor-patient or lawyer-client, there are only two parties. The holder of the privilege (the patient or the client) is the only person who can waive the privilege.

In a mediation, however, there are always more than two individuals. Can the privilege be held by the mediator without regard to the parties? Or can the parties waive it? In order to waive the privilege, must all parties agree? Another concern surrounding a liberal mediation privilege is the definition of mediation. In instances of established privilege such as that held by a penitent, patient or client, a relationship exists with a licensed or regulated professional. Mediation has not yet reached the stage where it is a licensed or regulated profession. Therefore, a party could assert a privilege to preserve the confidential nature of information by claiming that any third party present when the statement was disclosed is a mediator.

8.4 CONFIDENTIALITY AGREEMENTS Another means to secure confidentiality in mediation is through a confidentiality agreement. While most matters going before a court are not secretive or confidential, arguably when in mediation, there should be an exception.

In non-litigation matters, it is likely that courts would enforce a confidentiality agreement unless other laws mandating disclosure take precedence. Because of the current confusion and difficulty surrounding issues of confidentiality in mediation, parties who wish to assure themselves and the mediator of protection should execute an agreement which provides for confidentiality.

In fact, the American Bar Association’s Standards of Practice for Lawyer Mediators in Family Disputes indicates that a mediator should ask the parties for such an agreement. These standards, however, place a duty upon the lawyer to inform the parties of the limited effectiveness of the agreement as to third parties. Nevertheless, if the subject matter to be protected is not a matter about which testimony is compelled, it is likely that a court will up hold and enforce a confidentiality agreement.

8.5 COURT ORDERS

Courts can order the parties to maintain confidentiality, specifically through a protective order. Some courts routinely include in their order of referral to mediation a provision that the process is confidential. Of course this protection appears to be limited to the litigation process. In cases of a challenge, the courts will likely apply a balancing test. Courts will place a greater burden to show compelling need for the confidential information on those who stipulated to the protective order than on outside parties. To increase the likelihood of enforcement of the order, it should include an acceptable, reasonable justification.

8.6 DUTI ES TO DI SCLOSE Assuming that confidentiality is established as either an exclusion or a privilege, are there instances where the law establishes a duty on the part of the mediator to make disclosures? Some claim that the mediator’s duty to preserve confidentiality is paramount as there is no duty of the mediator greater than the duty to preserve the confidentiality of everything revealed to him or her during the hearing. Under the evidentiary exclusion, there should be very few instances other than a statutorily imposed one, where the mediator must disclose by testifying in a court. More difficult for the mediator are situations in which the mediator suspects wrongdoing, possible criminal action, or injury to one of the disputants or a third party. Is there a duty placed upon the mediator to disclose the information? When considering the duty to disclose, a number of general issues arise. The first is determining to whom the mediator owes a duty. The second is identifying to whom the disclosure should be made. This may include the other party at the mediation, a third party or entity such as law enforcement, or the administrative staff of a mediation program. The third issue is the determination of what type and degree of disclosure should be made. Mediators will have to make an independent judgment call on many of these related issues.

8.6.1 Current Legal Parameters Confidentiality which is invoked in a mediation may be established by law or by the agreement of the parties. Thousands of statutes currently exist which provide for confidentiality in the mediation setting.

Thousands of statutes currently exist which provide for confidentiality in the mediation setting. Some of these laws pertain only to court-referred cases. Others protect only those mediations taking place within an established mediation or dispute resolution program. Some statutes purport to provide both an evidentiary exclusion and a privilege. A few are quite general. The variation in these numerous approaches causes confusion and has been an impetus for the work to create a Uniform Mediation Act.

Chapter 9:The Mediated Agreement

In the majority of mediations, the parties and the mediator together will eventually arrive at a point where there appears to be an agreement on most, if not all, of the issues. A final agreement may not be reached in every mediation. Neither a mediation nor a mediator should be judged solely in terms of whether or not an agreement is reached. After all, there are other factors and alternatives to consider.

9.1 FACTORS TO CONSIDER • The parties may discuss the case a week later and reach a final agreement • There may be times when the parties end the session by agreeing to disagree • Partial agreements are also possible • Agreements to reschedule the mediation are another option

9.2 FINALIZING THE MEDIATED AGREEMENT When the parties themselves engage in negotiation and exchange options directly, there may be a tendency on the part of the mediator to take a back seat role. The mediator may allow his listening skills to become less than efficient. Yet, the mediator should be very active at this stage of the process.

It is clearly part of the mediator’s role and task to continue to guide the parties in concluding their agreement. Often parties negotiating toward agreement include a number of details in their discussions. The parties may inadvertently omit items previously discussed. The mediator, in a neutral role, should have notes identifying all of the interests, issues, options and agreements. It is important, then, that the mediator be an active participant in finalizing the agreement and assuring that all the items previously identified have either been addressed or purposefully discarded. After a number of hours at the mediation table, the parties are eager to end the mediation. The mediator’s task is to assure that all of the details are covered. A failure to fine tune the agreement could lead to further disputes.

The mediator, when reaching the stage where the agreement becomes fi nal, should determine from the parties, inasmuch as possible, whether all elements of

the final agreement have been achieved.

Procedural satisfaction is commonly achieved by participation in the mediation. When each party has actually participated fully in the process or feels that he/she has been provided the opportunity to participate without pressure, he/she usually feels satisfaction with the procedure.

Psychological satisfaction will be present if the parties have not only had an opportunity to be heard, but also to express their anger, frustration, disappointment, sadness or other emotion. Many times it is important that parties express themselves, that is, vent their emotion. This will enable them to then focus on working out a resolution. The mediation process by design, allows ventilation before cooperation is expected.

If the mediator has identified the interests of each party and those interests are satisfied, the result will be an agreement with substantive satisfaction. Where procedural, psychological and substantive satisfaction are substantially achieved, it increases the likelihood that the parties will completely comply with the agreement.

Chapter 10:Mediation Closure

Once the mediation is over, there may be a tendency on the part of the mediator, the parties or the attorneys to rush out the door. However, formal closure to the mediation is important.

The mediator must be certain that the parties have achieved formal closure. Therefore, the mediator must see closure as a specific stage in the process, one not to be ignored. Closure can take very different forms, however, depending on the relationship of the parties, context of the dispute, and whether an agreement has been reached.

10.1 CONCLUDING THE MEDIATION Most mediations are set for a certain length of time. Rarely do mediations continue indefinitely until an agreement is reached. Where the time is not definite, reaching the agreement is the primary indication that the process is ending.

10.1.1 Closure With Formal Mediated Agreement

In cases where agreement is reached, writing and signing the agreement is not necessarily the final part of the process. The majority of mediated agreements result in a written document. Some closing remarks and rituals may occur while the mediator is drafting the agreement.

The mediator is a neutral third party. After an agreement is reached, written, signed and distributed, the mediator should still maintain neutral. This includes refraining from providing business cards to, or soliciting business from, either the parties or the attorneys.

In closing the mediation, the mediator should make sure of the following items: 1. The parties have exchanged any necessary information such as addresses and telephone numbers 2. Everyone has a copy of the agreement 3. Any follow-up between the parties or the mediator is clear and specific 4. That all dates, times and places are clarified and preferably in writing

10.1.2 Closure Without a Formal Agreement Often, a mediation closes without a formal agreement. Sometimes this is done with all participants together; and at other times, while the mediator is meeting separately with the parties. Some of these cases reach no substantive agreement, but the parties agree to continue negotiations or schedule a follow-up mediation. Other cases end with no expectation of further negotiations, either between the parties directly or with the mediator’s assistance.

In many of these cases, the reason for termination of the mediation will be obvious to the parties. As participants, they observe firsthand the stalemate. If no agreement is reached, the mediator need not explain to the parties in detail why the mediation is being terminated. Instead, the mediator should explain only that it has reached an impasse, and should do so in a positive manner. In some cases, a mediator may declare an impasse to motivate the parties forward.

Remember, it is recognized that in rare instances, continued negotiation would be futile and should not be recommended.

The mediator should be careful in recommending that the parties reschedule. Certainly all attempts to achieve a settlement should be made prior to the parties proceeding to trial or taking other action. A mediator might recommend rescheduling the mediation, however, motivated by self-interest in reaching an agreement.

In most instances, the rule of thumb when considering whether to reschedule the mediation is to ask the question: Can something tangible be achieved by meeting again? Only if the answer is affirmative and specific should another session be scheduled.

10.2 POST MEDIATION FOLLOW-UP In instances where the mediation terminates without an agreement, some mediators continue negotiations with both sides by telephone in order to achieve a settlement. While this should not be discouraged, the mediator should take care in how this is approached.

Reasonable, non-coercive follow-up by the mediator is typically appreciated by the parties and viewed as evidence of the mediator’s sincere commitment to the process. Sometimes, the parties need to leave a mediation session with some progress made and take stock of their situation before the negotiations may continue. The mediator, by keeping his/her self in the loop, may test the parties’ new feelings about resolution and may obtain permission to extend new proposals. When the mediation does not result in final settlement of the case, the parties may decide to return to mediation at a later date.

A specific time may be predetermined at the original mediation. For example, where one or both of the parties need additional information or time to retrieve data, the mediator should write a memorandum or agreement to reflect that need, along with the time and place of the next meeting. Where there is not a definite time, and the session is not scheduled with the same mediator, a written agreement to continue is acceptable, though no necessary.

In cases of both rescheduling and follow-up, the mediator should have specific objectives in mind. Perhaps additional information is required. Perhaps the parties just need time to think about an offer or proposal on the table. A break may be necessary to allow one of the parties to obtain professional advice. In all cases, the mediator should close the session with the goals and objectives for any followup meetings clearly understood by all participants.

10.3 MEDIATOR ETHICS Ethical codes and guidelines have historically been established in a variety of professions. A major obstacle in determining ethics for mediators is that mediation has not yet been formally established as a profession. However, movement in that direction is apparent.

Most ethical standards include discussions of avoidance of impropriety, fraud, conflicts, dishonesty, etc. There is little doubt that these would be applicable in mediation.

The practice of mediation requires skills and behaviors that differ from other professions. Consequently, many of the ethical standards of other professions are not suitable as standards for mediators. Moreover, ethical considerations important in other professions could be in direct conflict with the mediator’s neutrality. But despite the difficulties, there have been attempts to created a code of ethics for mediators.

10.3.1 Current Codes Currently, there are likely over a hundred separate codes of mediator ethics, many of which include standards of conduct. Mediators’ duties may be determined by the type of case, the background of the mediator, the agency in which the case is mediated, or the place of referral, such as a court. With so many codes in existence, it is very difficult for the mediator to determine exactly which code of ethics to follow.

10.3.2 Areas for Ethical Consideration The variety of ethical issues facing mediators is considerable. The difficulty in determining which issues to address in a code of ethics is evidenced by the number of codes in existence and the variety among them.

A survey of the literature and of current drafts of codes reveals a few primary ethical concerns for mediators. These include: • Conflicts of interest • Impartiality • Role of the mediator versus self-determination • Providing professional advice • Advertising • Fees

In matters of conflicts of interest, the issue is just hoe neutral the mediator must be. For instance, should a mediator serve in a case where one of the parties is a former client if the matter is totally unrelated to that of the prior representation? Can a mediator mediate a case involving a former partner? A former roommate? Once a mediator serves in the neutral role, is he/she forever barred form providing services such as legal and accounting to that individual?

10.4 ETHICS FOR THE ADVOCATES AND PARTIES

In the development of the mediation process, it is natural that the primary focus of ethics be on the mediator and his/her activities. The concern, initially, was that the mediator, as facilitator and conductor of the process, was perhaps in a position to reach too far, coercing the parties into an agreement. This was particularly true when the general public was unaware of the specifics of mediation and had no idea or expectations of the process.

However, the mediator is not the only participant in the mediation session. In fact, often it is the participants, the parties and their representatives, who have the

more active roles in the mediation. Hence, it seems appropriate that these participants should have ethical guidelines to follow. In fact, some of the recent abuses or misuses of the process have been committed by the participants. Therefore, general guidelines for those participants should be examined, particularly as the roles of the parties and their representatives evolve.

The parties to the mediation might be bound by certain ethical guidelines associated with their primary profession. For example, professionals such as accountants and physicians often participate in mediation as parties negotiating past due accounts in small claims courts. These professionals may also find their way to the mediation table in response to a claim of malpractice. Ethical concerns may arise in the course of the mediation, and could even be the subject of the dispute. For instance, doctors have specific ethical guidelines which must be adhered to when dealing with a patient. It is likely that these guidelines continue to be operable in the mediation session.

Many times the party in a mediation will be accompanied at the session by a representative. In most cases this will be an attorney. In some matters, particularly in the family area, a therapist may attend the mediation with his/her client. It can be assumed that the individuals will abide by the ethical guidelines already established for their profession.

However, those ethics were not determined with the mediation practice in mind. For instance, there may be a conflict between the primary role of the attorney in the courtroom and that of the attorney in the mediation. The obligation of the attorney to represent him/her client zealously means something very different in trial than it does in mediation.

Chapter 11:Specialized Mediations

It has been claimed that mediation can assist in the resolution of disputes from A to Z - from agriculture to zoning matters, and everything in between. This chapter will highlight several of the diverse applications of mediation.

The following description of the variety of areas where the mediation process is used is by no means exhaustive. Many of these specialized areas have developed without direction, while others are mandated by statute.

Many mediations are conducted prior to the use of possible arbitrations as decisions from arbitrators are generally final. Some examples of potential uses of mediation in specialized situations continue below.

11.1 NASD MEDIATION The NASD mediation process is as follows: • The process is voluntary: The parties also decide who the mediator will be, when the mediation will take place, and how the dispute will be settled. • The process is informal: In mediation, an impartial person-the mediator-promotes negotiations between the disputing parties. • The process is inexpensive: The mediation process is less expensive than arbitration or litigation. • The process is non-binding: Unlike other forms of dispute resolution, such as

arbitration and litigation, the mediator does not impose a solution or decide your case. Instead the mediator guides or helps the parties to reach or crate their own solution. Parties may still arbitrate their dispute if they are unable to agree on a settlement. • The process is a “win-win” solution: The mediator’s role is to help the parties find a mutually acceptable solution to their controversy. Parties who mediate at this forum resolve four out of very five disputes, an 80% settlement rate.

11.1.1 Introduction NASD mediation rules and procedures provide parties with a process to settle disputes themselves. The goal of the mediation program is to provide public customers, member firms, and associated persons with another way to resolve their disputes.

11.1.2 NASD Mediators NASD mediators are independent neutrals, not employees of NASD Dispute Resolution. They are carefully screened and represent a cross-section of people, diverse in culture, profession, and background. Many have extensive knowledge of securities law and industry practices. Many NASD mediators are also arbitrators with training and experience in resolving securities matters. However, the skills required for each role are unique, and the two neutral pools are separate and distinct. NASD rules prohibit an individual from serving as both a mediator and arbitrator on the same case.

NASD Dispute Resolution staff and the Mediation Committee scrutinize each applicant against demanding qualification criteria. To qualify as an NASD mediator, an individual must submit four letters of reference from parties who have observed the applicant’s mediation technique. Formal mediator training and experience as a mediator are additional requirements of service.

All parties must agree to the selection before a mediator is assigned to a case. Either side can stop the mediation process if dissatisfied with the mediator.

11.1.3 NASD Mediation Success Rate Historically, parties settle most business disputes submitted to mediation. Mediation experts attribute this to the parties’ control over the process, costs and outcome. The parties approach the process with confidence, leading to successful resolutions. Approximately 80% of the cases in the NASD Mediation Program settle within a few weeks to a few months of the parties’ formal agreement to mediate.

11.1.4 Initiating Mediation

Parties may mediate before filing a formal claim or pleading in arbitration. Mediation can also be initiated at any stage of the arbitration process.

Mediating parties with a case in arbitration may choose not to have the processes run concurrently. If no arbitration hearing dates have been scheduled, parties can agree to make their arbitration inactive until the mediation is concluded. If arbitration hearing dates have been scheduled, parties can agree to adjourn the hearing dates, and will not be assessed a hearing adjournment fee if they mediate using NASD Dispute Resolution.

The parties may submit all of some of the issues in dispute to NASD mediation. They may mediate selected substantive issues or disputes over such procedural issues as the extent, nature and schedule of discovery.

11.1.5 Selecting the Mediator After conferring with the parties, NASD Dispute Resolution will propose a list of neutrals consistent with the parties’ needs from its roster of experienced mediators. The list is accompanied by a complete profile of each mediator. The parties may select their mediator form that list or ask for additional lists. The parties may also choose a mediator not on the list from outside the NASD roster. Any mediator is subject to the approval of all parties to the dispute. 11.1.6 Mediator Disclosures NASD Dispute Resolution will provide information on each mediator’s employment, education, training, credentials, and rates. Mediators must disclose any relationship that may affect impartiality or create an appearance of partiality or bias. Mediators are governed by NASD rules and the Standards of Conduct for Mediators developed by the American Bar Association, the Society of Professionals in Dispute Resolution, and the American Arbitration Association.

11.1.7 Scheduling Mediation The NASD Dispute Resolution staff works with the mediator and the parties to select a mutually convenient date and location for the mediation. Subject to the availability of the participants, the first session can be scheduled in a matter of days or weeks. Meetings are conducted in person, by telephone, video conference, or any other method agreeable to the parties and the mediator. When available, NASD Dispute Resolution provides meeting facilities at no charge. The parties will be responsible for room rental charges incurred at non-NASD Dispute Resolution locations.

11.1.8 Submissions to the Mediator Before mediation sessions begin, the mediator generally asks the parties information they feel will help the mediator understand the dispute and their respective positions and interests. Before the parties gather, some mediators contact each side separately to ask clarifying questions or to review case logistics. Unless a party instructs otherwise, all material, information, and other communications with the mediator are kept confidential by the mediator. At the conclusion of the mediation process, the mediator will either destroy these materials or return them to the party who provided them.

11.1.9 The Mediation Session A mediation typically consists of a joint session involving all participants as well as private sessions between the mediator and each party.

The joint session may start with an opening statement by the mediator. The mediator explains the framework of the session, encourages active participation, and reminds all parties of the shared goal of resolving the conflict and of the confidentiality of the settlement negotiations. In the joint session, the mediator gives each party the opportunity to make a presentation and asks for a commitment by all participant to work hard toward resolution.

Party presentations generally address facts, liability, and damages, as well as background information, key issues, and needs. The tone is one of respectful communication. Each presentation is directed to the mediator and to the other side. Participants do not provide sworn testimony and are not subject to crossexamination. The mediator may ask clarifying questions at the conclusion of the presentations.

11.1.9.1 Second Stage of Mediation The second stage of the mediation may then involve meetings, or “caucuses,” held by the mediator privately and separately with each party. Caucuses are confidential so that each party can be open and candid about the case. Only if the participant grants permission will the mediator reveal information disclosed in these private sessions. This gives the mediator the opportunity to help the parties examine strengths and weaknesses of the case, analyze risks objectively, and develop options for resolution.

The mediator explores each party’s needs and underlying interests in resolving the dispute. Through a series of caucuses, the mediator can compare settlement expectations, facilitate the exchange of settlement offers, and help the parties reach common ground.

It is critical to the success of any mediation process that all individuals with authority to resolve the dispute attend the mediation session. The failure to bring parties or representatives with authority to settle will hamper the efficiency of mediation.

11.1.10 Confidentiality Rules Under NASD mediation rules, neither the parties nor the mediator may disclose anything said during the mediation in any other proceeding, unless authorized by all other parties or compelled by law. No verbatim or other record is made of mediation

sessions.

11.1.11 Negotiation of Settlement Throughout the mediation process, the mediator will help the parties negotiate effectively. Efforts to reach a settlement through mediation will continue until: • The parties agree to a resolution and execute a written settlement • The parties conclude that further efforts to mediate the dispute would be futile and declare the negotiations at an impasse, or • Any party or the mediator withdraws from the mediation process for any reason

11.1.12 Written Settlement When a mutually acceptable resolution is reached, the parties will draft a document detailing all terms of the settlement. Parties save time and expense by signing a memorandum of understanding of essential terms at the close of the mediation.

When all parties agree to its terms, the parties sign and execute the written settlement. Once the settlement agreement is signed, it is final and binding on the parties.

11.1.13 When Settlement Not Reached Most parties express satisfaction with the mediation process even when they do not reach full settlement. Proper preparation for the mediation session readies the parties for the arbitration.

During the mediation process the parties and their representatives gain a better understanding of their case. This, in turn, helps them focus on the necessary next steps.

Further, the mediation process movies very quickly and does not delay the ultimate resolution. Finally, by the end of a single day of mediation, the improved liens of communication often place the parties in a better position to settle the case at a later stage.

11.1.14 Mediator Fees and Expenses

The parties are responsible for the mediator’s fees and expenses, including the mediator’s travel. Parties share these charges equally unless they agree otherwise.

11.1.14.1 Mediator Fees When the parties select their mediator, the parties and the mediator agree upon an hourly rate for the mediator’s services. The parties pay the mediator this hourly rate for time spent conducting the mediation session, either by phone or in person. Mediators may also charge for preparation and travel time.

11.1.14.2 Mediator Fees for Small Claims Many mediators on NASD Dispute Resolution’s roster have agreed to reduce their hourly rates for cases with an amount in controversy of $25,000 or less.

11.1.14.3 Expenses

Expenses incurred by the mediator in connection with the case are also the responsibility of the parties. These expenses might include travel, parking, telephone, and postage. The parties also pay for meeting room rental fees at non- NASD facilities. Expenses are shared equally by the parties unless they agree otherwise.

NASD Dispute Resolution requires mediating parties to submit a Mediation Session Deposit, covering the anticipated fees for the mediator’s time and expenses. NASD Dispute Resolution staff estimates the deposit based on the size and complexity of the case, the number of parties involved, and the mediator’s rate. Each party must submit its share of the deposit when the Mediation Submission Agreement is signed and before mediation begins.

If the parties need more of the mediator’s time than is covered by the Mediation Deposit, additional time is billed at the rate agreed to by the mediator and the parties.

11.2 SCHOOLS AND UNIVERSITIES MEDI ATION The use of mediation in schools and universities is one of the fastest growing areas of practice. Mediation can be used in schools and universities in a number of ways.

The first and most common application is peer mediation programs. Peer mediation employs student mediators to resolve disputes that occur between other students- peers. When a dispute or conflict arises, instead of resorting to traditional forms of discipline, teachers refer the disputing students to a peer mediator. This mediator is a student who has been trained in mediation or conflict management skills.

Administrative concerns in schools and universities provide another area in which the mediation process can assist in resolving disputes. These may occur within

the educational institution itself as in conflicts between departments. In other cases, mediation can resolve conflicts between an outsider, such as a parent or other interested party, and the administration. Mediation in truancy cases have been specifically provided for in some states.

Another area in the education field where mediation is appropriate and statutorily recommended consists of disputes involving special education issues. A variety of third party claims against schools and universities have also been resolved through mediation. Alleged violations of the Americans with Disabilities Act filed by students against a university have been successfully resolved through mediation. Additionally, mediation has been used to resolve sexual harassment claims against university professors and staff as well as age and sexual discrimination disputes.

Finally, mediation has successfully resolved land dispute claims involving university owned properties.

11.3 DIVORCE AND FAMILY MEDIATION Family and divorce mediation is one of the oldest “specialties” in the mediation profession. During the development of mediation and alternative dispute resolution in the seventies and early eighties, a primary focus was placed on cases involving divorce, and specifically child custody matters.

Divorce mediation differs from traditional or generic mediation in a number of ways. Mediation is not considered an ongoing, continuos process. However, because of the number of issues, and in particular the emotions involved in family law matters, the structure of the process in divorce mediation is extended over a period of weeks, and in complex cases, months. The actual sessions with the parties and the mediators are normally limited, generally to an hour, although some mediators extend the session to an hour and a half. The mediation typically takes from six to eight sessions, but it will continue until all property and custody issues are resolved.

In the divorce area, co-mediation is commonly used. The mediation team usually consists of a therapist or other individual from the social and behavioral sciences and a lawyer. An accountant or financial planner is sometimes included when the focus of the case is on asset division and financial matters.

11.4 EMPLOYMENT AND LABOR MEDIATION The labor and employment area is historically seen as the birthplace of the mediation process. Mediation was not, however, used in individual complaints, but rather in union or collective bargaining matters. In the traditional labor mediation model, the mediator meets with representatives of each group and then is very active in formulating solutions with each representative negotiator. Recently there has been an increased use of the mediation process to resolve individual complaints about employment issues, as well as to resolve individual complaints about employment issues, as well as to resolve intra-organizational disputes.

Major corporations have designed entire dispute resolution systems through which employees may resolve their grievances.

Mediation can also be effective in resolving charges of discrimination in employment. Mediation of private sector employment disputes has also become widespread

and successful. Many employment agreements provide for the mediation of all disputes as a condition of employment. Additionally, the very emotional nature of employment disputes lends itself to mediation.

Mediation provides the employees with an opportunity to be heard and express their feelings regarding perceived injustices and wrongdoings. Mediation also provides the employer with an opportunity to explain the basis of a termination. Because employment disputes involve a pre-existing relationship mediation may provide resolutions which restore such relationships or which sever such relationships on a constructive, mutually satisfactory basis.

In this regard, mediation has successfully resolved wrongful termination claims, age and sexual discrimination claims, claims under the Americans with Disabilities Act, sexual harassment disputes, whistle blower claims and disputes involving retaliation for filing workers compensation claims.

In mediating labor and employment cases, one of the most important aspects of the process is an initial issue determination. A primary issue is employment. The mediator together with the parties, must first determine whether continuation of employment is a possibility. The answer to that threshold question will likely shape the remainder of the mediation. If continued employment is agreed to, the mediation will take one direction. In the case where the relationship has been terminated, a different set of options will be explored.

11.5 DISPUTES INVOLVING ATTORNEYS The legal community has been very active in the promotion and implementation of mediation. If the profession is to practice what it preaches, then the mediation of lawyer-client disputes should increase.

Many complaints filed against attorneys by their clients resulted simply form lack of communication. Once the parties are able to better communicate, such disputes are often resolved. The use of mediation in attorney-client matters is in its infancy. Many state and local bar associations are experimenting with pilot projects.

Mediation between attorneys and clients can be used in disputes over skill in representation or negligence claims as well as in fee disputes. While mediation can assist in the resolution of legal malpractice claims as it does any professional negligence matter, more importantly, if resolution of an attorney-client dispute can be reached early, claims of malpractice may be prevented.

Many times dissatisfaction and claims of attorney malfeasance or malpractice arise out of a disagreement over attorney’s fees. If fee disputes are handled expeditiously, the matter may be privately concluded. The use of alternative dispute resolution can be quite effective in resolving disputes over attorney’s fees.

11.6 TRANSACTIONAL MATTERS MEDIATION Mediation is generally considered a dispute resolution device. It is a process used to assist parties in resolving a dispute, and is often defined as such. Yet, it also has been defined as a process which assists parties in a negotiation. Many negotiations take place in a transactional context-in putting together a deal, a sale, a contract. Mediation can be quite effective in providing assistance to the negotiating parties in such transactions. For instance, in the negotiation of a complex

contract or business arrangement, if the parties are unable to reach an accord on the specific terms, the assistance of a mediator may be beneficial.

Additionally, in the negotiation of partnership documents or formation of a corporate entity, a neutral, third party mediator can provide structure to the negotiations. Unlike mediation in dispute resolution, in a transactional matter, the parties are clearly planning to work together, and the mediation process may have even greater long-term benefit

Chapter 12:Future Trends in Arbitration

12.1 FUTURE TRENDS BACKGROUND The legal community is beginning to see arbitration as a complimentary rather than competitive component to the legal system. For many years, the courts have used the claim that they retain exclusive jurisdictions in disputes implicating public policy to find certain types of disputes not arbitrable.

12.2 AS TIME MOVES ON As the courts increasingly accept arbitration as an appropriate form of dispute resolution, this “public policy” exception to the issue of whether certain claims can be arbitrated is slowly eroding.

In recent years the courts have upheld arbitration in the areas such as employment, consumer rights, family law, torts, antitrust, bankruptcy, and intellectual property, which were previously considered not to be arbitrable. As the number of cases increase and the cost of litigation continues to climb, the use of arbitration and other forms of alternative dispute resolution is sure to expand.

12.3 RECENT TRENDS One of the most recent trends in the increasing use of the arbitration process has come about as a result of the advent of the information age. One area where technology is changing the face of arbitration is in the on-line arena. There is a growing worldwide interest in the use of on-line arbitration.

12.4 ON-LI NE ARBI TRAT ION

On-line arbitration is where all, or at least a significant portion of the communications between the parties, and the arbitration panel takes place remotely through electronic means. This form of arbitration poses several advantages over litigation as well as over regular arbitration.

The many benefits to this type of arbitration include the following: • It is less expensive • It is quicker than regular arbitration • It allows the parties to select arbitrators who are experts in a given field but that may not be local to the geographic area where the dispute arose • It provides a way to handle the growing number of disputes that arise through electronic commerce and do not have any real geographic sites.

12.5 CURRENT ON-LI NE ISSUES Currently, there are only a limited number of on-line arbitration programs. The most well known are the World Intellectual Property Organization’s (WIPO) On- Line Expedited Arbitration System and the Virtual Magistrate Project.

12.5.1 WIPO The WIPO On-Line Expedited Arbitration Process in an internet based system that allows the parties to assess the procedures through a web site. This process allows the disputing parties and the arbitrators to communicate and exchange information electronically thereby reducing the need for time consuming and expensive in-person meetings and hearings.

The process is available to resolve all types of commercial disputes and it is governed by a set of rules designed to expedite the process and to allow for clarity with respect to issues that arise because of the on-line mechanisms.

12.5.2 Virtual Magistrate Program In contrast to the WIPO process, which is available to resolve all types of commercial arbitration disputes, the Virtual Magistrate Program is used to resolve computer network disputes. The goal of the program is to attempt to receive and resolve complaints within 72 hours of acceptance.

Once submitted for arbitration, each case is assigned its own access-controlled news group, which is essentially a chat room that allows the parties to post communications for the arbitrator and for the arbitrator to post his/her decision.

This process has been slow to catch on but it serves as a potential model for the development of other high technology arbitration systems.

12.6 ARBITRATION AND ELECTRONIC COMMERCE On-line arbitration and other forms of on-line dispute resolution is a natural outgrowth

of the increasing popularity of electronic commerce. As more on-line arbitration awards are rendered, the process will likely attract larger and more complex disputes.

The process shows promise particularly in the area of international arbitration where the parties and the arbitrators are often separated geographically. On-line arbitration may one day develop into an acceptable, inexpensive and efficient process for resolving some disputes.

Chapter 13:History of Arbitration

13.1 ENGLISH HISTORY Arbitration is defined as a process of dispute resolution in which a neutral third party renders a decision after a hearing at which both parties have an opportunity to be heard. This process is by no means a modern invention. Many ancient civilizations such as the Persians, Egyptians, Greeks and Romans used arbitration as a way to resolve disputes.

During the Middle Ages arbitration enjoyed popularity as an alternative to the English court system. It remained as a viable option for dispute resolution in England for hundreds of years. By the end of the eighteenth century and into the early part of the nineteenth century, the use of arbitration had become less frequent. 2This decline was principally due to increasing suspicion of the process on the part of the English judges. They were concerned that those acting as arbitrators lacked the requisite legal training needed to properly interpret the right and responsibilities of the disputing parties.

In addition to the concern over the qualifications of those acting as arbitrators, the hostility toward arbitration displayed by the English judiciary was motivated by elements of self-interest. During this period in history judges in England were paid fees based on the number of cases they decided. Many judges felt that the arbitration process was a direct threat to their livelihood because it reduced the total number of cases in the judicial system.

The English courts became increasingly hostile toward arbitration and as they began to overturn arbitration awards with increasing frequency, disputing parties responded by moving away from the use of the arbitration process. Eventually, the suspicion of the arbitration process expressed by the courts in England spread to the United States where arbitration came to be viewed as treading on the U.S. courts’ traditional authority to adjudicate disputes.

13.2 DEVELOPMENTIN THE UNITED STATES

Arbitration has existed in the United States since the time of its founding. Its use can be traced back to the Dutch settlers in New York and the Quakers in Pennsylvania. During the colonial period, the arbitration process was most commonly used as a method of dispute resolution between disagreeing merchants. However, it was also occasionally used to handle personal matters.

While arbitration remained a way for Americans to resolve disputes without having to resort to the legal system for the next several hundred years, it remained marginal in the context of the entire American legal system largely because of the skepticism of the process.

The American courts growing dissatisfaction with arbitration was clearly expressed in Todey v. County of Bristol. In this case, Justice Story said: Arbitrators, at common law, possess no authority whatsoever, even to administer an oath, or to compel the attendance of witnesses..... They are not ordinarily well enough acquainted with the principles of law or equity, to administer effectually in complicated cases.

The skepticism and distrust of arbitration continued into the early part of the twentieth century. However, arbitration slowly began to reemerge as a useful means for resolving disputes. In 1920, New York was the first state to pass a state arbitration statute that would allow courts to enforce arbitration agreements in contracts between parties seeking to arbitrate future disputes.

Using the New York statute as a model, the U.S. Congress passed the United States Arbitration Act, commonly referred to as the Federal Arbitration act or FAA, in 1925. The Federal Arbitration Act (hereinafter FAA) was designed to encouraged the use of arbitration to resolve disputes by allowing federal courts to compel parties to comply with arbitration agreements and to enforce foreign and domestic arbitration awards.

Prior to the passage of the FAA, the courts were unwilling to enforce a pre-dispute arbitration agreement. The courts felt that the appointment of an arbitrator, like

appointment of an agent, was always revocable. This unwillingness to enforce a pre-dispute arbitration agreements allowed either party to choose litigation at any time, regardless of the prior agreement. This made the arbitration agreement virtually meaningless.

Today, almost all states have enacted some form of arbitration act modeled after the New York act of 1920. Taken together, the state statues and the FAA provide a system for the enforcement of pre-dispute arbitration agreements and thus placing them on equal footing with other commercial contracts.

13.3 STATUTORY DEVELOPMENT

13.3.1 The Federal Arbitration Act The Federal Arbitration Act, which was passed in 1925, enjoyed considerable support from the business community at the time of its passage. By the mid- .For example, George Washington’s will contained an arbitration clause as a means of resolving any challenges to the distribution of his assets. 1920s, the arbitration process was the mutually preferred method of dispute resolution among merchants and others in the business community. This was so because arbitration was seen as having great advantages over traditional litigation. It was believed to be more efficient, less expensive, and a better process for parties with ongoing business relationships.

The purpose of Congress in passing the FAA was to provide a mechanism to enforce agreements to arbitrate, including executory arbitration agreements, and thereby put these agreements on the “same footing as other contracts.” The main provision of the FAA is section 2 which states as follows: “A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract.”

The enforcement of the Act is provided for in subsections 3 and 4, which allow the federal courts to stay any action brought in court that should have been arbitrated, and to compel arbitration when one party is improperly refusing to arbitrate a dispute as provided for in the arbitration agreement.

13.3.2 State Statutes At the same time the FAA was being pushed in Congress, there was a corresponding movement to get states to follow New York’s lead and adopt a modern arbitration act. In 1924 the Commissioners on Uniform State Laws and the American Bar Association approved a draft of the Uniform Arbitration Act (hereinafter UAA), which excluded enforcement of pre-dispute arbitration agreements.9 This version of the UAA met with little success. It was enacted in only four states by 1943, at which time it was removed from the list of approved uniform rules by the Commissioner of Uniform Rules. In 1955, the Commissioners on Uniform Laws made a second attempt and proposed a new Uniform Arbitration Act. This version was more widely accepted than the first and today, it has been enacted by 34 states and the District of Columbia.

Today, the FAA and the UAA are the most prevalent sources of statutory law affecting the arbitration of disputes.

13.4 SUPREME COURT’S VIEW OF ARBITRATION

The last two decades of the FAA, the Supreme Court has slowly expressed an increasing preference for binding arbitration over litigation. The Court recognized the existence of a strong federal policy in favor of arbitration for the first time in Moses H. Cone Memorial Hospital V. Mercury Construction Corp.

Court held that it was an abuse of discretion for a federal court to stay an action seeking to compel arbitration pending the outcome of related litigation brought in state court.

The Court said: Federal law in the terms of the Arbitration Act governs this issue in either state or federal court . . . .Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to thecontrary. The effect of the section is to create a body of federal substantive law of arbitrality, applicable to any arbitration agreement within coverage of this act.

The Court went on to note that where there is a question as to whether a contract between the parties calls for arbitration of a particular issue, the contract should be construed in favor of arbitration rather than litigation. The Court stated that “the Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or the allegation of waiver, delay, or a like defense to arbitrality.

Relying on this federal policy in favor of arbitration, the Court has held that the FAA is applicable to claims brought in state as well as federal courts10 and that the FAA preempts any attempt to limit the reach of binding arbitration by state legislatures. The Supreme Court applied the FAA to state courts for the first time in the case of

Southland Corp. v. Keating. The plaintiff franchisees in this case sued the franchisor in state court for a violation of the disclosure requirements of the California Franchise Investment Law. The franchisor then sought to compel arbitration under the terms of the franchise agreement. In overruling the California Supreme Court’s holding that claims under the franchise law were required to be brought in state court and not in an arbitration proceeding, the U.S. Supreme Court held that the FAA not only applied to state courts but it also preempted the California courts interpretation of its own statute.

The Court found that the California Supreme Court’s interpretation of the law conflicted with the FAA because it purported to invalidate an arbitration clause for reasons other than those existing at law or equity. The Court went on to note that by enacting section 2 of the FAA, which provides that arbitration agreements are valid except; upon such grounds as exist at law or in equity for revocation of any contract, “Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which contracted parties agreed to resolve by arbitration.”

This is not to say that the states have no power to regulate the arbitration process. The Supreme Court has conceded that the states may regulate arbitration clauses “under a general contract law principle.”

10.Moses, supra note 32; Southland Corp. v. Keating, 465 U.S. 1 (1984) That is, states are permitted to regulate contractual arbitration clauses through state law governing issues such as the validity, revocability, and enforceability of contracts generally.

Moreover, while there may be a federal policy favoring arbitration, there is no federal policy favoring arbitration under any certain set of procedural rules. Consequently, if the agreement to arbitrate also incorporates a choice of law clause, the arbitration procedures of the state selected in that clause may apply even if the procedures are different than those under the FAA.

Other federal courts have followed the Supreme Court’s lead and similarly expressed a preference toward binding arbitration. Many of these courts have held that when a party attempts to avoid an arbitration agreement by claiming that the agreement was obtained through fraud, duress, or coercion, such defenses should be narrowly construed in favor of arbitration. Also, many lower courts have relied on the federal preference for arbitration to hold that appeal of an arbitrator’s award should rarely be granted.

Chapter 14:Arbitration Process

14.1 OVERVIEW

The arbitration process is what the parties say it is. They generally have wide latitude to set the terms and conditions under which a dispute will be decided. The Supreme Court has expressed their approval for the wide latitude that parties have in forming their arbitration agreements in Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University.

The parties in this case entered in to a construction contract that contained an arbitration agreements and a choice-of-law clause which provided for the law of the state where the project was located to govern. A dispute arose and appellee sued appellant in state court. The state appellate court relied on a state statute to stay the arbitration pending the outcome of the claim in state court.

In upholding the state appellate courts ruling, the Supreme Court held that arbitration under the Federal Arbitration Act (FAA) is based on the consent of the parties and that they are generally free to structure their arbitration agreements as they see fit. The court noted that just as the parties may “limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted.”

The court went on to hold that where the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the FAA would otherwise permit it to go forward.

14.2 VOLUNTARY ARBI TRAT ION Generally, arbitration can fall into two main categories, voluntary arbitration and court-annexed arbitration. By far the most common form of arbitration is voluntary arbitration. This is usually a binding process where both parties agree in advance to comply with the terms of the arbitrator’s decision.

Voluntary arbitration takes one of two forms depending on what is provided for in the parties’ arbitration agreement. It is either an ad hoc proceeding, in which the parties are free to design their own arbitration process, or it is what is known as a rule by reference proceeding where the parties follow the established rules of an administering organization.

14.2.1 Elements of Voluntary Arbitration onAlthough there is much latitude for the parties to create their own process and no uniformity between the procedures of the many administering organizations, the following elements are common in most voluntary arbitration processes: • An agreement to arbitrate • Selection of an arbitrator or arbitration panel • Pre-hearing preparation • An arbitration hearing • The arbitration award • Post-award actions.

14.2.1.1 Agreement to Arbitrate

A party generally cannot initiate an arbitration proceeding unless there is an agreement to arbitrate between the parties. There are two types of agreements the parties can enter into: 1. A pre-dispute arbitration agreement, which is inserted into a contract before any dispute arises and requires the parties to use arbitration if there is any future disagreements 2. A submission agreement, which is entered into after a dispute has already arisen.

Agreements to arbitrate, whatever form they are in, are typically every simple agreements that outline the types of disputes subject to arbitration, the authority of the arbitrator, the substantive law to be applied to the dispute, and the arbitration rules and procedures to be followed.

Perhaps the most widely used arbitration clause is that of the American Arbitration Association. The AAA even boasts that its standard arbitration provision “has proven highly effective in over a million disputes.”

Their suggested clause for the arbitration of disputes in as follows: “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American ARbitration Association and judgment upon the award rendered by the Arbitrator may be entered in any court having jurisdiction thereof.”

Once an agreement to arbitrate is in place, either party can demand arbitration pursuant to the terms of the agreement. If either party resist the demand to arbitrate, the party asking for the arbitration can petition a court to issue an order compelling arbitration under the FAA or a state arbitration act. In Dean Witter Reynolds Inc. v. Byrd, the court noted that the use of pre-dispute arbitration clauses in consumer contracts has caused some concern. Many businesses use standardized adhesion (drawn by the company) contracts, which do not allows for any meaningful negotiation of the terms. As a result, customers have little chance to explore alternative options and select the dispute resolution process that best suits their needs. The courts will sometimes not enforce these contracts on public policy grounds if they are too burdensome on the consumer.

When a party seeks to compel arbitration under the terms of the arbitration agreement, an issue may arise as to whether a particular dispute was intended to be, or should be, resolved through arbitration. This is known as a question of arbitrality.

There are two types of arbitrality, procedural and substantive. Procedural arbitrality deals with the question of whether the parties have fully complied with all of the procedural prerequisites to arbitration. Substantive arbitrality answers the question of whether an issue should be subject to arbitration or not. Unless the parties stipulate otherwise in their agreement, issues of substantive arbitrality are decided by the courts and questions of procedural arbitrality are decided by arbitrators.

When making a determination on the issue of substantive arbitrality, courts generally consider two issues: • First, the courts determine whether an agreement to arbitrate exists between the parties. • Second, they determine whether the dispute in question is within the coverage of the arbitration clause. Once the court determines that the dispute is within the limits of a valid arbitration clause, the court will compel arbitration and subsequent issues regarding the merits of the underlying claim are for the arbitrator.

14.2.1.2 Selection of the Arbitrator The parties in arbitration are generally free to set the terms and conditions of the process. As such, they are free to choose any third party to act as an arbitrator for their dispute in accordance with the method of selection that is provided for in their arbitration agreement.

The arbitrator may be a lawyer, judge, or any businessperson that is experienced in a particular industry. Typically, the parties will either name a specific arbitrator in their agreement or they will agree to choose an arbitrator from a list supplied by an administering organization once a dispute actually arises.

14.2.1.3 Power of the Arbitrator The powers of the arbitrator are usually set by the terms of the arbitration agreement. Typically the agreement gives the arbitrator the procedural power to do such things as order discovery and make rulings on the admissibility of evidence. In addition, the arbitrators possess the substantive authority to decide issues of law and fact and to render an arbitration award based in their decisions. However, absent a provision to the contrary in the arbitration agreement, they are not bound by principles of substantive law. The powers of the arbitrator are almost entirely a product of the agreement of the parties subject only to the limitation that they are restricted from adding to, deleting from, or modifying the terms of the parties’ contractual obligations.

In fashioning a remedy the arbitrator is given broad discretion, subject only to the limitation that the remedy does not violate public policy or exceed the arbitrator’s contractual authority. Usually an arbitration agreement gives the arbitrator the power to award equitable remedies such as compensatory, consequential, and liquidated damages, as well as interest on such damages.

14.2.1.4 Duties of the Arbitrator In conducting an arbitration hearing, arbitrators are bound by ethical cannons aimed at ensuring the fairness, confidentiality, and impartiality of the proceedings. Violating these duties may result in judicial appeal and reversal of the arbitration award.

Arbitrators are often chosen for their experience and knowledge in a given field. Many times, an arbitrator will have some type of previous business relationship with one or more of the parties in the arbitration process and thus presents a potential for the arbitrator to act with partiality to the party with whom they had previous dealings.

The concern over partiality in the arbitration process is heightened by the fact that the arbitrator is not required to give an explanation of his/her rulings and because the arbitration award is generally not subject to review. Because of this potential for partiality, an arbitrator is obligated to disclose all personal and professional information that might affect their ability to be impartial.

Despite the concern over the need for impartiality by the arbitrator, they will not be automatically disqualified by a business relationship with one of the parties before them if both parties are informed of the relationship in advance, or if they are aware that the relationship is trivial.

A party alleging bias must establish specific facts that create a reasonable impression of partiality.

14.2.1.5 Pre-Hearing Preparation The need for discovery is no less important in arbitration than it is in litigation. Each party needs to have the opportunity to exchange relevant records and documents. In the context of arbitration, discovery is usually conducted on a much more abbreviated schedule. If one party is in possession of documents needed by the other party and they do not respond to requests to produce those documents, the arbitrator has the sole authority to issue a subpoena for the records.

14.2.1.6 Arbitration Hearing The arbitration hearing is generally less formal and shorter than an actual trial. Formal objections are discouraged because the arbitrator is considered to have the knowledge, judgement, and experience necessary to weigh the credibility and relevance of the evidence presented. The rules of evidence are relaxed and regular courtroom rules do not apply in arbitration hearings.

While the arbitrator has great latitude in the admission of relevant evidence, the refusal to consider relevant evidence may be grounds for judicial appeal under section 10 of the FAA if the refusal prejudices the rights of the parties and denies them a fair hearing.

A party seeking to vacate an award on the grounds of an improper refusal to consider evidence has a relatively high threshold to cross. In Pompano-Windy City Partners, Ltd. v. Bear Sterns & Co.,14 a motion to vacate the arbitration

award was brought on the grounds that the arbitrators had improperly excluded the testimony of a witness. The court concluded that even if the exclusion was improper, it was clear from the “wealth of evidence in the record” that the exclusion did not constitute a denial of “a fundamentally fair hearing” sufficient to justify vacating of the award.

The general process proceeds in much the same fashion of a regular trial. Typically, the parties are represented by lawyers in the hearing however, the parties are allowed to appear if they so choose.

In addition, there are opening and closing statements, witnesses give testimony, and each party is allowed to cross-examine the others witnesses. There is typically no required burden of proof in an arbitration hearing unless otherwise agreed to by the parties. The arbitrator may apply the clear and convincing standard, the preponderance of the evidence standard, or they may simply look at the general persuasiveness of the evidence presented and base their determination on that.

14.2.1.7 The Arbitral Award After the arbitration hearing the arbitrator will make an arbitral award. The arbitrator usually announces the award about a month after the close of the hearing, however the parties can alter this length of time in the terms of their arbitration agreement.

The arbitrator is not required to issue an actual written decision but if they so choose they are free to write a formal opinion. In reality, most arbitral awards do not set out the important facts material to the issue in dispute, do not identify the relevant law and contract language, and do not demonstrate how the relevant law and contract language were applied to the material facts in order to resolve the controversy. This is done largely out of fear that a written opinion could open avenues for unsuccessful parties to appeal and seek to vacate the award. In determining the appropriate award, the arbitrator is generally free to award equitable remedies such as compensatory, consequential, and liquidated damages, as well as interest on such damages.

However, some courts have recently begun allowing an arbitrator to award punitive damages in certain circumstances.

14.2.1.7.1 Punitive Damages in the Arbitration Award Historically, the award of punitive damages in arbitration was not looked upon favorably. Punitive damages are intended to act as a private fine levied by civil juries to punish reprehensible conduct and deter its future occurrences.

Until about 15 years ago it was widely believed that the court system was the only appropriate forum to punish the parties through the award of punitive damages because the court system had built in protections such as appellate review and the ability of the judge to instruct juries.

By contrast, it was believed that the arbitration system itself was designed as a method of resolving disputes and was not appropriate for punishing parties. This view was based primarily on the fact that arbitrators

were not required to be trained in the law and the ability from an arbitration award is very limited.

The view that punitive damages were not appropriate in arbitration was held by attorneys and by the courts for many years. However, beginning with the case Willoughby Roofing & Supply Co. v. Kajima International, Inc., the tide began to shift. This is one of the first cases in which a federal court upheld the award of punitive damages.

In this case, plaintiff sought arbitration for claims of fraud and misrepresentation, which generally give rise to punitive damages. In an amended decision, the arbitration panel found that the respondent willfully misrepresented material facts with the intent to deceive and in addition to compensatory damages, the panel awarded the plaintiff over $100,000 in punitive damages.

The respondent challenged the decision on the grounds that the arbitrators had no power to award punitive damages because they were not authorized to do so in the arbitration agreement and an award of this type is against public policy.

The court found that the arbitrators did in fact have the authority to award the punitive damages because the arbitration agreement provided for the arbitration to be conducted according to the American Arbitration Association’s rules and procedures. These rules provide that “the arbitrator may grant any remedy or relief which is just and equitable and within the agreement of the parties.” The court found that there was no public policy prohibition against punitive damages by arbitrators. It reasoned that if there were such as policy, then a party who acted in gross and malicious manner could avoid punishment merely by agreeing to arbitrate future disputes.

The court continued by saying that this would be “a much more serious distortion of public policy then vesting the authority to award such damages in the impartial and experienced arbitrator.”

The issue of whether arbitration is the appropriate forum for the award of punitive damages has not been directly decided by the Supreme Court. However, the Court did uphold the award of the arbitrator, which included punitive damages. In this case, the court addressed the issue of whether a New York choice-of-law clause in an arbitration agreement meant that the parties intended to follow New York arbitration law, which would prohibit the arbitrator from awarding punitive damages, or only

New York substantive law. The Court found that the parties did not intend for their agreement to be governed by the arbitration laws of New York and therefore, punitive damages award was allowed to stand.

14.2.1.8 Post Arbitration Actions The following post arbitration actions will be discussed: 1.Motion to confirm the arbitration award 2. Motion to vacate the arbitration award 3. Having the award vacated

14.2.1.8.1 Motion to Confirm the Arbitration Award Arbitrators have no authority to enforce the terms of the arbitration award so if one party seeks to enforce the award against a party who has refused to comply, they must look to have the award confirmed by the courts.

Under the FAA, an award may be entered by the court “if the parties in their agreement have agreed that a judgment of the court shall be entered upon the award.”

Generally, an explicit agreement between the parties providing for judicial confirmation of an award is not an absolute prerequisite to judgment on the award by a court, particularly where the arbitration agreement provides that the award of the arbitrator shall be “final and binding.” If a party seeks to have an award confirmed, they may apply to the court for an order confirming the award. To initiate a confirmation proceeding, the party seeking confirmation must file either a petition or a motion to confirm the award. While states vary on the time limit in which an action to confirm an award can be brought, the FAA provides that an action to conform must be brought within one year of the award. The court must grant the order confirming the award unless the award is vacated, modified, or corrected as prescribed in the FAA.

14.2.1.8.2 Motion to Vacate the Arbitration Award There are two ways that a party to the arbitration process can seek to have an award vacated. Any party may bring a motion to vacate in response to a motion for confirmation of the award. In addition, any party who is displeased with the outcome of the arbitration process may petition the court to vacate or modify the award.

In federal court, a Motion to vacate, modify, or correct an award must be brought within three months after the award is delivered. Complying with this time requirement is of utmost importance to a party seeking to vacate an award because several federal courts have held that failure to bring the motion within the three months after the award precludes the party from later seeking that relief when a motion is made to confirm the award within one year but after the expiration of the three months.

An award will generally only be vacated in limited circumstances. If the court does not wish to vacate the award it may allow for the modification of an award for technical reasons such as arbitrator mistake in calculating amounts, deciding matters not specifically submitted for review, and drafting award in an improper form that does not affect substantive issues.

14.2.1.8.3 Having the Award Vacated Historically, the only method for challenging an arbitration award was by bringing a bill in equity court for vacating the award. This could be brought for reasons that ordinarily gave rise to equitable jurisdiction such as bias, fraud, corruption, or mistake.

Today the majority of courts are reluctant to intervene using their equitable powers because they view the arbitration statutes as affording an effective remedy. In the view of courts today, “if the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity will not set it aside for error, whether in law or fact.”

Under the terms of the Federal Arbitration Act (FAA), the scope of judicial review is “extremely narrow.”2The FAA does not allow courts to roam unbridled in their oversight of arbitration awards. Section 10 of the Federal Arbitration Act sets out a very limited number of grounds for vacating the award of an arbitrator.

Section 10 of the FAA states: In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party of the arbitration: 1.Where the award was procured by corruption, fraud, or undue means. 2. Where there was evident partiality or corruption in the arbitrators, or either of them. 3. Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or any misbehavior by which the right of any party have been prejudiced. 4. Where the arbitrator exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 5. Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.

Aside from the statutory reasons for vacating an arbitration award set forth above, the federal circuit courts have created several non-statutory grounds for granting vacating of an award. The most significant of these is known as “manifest disregard of the law”.

While it is established that arbitrators are not required to follow precedent or abide by case law, if the arbitrator acknowledges the existence of statutory or case law on the point in issue and disregards it the award will be vacated. In order to overturn an award based on manifest disregard of the law, one must show “more than error or misunderstanding with respect to the law.” Rather, the court must find both that the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and that the law allegedly ignored by the arbitrators was well defined, explicit, and clearly applicable.

14.2.2 Advantages of Voluntary Arbitration Over Litigation

While the arbitration process bears some resemblance to litigation, arbitration holds several striking advantages. Arbitration is usually cheaper and faster than litigation, it can have simpler procedural and evidentiary rules, it normally minimizes hostility and is less disruptive of ongoing and future business deadlines among the parties, and it is often more flexible in regard to scheduling of times and places of hearing and discovery devices.

Because litigation is governed by wee-established set of rules of evidence and civil procedure, the disputing parties have very little control over the process. In arbitration, the parties control the process and can decide to create their own rules or to be bound by the rules of an established administering agency. The parties in arbitration have the ability to choose the arbitrator that will hear their dispute and to work with that person to set dates for the pre-hearing events and even the hearing itself.

The ability to choose the arbitrator also allows the parties to select a decision maker with the professional experience and industry knowledge that is crucial to understanding the dispute and rendering a remedy appropriate to the circumstances. Because arbitration afford the parties the ability to be directly involved in the process, they are often more satisfied that the result reached was fair and thus they are more willing to voluntarily comply with the terms of the arbitration award.

The informal nature of the arbitration process stands in contrast to the ridged rules of litigation, which produce an adversarial atmosphere. The informal nature of the arbitration process enhances the behavior of the participants and diminishes the adversarial nature of dispute resolution by encouraging the parties to work closely together in an effort to seek common solutions to their differences.

In litigation, court documents are generally open to the public. A business seeking to resolve a dispute without publicity may not be able to. Bad publicity from a lawsuit can harm a company’s reputation and its relationship with its customers.

Because of the potential effect of bad publicity, the threat of such exposure may be used by an opposing party in a dispute as a means of securing an unfair settlement. In contrast, arbitration is a private contractual process in which the documents and the hearing process are not open to public scrutiny. The more private nature of arbitration may help disputing parties to protect their reputations, maintain better moral, protect valuable working relationships, and reach an outcome to their dispute that is decided on the merits and not affected by any outside pressure.

One of the most significant advantages of arbitration is that it saves a lot of time and money for the parties seeking to resolve their differences. The present state of the U.S. court system is one of congestion and backlog. On an average it takes 19 months for a case to be tried in federal court.

Many companies may not be able to afford the high cost of litigation or the long wait required to have a dispute heard. The arbitration process allows the parties to save time and money by affording them the opportunity to set their own schedule and determine how rapidly the disputes move through the process. Additionally, there is a cost savings to the parties because 80% of all litigation related legal fees result form the discovery process and in arbitration that process is generally limited.

By allowing the parties to save time and money, arbitration also serves to level the playing field between smaller parties and those with greater financial resources. Many smaller parties who would not be able to afford to bring a claim in the traditional courts system will be able to arbitrate their disputes.

Moreover, in litigation, a party who is larger and has greater access to money may use delaying tactics in an attempt to exhaust the resources of a small party and force them into a potentially unfair settlement. Arbitration reduces the financial differences between parties and allows the small party to have more power in the process.

Another advantage to arbitration is finality. In litigation, the decision of the trial court provided very little in the way of certainty for the parties. There is a whole series of higher courts to whom the decision may be appealed. For parties seeking finality in the resolution of their dispute, the appeals process wastes time and money.

In arbitration, the decision of the arbitrator is generally viewed as final, with little or no opportunities for appeal. This finality of the award allows the parties to more accurately assess the cost of resolving the dispute and the cost and chances of future appeals. In addition, it allows the parties to be able to expect and rely on compliance of the arbitration award so that the parties may return to their normal business activities.

The arbitration process also affords a type of benefit to society as a whole. It not only relieves some of the backlog of the court system, it also eases the burden on the taxpayers who support that system. In addition, arbitration improves social productivity by bettering the long-term relationships between disputants, and by encouraging more cases to be settled quickly and amicably.

14.2.3 Disadvantages of Arbitration Despite the many advantages to arbitration, there are a few disadvantages that bear mention. First, because an arbitrator is not required to issue a formal opinion or follow legal precedent, their awards do not establish precedent. This lack of precedent make it difficult for parties to defend against future claimants in the same type of matter. Second, limited discovery, while it saves time and money, may not always be to the advantage of the parties.

Some types of disputes may require lengthy in depth discovery to resolve and the limited discovery of arbitration can make the case more difficult to prove. Finally, unlike litigation, all parties in a dispute must agree to arbitrate and it sometimes may be difficult to persuade one party to agree to arbitrate after a dispute has arisen and animosity has built up.

14.3 COURT REQUIRED ARBI TRATION Currently, about 1,200 state and federal courts offer some type of Alternative Dispute Resolution Process including what is known as supervised or court-annexed arbitration. The parties may be required to arbitrate their disputes under statutory law, local court rules, or court order. Many of the cases that are sent to arbitration in the state and federal courts involve simple factual and legal issues and relatively low amounts of damages being sought.

14.3.1 Not a Voluntary Process Court-annexed arbitration is not a voluntary process. Courts will often require the parties to arbitrate a dispute as a precondition to trial. This type of court innovation, as an effort to expedite the resolution of disputes and reduce the time and cost of litigation, is usually allowed if the results are not outcome determinative. Because court mandated arbitration is nonbonding, it is not outcome determinative. The parties who had their dispute arbitrated are generally still free to request a trial as a basic right within a specified period of time after the arbitration award.

14.3.2 Provisions Governing Court-Annexed Arbitration Although provisions governing court -annexed arbitration vary, they generally have certain basic features in common. The type of cases that the courts typically refer

to arbitration are generally those involving person injury or contract actions in which no more than a specified dollar limit is demanded. The arbitration hearing is generally conducted as an informal trial, in which a panel of arbitrators render a decision based on the evidence and arguments presented by the parties.

14.3.3 Similarities with Voluntary Arbitrations Court-annexed arbitration shares some similarities to the voluntary arbitration process. It has a limited discovery and relaxed procedural rules much the same way that voluntary arbitration does. However, unlike voluntary arbitration, courtannexed arbitrators are required to follow the substantive law in the jurisdiction and they must apply the preponderance of the evidence burden of proof instead of the burden of general persuasiveness that is sometimes used in voluntary arbitration. Despite the similarities, court-annexed arbitration does not provide the parties with the same amount of control over the process as voluntary arbitration. The parties in a court-annexed arbitration proceeding do not have the free reign to select an arbitrator or arbitration panel.

The arbitrators are generally certified by the courts, most of them being former judges or experienced lawyers. Sometimes the parties are limited and must chose only between court certified arbitrators and at other times the court directly appoints the arbitrator. All hope is not lost for the parties because they are still permitted to challenge the court appointed arbitrator on the grounds of bias or lack of impartiality.

Chapter 15:Development of Arbitration

15.1 OVERVIEW

Business has increasingly turned to arbitration as a mechanism for resolving their disputes. Its use can be seen in many different sectors of the business community from labor disputes to securities and construction and even international disputes. The courts have enforced arbitration agreements in a myriad of business situations. For example, in Gilmer v. Interstate/Johnson Lane Corp.,28 the court enforced an agreement to arbitrate disputes involving employment contracts and statutorily based civil rights claims. Also, in Allied-Bruce Terminix Cos. v. Dobson, 29 the court enforced an arbitration agreement in an adhesive consumer contract.

15.2 COURT DECI S I ON RESULTS These types of decisions of the Court have had a far reaching effect on the use of arbitration clauses in contracts. Private schools have now begun to require their students to agree that any future claims against the school will be submitted to private dispute resolution including arbitration.

Securities firms, banks, and insurance companies, similarly require their customers to agree to dispute resolution. Some health care providers have even begun to require their patients to include arbitration agreements in their contracts for service.

15.3 NASD CODE OF ARBI TRAT ION PROCEDURE NASD arbitration is a dispute resolution mechanism to help determine if aggrieved parties are entitled to recover damages. An impartial person or panel hears all sides of the issues as presented by the parties, studies the evidence, and then decides how the matter should be resolved. This arbitration is final and binding, subject to review by a court only on a very limited basis.

15.3.1 Brokerage Firms Out of Business The NASD points out that over 80% of all unpaid awards involve a firm or individual that is no longer in business. So, bear in mind that if the broker or brokerage firm in a arbitration goes out of business or declares bankruptcy, there may not be any recovery even if the arbitrator or a court rules in the favor of the moving party.

15.3.2 Case Results

Most arbitration cases end with a settlement between the parties either through direct negotiation or through mediation. In recent years, parties agreed on a resolution in about 60% of all cases. Other cases are withdrawn or closed before the process begins. For example, more than 3,600 investor cases closed in 2001. Arbitrators decided the outcome in 1,365 of those cases and in 725 cases, 53% of the decisions, arbitrators awarded damages to investors.

During the first quarter of 2003, arbitrators in NASD cases granted monetary damages against a brokerage firm or against a registered representative in 287 cases. In 78 of those cases, the award was not paid in full. In 67 cases, over 85% of the unpaid awards, the party responsible for the damages was a broker-dealer firm or associated person that had left the securities industry.

The NASD aggressively pursues disciplinary action against all active firms or individual brokers that do not promptly fulfill their obligations.

15.3.3 Deciding Whether to File Firms and individual respondents who remain in the business generally pay arbitration

awards entered against them, and information about unpaid awards should not discourage the moving party from pursuing an arbitration claim.

15.3.4 Matters Eligible for Arbitration The Code of Arbitration Procedure is prescribed for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the NASD or arising out of the employment or termination of employment of associated persons with any member, with the exception of disputes involving the insurance business or any member which is also an insurance company: • Between or among NASD members • Between or among NASD members and associated persons • Between or among NASD members or associated persons and public customers or others

15.3.5 Arbitration Case Flow Turn to the next page for a flow chart of arbitration cases from the receipt of a claim received by the NASD with filing fees collected to a prehearing to discovery to hearings held to deliberation to final awards written and served. 15.3.6 Industry Controversies A dispute, claim, or controversy eligible for submission between or among members and/or associated persons arising in connection with the business of such members or in connection with the activities of such associated persons or arising out of the employment or termination of employment of such associated persons with such member, shall be arbitrated at the instance of: 1. A member against another member 2. A member against a person associated with a member or a person associated with a member against a member 3. A person associated with a member against a person associated with a member 4. A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose.

15.3.8 Non-Public Arbitrator The term non-public arbitrator means a person who is otherwise qualified to serve as an arbitrator and: Is, or within the past three years was: • Associated with a broker or a dealer • Registered under the Commodity Exchange Act • A member of commodities exchange or a registered futures association • Associated with a person or firm registered under the Commodity Exchange Act

Or is (a) retired from engaging in any of the business activities listed above, or (b) is an attorney, accountant, or other professional who has devoted 20% or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities above or (c) is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors

the compliance with the securities and commodities laws of employees who engage in such activities.

15.3.9 Public Arbitrator The term public arbitrator means a person who is otherwise qualified to serve as an arbitrator and is not: • Engaged in the securities or commodities business • Not the spouse or an immediate family member of a person who is engaged in the conduct complained of. An immediate family member means: - A family member who shares a home with a person engaged the securities or commodities business. - A person who receives financial support of more than 50% of his or her annual income from a person engaged in the securities or commodities business. - A person who is claimed as a dependent for federal income tax purposes by a person engaged in the securities or commodities business.

In disputes subject to arbitration that arise out of the employment or termination of employment of an associated person, and that relate exclusively to disputes involving employment contracts, promissory notes or receipt of communications, the panel of arbitrators shall e appointed as follows:

15.3.9.1 Claims of $50,000 or Less If the amount of a claim is $50,000 or less, the Director shall appoint an arbitration panel composed of one non-public arbitrator, unless the parties agree to the appointment of a public arbitrator.

If the amount of the claim is $25,000 or less and an arbitrator appointed to the case requests that a panel of three arbitrators be appointed, the Director shall appoint an arbitration panel composed of three non-public arbitrators unless the parties agree to a different panel composition.

15.3.9.2 Claims of More than $50,000 If the amount of a claim is more than $50,000, the Director shall appoint an arbitration panel composed of three non-public arbitrators, unless the parties agree to a different panel composition.

15.3.10 Simplified Industry Arbitration • Any dispute, claim, or controversy arising between members or associated persons submitted to arbitration involving a dollar amount not exceeding $25,000 shall be resolved by an arbitration panel consisting of a single nonpublic arbitrator. • Any dispute, claim or controversy arising between a public customer and an associated person or a member subject to arbitration involving a dollar amount not exceeding $25,000.

15.3.11 Employment Arbitration

For disputes involving a claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute each panel shall consist of either a single public arbitrator or three public arbitrators qualified under the rules, unless the parties agree to a different panel composition.

• A single arbitrator shall be appointed to hear claims for $100,000 or less. • A panel of three arbitrators shall be appointed to hear claims for more than $100,000, unless the parties agree to have their case determined by a single arbitrator.

15.3.12 Hearing Requirements - Waiver of Hearing • Any dispute, claim or controversy except as provided with Simplified Industry Arbitration or Simplified Arbitration, shall require a hearing unless all parties waive such hearing in writing and request that the matter be resolved solely upon the pleadings and documentary evidence. • Notwithstanding a written waiver of a hearing by the parties, a majority of the arbitrators may call for and conduct a hearing. In addition, any arbitrator may request the submission of further evidence.

15.3.13 dismissal of Proceedings • At any time during the course of an arbitration, the arbitrators may either upon their own initiative or at the request of a party, dismiss the proceeding and refer the parties to their judicial remedies, or to any dispute resolution forum agreed to by the parties, without prejudice to any claims or defenses available to any party. • The arbitrators may dismiss a claim, defense, or proceeding with prejudice as a sanction for willful and intentional material failure to comply with an order of the arbitrators if lesser sanctions have proven ineffective.

15.3.14 Settlements • Parties to an arbitration may agree to settle their dispute at any time.

• The terms of a settlement agreement do not need to be disclosed. However, the parties will remain responsible for payment of fees incurred, including fees for previously scheduled hearing sessions. If the parties fail to agree on the allocation of outstanding fees, the fees shall be divided equally among all parties.

15.3.15 Awards • All award shall be in writing and signed by a majority of the arbitrators or in such manner as is required by applicable law. • Such awards may be entered as a judgment in any court of competent jurisdiction. • Unless the applicable law directs otherwise, all awards shall be deemed final and not subject to review or appeal. • A copy of the award will be served on each party, or the representative of the party. Serving the award can be done by any method available and convenient to the parties . Methods can include registered certified mail, hand delivery, and facsimile or other electronic transmission. • The arbitrator(s) shall endeavor to render an award within thirty (30) business days from the date the record is closed. • The award shall contain the names of the parties, the name of counsel, if any, a summary of the issues, including the type(s) of any security or product, in controversy, the damages and other relief requested, the damages and other relief awarded, a statement of any other issues resolved, the names of the arbitrators, the dates the claim was filed and the award rendered, the number and dates of hearing sessions, the location of the hearings ,and the signatures of the arbitrators concurring in the award. • All awards and their contents shall be made publicly available. • Fees and assessments imposed by the arbitrators shall be paid immediately upon the receipt of the award by the parties. Payment of such fees shall not be deemed ratification of the award by the parties. • All monetary awards shall be paid within thirty (30) days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction.

Chapter 16:

Structured Settlements 16 .1 INTRODUCTION A structured settlement is an agreement made to settle a claim or lawsuit involving an individual (claimant). It provides for a series of payments to be made over time to the claimant. These payments most often are intended to cover livi ng expenses and medical costs.

Structured settlements are especially appropriate in catastrophic cases in which payments must meet significant expenses throughout the claimant’s lifetime. To fund these payments, the defendant may purchase an insurance contract called an annuity or establish a trust fund that invests in U.S. treasuries.

The payments are then “structured” to meet the personal needs of the injured individual and/or family. Annuities have become the preferred method for funding structured settlements because their pricing and overall design provide a great deal of flexibility to structure payment streams geared to individual needs. In many cases, a structured settlement is negotiated and agreed upon by all parties in a pre-trial setting. In other cases, such as those involving a minor or an individual

deemed incompetent, structured settlements may be required by law or court order.

16.1.1 Reality Check and Solution

16.1.1.1 Reality Check At the time of his accident, Billy Bob Holcomb earned $40,000 a year as a factory worker on an assembly line. After receiving a $2 million settlement from his employer, new friends and “exciting” business opportunities seemed to appear weekly. Unaccustomed to managing his financial windfall, the twenty-six year-old high school graduate started making withdrawals of ever-increasing amounts. Four years later after the accident, Billy Bob is left facing angry bill collectors with $400 in his checking account. His future employment prospects are slim to none.

16.1.1.2 Solution For some time it was not uncommon for a liability carrier to present a claimant with a lump sum award. Some carriers continue to engage in the practice. With lump sum distributions come unique problems, however. Studies reveal that twenty-five percent of all claimants will dissipate an entire lump sum settlement within two years. Ninety percent manage to retain the award only for an additional three years. With this in mind, it is clear that a lump-sum settlement may defeat the very purpose for which it was awarded. Fortunately for all parties involved, there is an alternative, the structured settlement.

16.2 STRUCTURED SETTLEMENT HI STORY

Although European courts have utilized structured settlements since the early 1950’s, American courts have only come to embrace the concept within the last two decades. The Oklahoma Supreme Court actually applied a structured settlement in its M&P Stores v. Taylor decision.

At the time of that court’s decision, the approach was all but unheard of. Consequently, the settlement arrangement had little effect on American courts. Within ten years, a popular pharmaceutical and its nightmarish side-effects would reintroduce changes.

16.2.1 Thalidomide Case Thalidomide was first introduced to the European market in the late 1950’s.33 Hailed as an effective means of treating morning sickness in expectant mothers, the drug was later introduced to other markets, including Brazil, Japan and North America. By 1957, it was becoming increasingly obvious that Thalidomide treatment carried unanticipated side effects.

The drug was responsible for the birth defects and deformities of thousands of children. At the time Thalidomide was taken off the market, the damage had been done. Although conservative estimates assess that 6,600 children were affected by the drug, some experts have placed the figure at over 10,000.

Rather than endure hostile publicity or chance enormous jury awards, the American distributor of the pharmaceutical chose to forgo a trial and instead settled the matter as quietly as possible.

The settlements provided for an immediate disbursement for the families to provide for pressing medical and emotional needs. A separate settlement, funded by an annuity, provided for subsequent disbursements to follow periodically in order to assist with the future medical needs and treatment of their children. After the parties had agreed to the terms of the settlement, the arrangement was included in a court order and sealed. Although the Thalidomide settlements (in addition to a similar approach American courts applied in the Ford Pinto settlements of the late 1970’s) are regarded as the catalyst to the use of structured settlements in the United States, the IRS rulings of the late 1970’s and early 1980’s and the tax-favored status they created for the structure were additional factors in its acceptance.

16.2.2 IRS Rulings By the late 1970’s, the IRS recognized the non-taxability of monetary awards acquired through personal injury settlements. IRS revenue Ruling 79-220 provided that:

An insurance company purchased and retained exclusive ownership in a single premium annuity contract to fund monthly payments stipulated in settlement of a damage suite. The recipient may exclude the full amount of the payments from gross income under section 104 of the Code rather than the discounted present value.

Only three years later, Section 104 of the Internal Revenue Code was amended by the Periodic Payments Act, codifying the earlier IRS ruling; • Gross income does not include; - The amount of any damages received (whether by suit or agreement and

whether as lump sums or as periodic payments) on account of personal injuries or sickness.

The foundation has been laid. By 1979, 3000 cases employed structured settlements. Within five years, that figure jumped to 20,000. Today, with high jury awards on the rise, the climate continues to be conducive for the structured settlement.

16.3 STRUCTURED SETTLEMENT DEFINED Technically any settlement that is not distributed in a lump-sum can be considered a structured settlement. Specifically, a structured settlement is a means by which an insurance carrier resolves a dispute or lawsuit by providing a claimant with periodic payments specifically designed to meet future needs of the claimant. In addition, a structured settlement may provide an immediate cash award to satisfy the claimant’s current financial needs. The settlement’s structure will reflect the unique facts of the case and the clients involved.

16.4 ADVANTAGES OF A STRUCTURED SETTLEMENT Historically, a lump sum of money was paid to claimants to settle personal injury cases. This type of settlement can place a significant burden on the injured individual

or family because they then are responsible for managing a large sum of money over the course of the claimant’s lifetime. Few individuals possess such sophisticated money management skills or experience. Structured settlements, by design, address this issue and provide a number of additional advantages.

These advantages are as follows; • No income taxes are owed on the settlement or any earnings that result from the growth of that money while it is in possession of the party responsible for making payments. • While a cash settlement would be income-tax free, any interest or investment earnings would be taxable. • As a result, structured settlements usually provide more money over time-taxfree. • The claimant and the family are released from worry that money will be spent prior to meeting the long-term needs the settlement is intended to cover. • It is estimated that 90% of all cash settlements are spent in less than five years. • In cases involving a minor or incompetent individual, a structure may relieve guardians from annual court reporting requirements and from filing of income tax returns pertaining to the settlement. • Payments can be structured to meet the personal needs of the individual. • Payments can be set to remain the same over the years or increase by a certain amount during designated years. • Payments can be guaranteed for the claimant’s lifetime or a certain number of years. • When payments are guaranteed for a certain number of years and the claimant dies before al payments are made, remaining payments are made to the claimant’s named beneficiary. While structured settlements can provide clear advantages over cash settlements,

they are most appropriate for cases that involve; • A claimant who is temporarily or permanently disabled • Workers’ compensation claims • Minors or incompetent individuals in which a guardian is involved • Wrongful death cases in which the surviving spouse and/or children require monthly or annual income • Claimants with limited money/investment management skills or experience • Severe injury, especially those involving shortened life expectancy or mental incompetence. Structured settlements are appropriate for claimants with specific needs, such as; • Coverage of significant, long-term medical costs • Expenses for rehabilitation or permanent care facility expenses • Deferred payments for college, retirement, down payment or home mortgage costs • Replacement of annual or monthly income or supplemental income

16.5 OTHER USES FOR STRUCTURED SETTLEMENTS Structured settlements are also appropriate for; • Personal injury cases that do not involve physical injury, such as age or sex discrimination • Wrongful termination • Sexual harassment • Or cases in which punitive damages are awarded. Note: While payments from such cases are subject to income taxes, taxes are owned only on the amount received each year.

16.6 FUNDI NG STRUCTURED SETTLEMENTS Under current tax laws a structured settlement can be funded in one of two ways; • Either through an annuity of through government securities

16.6.1 Annuity Funded Structure The annuity funded structure is the preferred say of funding because of its pricing and flexibility for settlement design. In an annuity funded structured settlement, the liability carrier will use settlement funds to purchase an annuity. This annuity is typically invested by a life insurance company.

Unlike other investment portfolios, however, such invested annuities generally produce consistently high returns. Invested properly, the annuity will provide the claimant with periodic distributions throughout his or her life.

In most annuity funded structures, the liability carrier will not serve as the guarantor of the annuity policy. On the contrary, many liability carriers are ill-equipped for the demands necessary to financially mange the annuity. Rather than compromise the arrangement’s tax-exempt status, the liability carrier entrusts its assets to an annuity company. So that the annuity is as secure as possible, the carrier will seek a life insurance company with the highest management rating.

16.6.2 U.S. Securities Funded Structure Whereas an annuity funded settlement produces income through insurance company investments, a government securities funded structured settlement is invested entirely in U.S. Treasury Bonds. Although this type of settlement delivers less substantial returns, it is also less risky in that it is backed by the United State

Treasury. Unlike annuity funded settlements, however, a securities funded structure can only last thirty years.

16.6.3 Structured vs. Lump-Sum Distribution Whether funded by an annuity or through U.S. securities, a structured settlement offers benefits that a lump-sum distribution does not. While the principal of a lumpsum distribution is considered nontaxable, any return the principal earns is taxable. That is not the case with a structured settlement. In a structured settlement, the claimant is never in constructive receipt of the annuity. Instead, he or she simply benefits from the arrangement. As a result, any distribution forthcoming is entirely tax-free. Depending on the structure, the claimant may enjoy these tax-free periodic disbursements throughout his or her lifetime.

16.7 STRUCTURED SETTLEMENT DEVELOPMENT STAGES While the execution varies from one structured settlement to another, almost all structured settlements share common considerations in the developmental stages. these prevalent factors include: • The claimant’s immediate and potential medical needs • The present and prospective financial needs of the claimant’s family • The future educational needs of any dependents involved • Attorney fees Note: The real difference among structured settlements occur in their satisfying stated objectives.

16.8 STRUCTURED SETTLEMENT BENEFI TS Although the structured settlement is seen primarily as a defense driven means of settlement, the benefits a claimant receives under a structure are obvious. The claimant primarily benefits from a steady stream of future income. Because the settlement is driven by low-risk sound investment practices that deliver higher profits than regular investments, the claimant is free from the worry of financial management. More than anything, a structured settlement assures that the claimant will have a dependable source of income to take care of his or her immediate and future needs. The claimant is not the only party to benefit under the arrangement, however. The liability carrier benefits from the structured settlement, as well. As a result of increasing interest rates, the carrier is able to provide a significant damage award at a discounted price. At the same time, the carrier is able to avoid the expense of litigation costs and potentially large jury awards.

Another attractive feature of the structured settlement is that current tax laws enable the carrier to assign its liability on to a third party such as a life insurance company or the U.S. Treasury specifically.

While both parties benefit from the approach, however, there are important ramifications that each must assess. Considered to be the structure’s “biggest advantage and disadvantage”, the claimant should be aware that once the structure is implemented, he or she has no control over the terms of the settlement. Its conditions are fixed and cannot be altered. In addition, the claimant should be advised

of the dramatic effect future inflation could have upon the structure. The settlement should be structured to endure inflation’s potential impact.

This can be done in two ways; 1. The structure could provide for gradual increases in the amount of the monthly and year disbursements. 2. Supplementary lump-sum payments would offer the claimant the additional monies needed to counteract inflation.

16.9 LIAB I L ITY CARR IER RISKS

The liability carrier faces significant risks of its own. Though unlikely, it is conceivable that the annuity company could go bankrupt. This is a significant factor, particularly in the wake of the Executive Life of California insolvency in 1991. In the ten-years between 1982 and 1992, 129 life and health carriers failed or merged. Recognizing this risk, however, liability carriers are taking the necessary steps to protect themselves. An increasing number of carriers are placing their annuities only with the highest rated insurance companies.

16.10 EVALUATI NG ANNU I TY COMPAN IES Congress has created its own method of evaluating annuity companies, as well. Under the Uniform Payment of Judgments Act of 1990, Congress now requires that only the highest rated insurers are deemed “qualified insurers”. In addition, liability carriers are opting to split-fund the annuity between different insurance companies, thus reducing the risks of the insolvency of one. Even with these considerations, the benefits of a properly projected structured settlement far outweigh its risks.

16.11 DETERMINING PAYMENTS Once the claimant and defendant in a personal injury case have agreed upon the long-term monetary needs of the injured individual, the defendant agrees to fund payments for the claimant to cover those needs. The defendant can agree to make the payments or assign the obligation to a third party, such as an insurance company, which funds the payments through an annuity.

The latter is referred to as an Internal Revenue Code Section 130 “qualified assignment”. This process relieves the defendant of further responsibility for the payments and can provide for the transfer of the administration and record-keeping responsibilities to the assignment company.

16.12 STRUCTURED SETTLEMENT CONSULTANT A structured settlement consultant often is involved in the case. The consultant assists in the assessment of the case, prepares a needs based analysis when necessary, provides calculations on the cost of the annuity, prepares settlement proposals and is available to assist in the settlement negotiations.

16.13 APPLYING A STRUCTURED SETTLEMENT A structured settlement requires a great deal of planning, preparation and analysis. As a result, most cases do not justify the effort. Primarily, the structured settlement is utilized in personal injury and wrongful death/survival actions. Structured settlements are utilized in 12% of all personal injury settlements under one million dollars, and 20% of settlements over one million dollars.

16.14 STRUCTURED SETTLEMENT ILLUSTRATION At the time of his death, Jo Bob Stevens was thirty-five years old and earning $35,000. Jo Bob’s wife is a homemaker who cares for her two children, ages seven and nine. Because Jo Bob’s death was wholly the fault of the defendant, their attorney is seeking a $1,000,000 award from the defendant’s insurer. Rather than risk a potentially large jury award, the defendant’s insurer decides to settle the case.

Assessing the needs of Mrs. Stevens and her two daughters, the parties agree to an annuity-funded structure settlement instead of a $600,000 lump-sum. Under the terms of the settlement, the Stevens family will receive; Structured Settlement Totals Immediate Cash Settlement $ 35,000 Monthly Life Income (20 year guarantee)

$2,000/month for 5 years, then $120,000 $2,500/month for 5 years, then $150,000 $3,500/month for 5 years, then $210,000 $4,000/month for 5 years, then $240,000 $4,750/month for 5 years, then $285,000 $5,500/month for 5 years, then $330,000 $6,500/month for life thereafter $936,000 Subtotal $2,271,000

Education Fund

Beginning in 9 years $15,000 a year for 4 years $60,000

Beginning in 11 years $15,000 a year for 4 years $60,000 Subtotal $120,000

Future Lump Sums In 7 years, $10,000 $10,000 In 14 years, $20,000 $20,000 In 21 years, $35,000 $35,000 In 28 years, $50,000 $50,000 Subtotal $115,000 Totals $2,541,000

16.15 STRUCTURED SETTLEMENTS- USE THEM OR NOT? • Under a structured payment scheme, an overwhelming settlement becomes manageable. • A structured settlement is generally not appropriate where the claimant is in immediate need of money or suffers from a terminal illness. • Some believe that structures are generally impractical with settlements of less than $10,000

16.16 STRUCTURED SETTLEMENTS TAX LAWS There are various tax laws governing structured settlements. Among them, Section 104 of the Internal Revenue Code (IRC) addresses the tax treatment for claimants receiving structured settlement payments. • Section 104 (a) states that amounts received as damages for workers’ compensation claims or for personal physical injuries or physical sickness are not subject to income tax. • IRS regulations provide that a structured settlement remains tax free so long as the claimant has no control over the monies. Once the claimant is in constructive receipt, however, the settlement loses its tax-free status. Constructive receipt is essentially a controlling interest in the monies. While the claimant is the beneficiary of the settlement, once the structure is implemented, he or she has no real control over the distribution of the actual award. • This is true whether damages are paid in a lump sum or under a structured settlement agreement. • Any earnings realized over time on amounts inside the structured settlement contract also are not subject to income tax. • Earnings on investments from a lump sum, however, are subject to income tax.

16.16.1 Revenue Ruling 79-220 • Certain requirements must be met in order for damages to be exempt from income taxes under Section 104 (a). • Basically, the ruling states that the claimant must have no control over the assets that fund his or her payments. • The claimant’s only right is to receive the payments.

16.16.2 Periodic Payment Settlement Act of 1982 • Congress gave statutory support to the tax rulings for personal injury cases and established Section 130 of the IRC.

• Section 130 allows the third party in a qualified assignment to exclude the amount received for the assignment from gross income. • The amount is only considered to be the amount used to purchase the funding vehicle for future payments.

16.16.3 IRC Section 130 • Allows a claimant to have a general creditor’s interest in the assets of the defendant in regards to future payments. • To the extent permitted by applicable state law, under a qualified assignment, the claimant has an opportunity for secured creditor status in the annuity contract. • In such cases, if the assignment company fails to pay the claimant, the claimant can become owner of the funding asset used to fund his or her payments. This ensures that the defendant’s other creditors cannot satisfy their claims against the defendant by accessing the claimant’s structured settlement funds. • Section 130 established very specific requirements for qualified assignments.

They are; - The assignee assumes the payment liability from the defendant - Both the victim (and his/her attorney) and the defendant agree that the payment schedule cannot be “accelerated, deferred, increased or decreased” - The payment stream may be excluded from the recipient’s gross income for tax purposes - The injury must be a physical sickness or injury - A highly secure funding asset, such as an annuity or U.S. Government obligation must be used to fund the payments

16.17 PRESENT CHALLENGES, FUTURE CONSEQUENCES Despite a structured settlement’s inherent safeguards, some finance companies are taking advantage of short-sighted claimants by purchasing a claimant’s structured settlement at a percentage of its value.

In response, a growing number of states have developed statutory safeguards that specifically address the assignability of a periodic disbursements. Illinois, for example, has enacted legislation which provides; • No insurance company may make payments on a structured settlement of a claim for personal injury to anyone other than the beneficiary of the settlement without prior approval of the Circuit Court of the county where an action was or could have been maintained. • No person who is the beneficiary of a structured settlement of a claim for a personal injury may assign in any manner the payments of the settlement without prior approval of the Circuit Court of the county where an action was or could have been maintained.

Chapter 17:Potential Uses for Structured Settlements

17.1 WINNING A LOTTO When the latest lotto craze was going on everyone was wondering who the winner would be. When it was speculated as to how the winner would take the money two choices became evident.

1. A lump sum taken up front as a reduced amount; or 2. An annuity with annual payments over a period of 20 years.

The second choice, an annuity, is a form of a structured settlement.

17.2 INSURANCE COMPANY SETTLEMENTS AND CONCERNS There was a time in the insurance business when large settlements were made to plaintiffs (those bringing the suit). These sums were paid as lump sums minus any fees owed their attorneys.

Then some civic minded people became concerned because they soon discovered that some of those persons who received large lump sum settlements were now destitute and squandered their dollars. In many cases people needed constant care and had costly medical bills.

A study determined that this was a universal problem and that the average settlement was dissipated in less than three and a half years. In fact, many of those persons had to become wards of the state. There were many reasons for becoming destitute, but the prevailing reason was too much money too quickly. Basically spending money unwisely.

17.2.1 Use of Annuities

Insurance companies for yeas had sold various types of annuities. Lump sum payments were used to purchase annuities and then the insurance company would arrange for an income choice such as income for life. In a way the insurance company actually created a structured settlement.

When annuities were first offered as structured settlements, plaintiff attorneys and judges as well were not convinced that this was a workable solution. In fact, it was viewed with much skepticism from all sides of the agreement. Attorneys felt that they would be deprived of a full fee if the client was given his/

her money over a period of time. Judges were concerned that if they did approve the annuity, it may not work and they would be to blame.

17.2.2 The Annuity Learning Curve Then insurance companies realized that if a structured settlement of $10 million using an annuity to provide income over a period of 20 years, as an example, it wouldn’t take a full $10 million to fund it because of discounting and growth of the principal. In fact, the annuity would cost substantially less than the $10 million settlement. But just like anything else there was a stiff learning curve for all the parties involved as this was a “new” concept.

One of the major obstacles for the annuity were the attorneys because of the fear that their full fees would not be paid. This was quickly resolved with the attorneys who were given the choice of a lump sum fee up-front or the fee could be spread out over a period of time, whichever the attorneys preferred.

17.2.3 The New Age After a period of time all the parties involved got over their initial concerns and understood the basic benefits of structured settlements using annuities. Now it was up to these parties to help convince the judiciary that these types of structured settlements in lieu of lump-sum payments were in the best interest of everyone involved.

With the help of law review articles and seminars on structured settlements it became apparent to the judiciary that these were a benefit to the injured parties and would be an acceptable method of dispersing funds in settlements. It wasn’t long before specialized companies came into existence for the sole purpose of preparing structured settlements for insurance companies and attorneys.

17.3 REAL LIFE EXAMPLE

17.3.1 Background Shortly after noon, a few years ago, Dan was driving on Route 66 in California. Dan’s car veered off the road and hit a 5 foot dirt embankment. In about one second his car’s speed went from about 60 miles an hour to zero.

When that happened, the inertia threw Dan forward and Dan became a quadriplegic.

17.3.2 Following the Accident No one can ever be prepared for such a change in life. Dan had been a football fullback and wrestler in high school and enlisted in the Navy spending four years as a submariner, quartermaster and diver.

So, four years after the accident, what lessons did Dan learn? Above all, there is the reality that no matter how strong a person’s body, the real power is with the mind. Dan is studying at a community college near San Fran- cisco, with plans to transfer to a four year university to complete his degree in computer engineering.

The case settled and Dan received damages from the State of California due to

inherent flaws in the road design. Dan could have taken all the money up front and in cash as this was quite tempting.

However, Dan’s attorneys told Dan about another option, an alternative designed specifically for people like Dan who have ongoing medical needs. That option is called a structured settlement. It is a benefit in the Federal tax code specifically designed for people with catastrophic or long-term injuries, such as spinal cord injuries.

As explained to Dan, a structured settlement is sort of a trade-off. The injured person agrees to have funds from the settlement go to purchase an annuity that will be held by a third party, such as a life insurance company. That annuity will provide guaranteed payments at set intervals determined by the injured person, his/ her attorney and adviser(s). In this way, there is no temptation to squander the proceeds which, for many of us, have to last for decades.

Dan also took the structured settlement because of the underlying fear of having to manage the settlement by investing in stocks, bonds etc. and the chance that all his money could be lost.

Dan’s attorneys brought in a professional broker who puts together structured settlements to fit the situation. This broker explained various payment plans and even offered suggestions. In the end, the settlement the broker designed has been a remarkable success by meeting Dan’s daily needs while also guaranteeing his long-term financial success.

17.4 STRUCTURED SETTLEMENTS TODAY There are many companies that are now in the business of purchasing structured settlements from the beneficiaries of the settlements. They purchase the settlement dollars from the beneficiary at a discounted price. The beneficiaries are happy as they now have a lump sum instead of income over 20 or 30 years. Let’s take a look at some of these companies (real names not used) and how they advertise.

17.4.1 Great Structured Financial Group Helping families and individuals improve their quality of life, achieve their financial goals and make hopes and dreams come true now. Through the years we have helped clients turn their Structured Settlements and Annuity Payments into cash. To be free from collecting small payments for 10, 20 or 30 years, whole they’re young enough to enjoy a better quality of life. So they could . . . • Buy a new home • Start a new business • Buy a new car, van or truck • Pay off bills and be debt-free • Settle an estate • Pay college tuition

• Pay wedding expenses • Set up a nest egg for retirement • Buy income property • Make a dream come true

We care about your financial security. Your family can count on us to help with any questions yo have about selling y our future payments.

The more you know, the better informed you will be to make important decisions. We will teach you what you need to know to protect yourself from companies that prey on your lack of understanding. Whether you use our company or not, we are here to help. We can help you understand when the time is right to sell your payments and when it is not in your best interests.

There is never a charge for our services. Many families have counted on us to help sell their future payments.

17.4.2 Peace of Mind Resources • Awarded a Settlement and looking for financial alternatives? • You were in an accident 8 years ago. The accident caused you to be hospitalized for several months and what followed was 6 months to a year of physical therapy. So you hired an attorney and sued the company or individual who was responsible for your accident or more likely you sued their insurance company. • Your attorney advises you that you will be awarded a substantial sum of money. The insurance company and your attorney negotiate anywhere from six months to several years. You’re finally relieved; there is an agreement or more importantly there is going to be a settlement. Your settlement is sizable but the cash you receive up front only goes to pay the medical bills. • Your companion is going to be paid out in the form of an annuity which is to be paid out over the next 15 to 30 years. The monthly, annual or periodic payment is not going to change your life today. The annuity your being paid on cannot be pledged for collateral with a bank or a traditional lending source. It appears those payments in the future your entitled to receive you are more or less locked into. • The good news is there is now a choice to access those funds today? Peace of Mind Resources purchase income streams from accidents known as structured settlements. In addition we will purchase lottery winnings, contest winnings or any other guaranteed income stream. • People now have a choice and do not necessarily need to be locked into a payment arrangement that does not meet their lifestyle. Initially, for most people at the time of their award or settlement the payment plan appeared to make sense but life never works out the way we plan it. A financial emergency, a business opportunity, an unforeseen medical expense, or a house purchase can really put a dent into a family’s finances. • There are different programs whereby a person can access any portion of their annuity. For example, an individual may want to sell as little as 4 years worth of payments, receive a lump sum payment while still enjoying some portion of their monthly payment or sell a large payment that is 5 or 6 years in the future. Each one of these situations can be structured to access

future capital. • People who have income streams that have experienced a financial setback now have a choice. Preliminary research indicates there are over 400,000 individuals nationwide that have been awarded settlements and 20,000 or so individuals that have won the Lottery or have a Casino Jackpot winning. DEF Resources can now help to get the lump sum payment for them.

17.5 ECONOMIC APPROACH TO STRUCTURED SETTLEMENTS

Parties to a personal injury case may use a structured settlement when one or more future payments are used to settle the dispute. A structured settlement provides secure, management-free, guaranteed payments for plaintiffs, their families and their beneficiaries. Payments may be made for the lifetime of the plaintiff or for a fixed period and may include cost of living increases.

A structured settlement has many advantages. When the dispute involves a physical personal injury, the payments are entirely income tax free. The funds allocated to the structure cannot be quickly dissipated and the injured plaintiff can be guaranteed a secure source of funds for life. These guaranteed payments are independent of “get rich quick” schemes and the ups and downs of the stock market.

Payments can be arranged for many different needs, such as ongoing monthly bills, college tuition payments, medical payments, special needs, retirement, down payment on a home or business, or even ongoing mortgage payments. A broker can obtain quotes and assist in purchasing structured settlements from highly rated annuity companies, working closely with all parties and having the plaintiff’s best interests in mind.

If the defense makes a structured settlement offer, it is important to know the cost, or present value of the future payments, so it may be compared with an immediate

cash settlement. Often, the plaintiff may want to make a counter offer, either increasing the payments or changing the timing to provide for the known needs of the plaintiff. In any event, it is always advisable to have an expert review the documentation to ensure that it meets industry standards regarding constructive receipt, secured creditor, assignments and other issues.

To obtain the best results, it is most important to involve a structured settlement advisor as early as possible in the negotiations. Once an agreement has been reached to settle for cash, it is generally too late to obtain the tax and other advantages of the structured settlement.

Chapter 18:Claims for Structured Settlements

18.1 Introduction Depending on the settlement value of each case, as well as the identifiable and long-term needs of the injured party, practically every type of personal injury claim should be eligible for consideration as a structured settlement.

What follows is a discussion about the various types of claims that can be considered for structured settlements.

18.2 AUTO LIABILITY The insurance industry is well aware of its challenge to reduce the effects and high costs of automobile related losses. Unfortunately, some companies have been forced to cease or curtail their writings of insurance in certain states.

18.2.1 Auto Liability Structured Settlements Endorsement The Insurance Services Office, Inc. (ISO) has designed an auto policy endorsement found in auto insurance policies. The statement reads as follows:

“Where it appears that payment of medical expense benefits in the form of a structured settlement will be both cost-effective to us and in the best interest of an insured, we and any insured may make an agreement which is mutually satisfactory as respects timing and amounts of payments under Extraordinary Medical Benefits Coverage. This may include annuities or other long-term payment arrangements.”

18.2.2 Medical Malpractice

The potential for high claims in this line of business as well as continuance of defensive medicine have a significant effect on medical costs for everyone.

18.2.3 General Liability The statutory underwriting loss for this line of business over a 5-year period (1986 - 1990) aggregated $10.6 billion and the so-called trade-ratio was about 110%, that is, $1.10 was paid out in claims for every $1,00 received in premiums.

18.2.4 Products Liability Products liability claims are actions brought against manufacturers, wholesalers, retailers, and others, resulting from injuries or property damage caused by a defective product.

Unlike other lines of business, potential products liability claims arise from a wide variety of areas. There is an ever increasing assortment of new products hitting the marketplace everyday that are capable of inflicting some type of injury. From complex and expensive vaccines, to automobiles, and even many common household items such as lawn mowers and tools, the frequency and severity of products claims are constantly on the rise.

18.2.4.1 Most Common Products Liability Cases Two of the most frequent product liability cases involve automobiles and pharmaceutical products. Auto manufacturers are held strictly liable for injuries caused by the unreasonably dangerous condition of its product. Manufacturing defects, such as a defective fuel pump which causes an explosion, as well as design defects, are the most common types of claims.

The Fort Pinto which had its gas tank located directly rear of the car, and often exploded upon rather common rear-end hits, is a famous example of design defect claims.

With pharmaceutical products, manufacturers of defective or contaminated drugs are held strictly liable for injuries or side effects sustained by the consumer. Often this becomes not a question of a defective product, but the question of failure to warn the consumer of side effects, dosage and use, or packaging of the product.

In the Tylenol related cyanide deaths in the late 1980’s, the manufacturers were presented with allegations of failing to adequately protect their products from tampering.

18.2.5 Serious Nature of Injuries The usually serious nature of the injuries in these cases, combined with the high dollar amounts of their eventual settlements, have given this area a high profile in the products arena. Settlements have typically involved a creative blend of solutions such as lump sums, medical trust funds, and structured settlement annuities.

18.3 Workers compensation Since the enactment of the Workers Compensation Act of 1911, the payment of periodic benefits to the victims of work related injuries has been the standard mode of claims settlement.

18.3.1 Basic Objectives of Workers Compensation Laws 1. Provide sure, prompt and reasonable income and medical benefits to workaccident victims, or income benefits to their dependents, regardless of fault. 2. Provide a single remedy and reduce court delays, cost and workloads arising out of bodily injury litigation. 3. Relieve public and private charities of financial drains. 4. Eliminate payment of fees to lawyers and witnesses as well as time consuming trials and appeals. 5. Encourage maximum employer interest in safety and rehabilitation through an appropriate experienced rating mechanism. 6. Promote the study of causes of accidents - thus reducing preventable accidents and human suffering.

18.3.2 Recent Times

In recent years, approximately 65% of workers compensation was provided as periodic payments and 35% represented medical rehabilitating costs. In essentially every state in the union, all individuals who are totally disabled as a result of work related injury or occupational disease have life-time medical benefits.

18.3.3 Transfer of Obligation Some innovative life insurance companies that have been involved in structured settlements have introduced the workers compensation transfer of obligation. Basically, this is a reinsurance arrangement between the insured and the life

insurance company that will act as reinsurer under an Assumption Reinsurance Contract.

Under this arrangement the life insurance company pays the workers compensation claimant directly and receives extra assurance that his payments will not be interrupted by any insolvency or bankruptcy of his employer and his employer’s workers compensation carrier.

18.4 NON-PERSONAL INJURY CASES There are other types of cases that lend themselves to structured settlement techniques, even though they may not receive favorable tax treatment under IRS rulings. Examples of special cases that can be successfully structured are the following:

18.4.0.1 Divorce Settlements There are more than one million divorce cases each year. For women left alone or with children there often is the added potential of poverty or a substantial decrease of living standards. Upon distributing marital property, women in many states receive no more than one third of the total. Quite often the husband’s living standards increase and future pension benefits inure totally to him.

18.4.0.2 State Lotteries States ran lotteries of one sort or another where all or part of the lottery profits were allocated to specific state projects. New types of promotions are developed to keep sales up with annual sales increasing each year. While many states award cash payments, some states award annuities to the larger winners.

18.4.0.3 Employment Contract or Labor Di sputes Wrongful discharge cases are becoming more widespread in the fields of business, education and sports. According to a recent newspaper account, a 57 year ousted executive received a settlement of more than $4 million to be paid annually at the rate of $400,000 for life.

Structured settlements are becoming more prevalent in cases involving sexual harassment and labor contracts.

Under this arrangement the life insurance company pays the workers compensation claimant directly and receives extra assurance that his payments will not be interrupted by any insolvency or bankruptcy of his employer and his employer’s workers compensation carrier.

18.4 NON-PERSONAL INJURY CASES There are other types of cases that lend themselves to structured settlement techniques, even though they may not receive favorable tax treatment under IRS rulings. Examples of special cases that can be successfully structured are the following:

18.4.0.1 Divorce Settlements There are more than one million divorce cases each year. For women

left alone or with children there often is the added potential of poverty or a substantial decrease of living standards. Upon distributing marital property, women in many states receive no more than one third of the total. Quite often the husband’s living standards increase and future pension benefits inure totally to him.

18.4.0.2 State Lotteries States ran lotteries of one sort or another where all or part of the lottery profits were allocated to specific state projects. New types of promotions are developed to keep sales up with annual sales increasing each year. While many states award cash payments, some states award annuities to the larger winners.

18.4.0.3 Employment Contract or Labor Disputes Wrongful discharge cases are becoming more widespread in the fields of business, education and sports. According to a recent newspaper account, a 57 year ousted executive received a settlement of more than $4 million to be paid annually at the rate of $400,000 for life.

Structured settlements are becoming more prevalent in cases involving sexual harassment and labor contracts.

Chapter 19:Important Design Factors

There are a number of important factors that all parties to a liability claim must balance before entering into a structured settlement agreement.

19.1 LIFE EXPECTANCY OF THE INJURED PARTY Most lifetime annuities are based on the assumption of normal life expectancy. In a catastrophic injury case, an annuity broker will submit the medical data to several different insurance companies for evaluation. Each company will make its own judgment, as to the plaintiff’s life expectancy and base its annuity quotes on that opinion.

Because this is largely a subjective judgment, life expectancy estimates can vary from one company to another. The lesser life expectancy generally reflects the lower annuity cost.

It should be noted that in a catastrophic injury case, attorneys must distinguish between trial arguments for life expectancy and the life expectancy on which an insurance company might base an annuity. It is not uncommon for a plaintiff attorney at trial for a normal life expectancy for a paraplegic or quadriplegic.

19.2 STABI L I T Y OF INSURANCE COMPAN IES

Although failure of a “superior” or “excellent” rated life insurance company is extremely rare, there are at least two things you can do to maximize security:

1. Insist that the annuity company has an excellent rating from the A.M. Best company. Information regarding the financial health of life insurance companies can be found in “Best’s Agent Guide to Life Insurance”.

2. Insist that the periodic payments are guaranteed by a third party. The defendant or insurer there after is not obligated for future payments. Theoretically, life companies have historically been more secure and less volatile than their counterparts in property and casualty.

19.3 STABILITY OF TRUST FUNDS Medical trust funds are often established for cases where traumatic injuries place heavy financial and other burdens on parents or guardians of disabled persons. The services of a trust advisor are frequently coordinated with a reliable trust company. Therefore, the stability of the trust company must be carefully considered by taking into account the financial resources and historical track record of the organization. It should also be noted that these trust companies are subjected to federal and state regulatory control.

19.4 ADDRESSING THE PROBLEM OF INFLATION Inflation is inherently unpredictable, and it is almost impossible to protect the recipient against it fully. This is true for lump sums and to a lesser degree, for structured settlements. In a structured settlement, though, the effects of inflation can be minimized by providing monthly payments that compound a given percentage each year.

Another method is to include a series of deferred lump sum payments to be received at three, five, or ten-year intervals with the income stream. If hyperinflation is experienced, these lump sums can be reinvested at the higher yields that may accompany inflation.

A third method is to arrange for the monthly income to increase every third or fifth year at a predetermined amount, referred to as a step annuity.

19.5 LOST EARNINGS The effect of inflation and growth rates is critical in establishing the damages from lost earnings due to disability or wrongful death. Inflation and wage growth tables can be provided by the defense economist or a professional structured settlement consultant.

Estimates of lost earnings reflect expectations of additional years of active employment lost due to total disability or death.

Interest rates, inflation and productivity trends over time are critical factors in the calculation of lost earnings. If interest rates are expected to increase more than the inflationary and productivity trends, then those future losses can be discounted by a factor that will reflect a safe rate of return, such as the yield rate of long-term government bonds.

Example of a “Step Annuity” End of Year At Age Yearly Total Payments Total Cumulative Payments 1 40 $10,000 $10,000 2 41 $10,000 $20,000 3 42 $10,000 $30,000 4 43 $15,000 $45,000 5 44 $15,000 $60,000 6 45 $15,000 $75,000 7 46 $20,000 $95,000

19.6 GUARANTEED PAYMENTS A guaranteed or certain payment is one that will be made to the recipient or the recipient’s estate regardless of whether the recipient is alive.

Nearly all structured settlements guarantee payments for a period of time. Most guarantee between one-third and one-half of the payments over the recipient’s life expectancy. This, of course, is a trend, not a rule. Some settlements pay only for the recipient’s lifetime, while others guarantee payments beyond the recipient’s life expectancy.

Guarantees are particularly useful when the plaintiff or his/her estate is/was the family breadwinner. In these cases, the structured settlement should be guaranteed at least until the youngest child is expected to leave home. This assures the family’s financial security regardless of the breadwinner’s status. Guaranteeing a structured settlement may cost much less than believed. In this regard, it is advisable to invite a structured settlement specialist into final negotiatoins. He/she can adjust the structure to reflect a variety of guarantees and payment

periods. The specialist’s presence can mean the difference between a settlement now and a more costly settlement or verdict later.

19.7 ESTATE AND GI FT TAX CONSIDERAT IONS

Under current tax law, the present value of the future payments at the time of death of the injured party is includible in the estate or the federal estate taxes. Although the decedent had no incident of ownership in the annuity, the right to receive future payments by the estate or named beneficiaries is deemed to be an asset.

Due to the complex nature of gift and estate taxes, it is suggested that structured settlement specialists never give any kind of tax advice and that the claimant/ plaintiff seek advice from his/her own tax counsel on these issues.

19.8 INCOME TAX ADVANTAGE When properly constructed, structured settlement payments to the recipient are tax free under Section 104 of the Internal Revenue Code, but the degree of the tax advantage depends entirely on the recipient’s effective tax rate.

As a rule of thumb, if the recipient’s effective tax rate after deductions is 20% or higher, there usually will be a benefit from a structured settlement. Alternatively, high quality municipal bonds usually pay less than structured settlement annuities. The tax advantage is very limited for small structured settlements (under $50,000) or for recipients in low income brackets. But because the primary advantage of a structured settlement is that it prevents a dissipation of assets by persons lacking financial planning capability, a structured settlement still may be advantageous in a small case because it safeguards assets and provides secure management-free income.

Chapter 20:Medical Trusts

20.1 MEDICAL TRUST VS. CONVENTIONAL LUMP SUM

A medical trust can be described as a fund set aside as part of a structured settlement to provide for the injured party’s future medical, custodial, hospital, nursing, therapy costs, plus the costs of prescription drugs, equipment and supplies. It is an effective cost containment device made popular over the last 20 years by government agencies for catastrophic cases.

Some examples are cases involving: • Paraplegia • Quadriplegia • Stabilized comatose victims • Anoxic brain damaged babies

For decades, states have protected the disabled worker under workers compensation statutes requiring lifetime medical care, regardless of the cost, for those individuals who continue to be rated totally and permanently disabled.

Likewise, in some states, unlimited care is required by statute under no-fault auto liability. These statutes provide for a safety net of disabled. Historically, the medical reserves set up under these statutes have been revisionary at death. In other words, the unused accumulated trust funds revert to the defendant or insurer, rather than the estate of the beneficiary at the time of death.

The conventional method of providing for future medical costs is to provide a substantial portion of the settlement in the form of additional lump sums. Should the injured person or their guardian dissipate the funds, the government, whether through Medicaid or Medicare may be obligated by statute to provide for these damages through welfare or another entitlement program.

Commercial insurance companies and self-insureds have only on rare occasions used this cost containment device. The most likely reason is because of inexperience in handling objections or lack of awareness of the device. For this reason, it

is advisable to have a structured settlement specialist, experienced in the operation of a medical trust, be present during negotiations to assist in the communication of this device.

20.2 MEDICAL TRUST TERMINOLOGY The following are terms used in the design and administration of a medical trust:

• Trust: A fund of money transferred to a financial institution to be administered on behalf of a beneficiary in accordance with specific directions from a grantor. • Trustee: Usually the financial institution in charge of the assets and is expected to invest and manage the principal of the fund and distribute income when necessary. The selection of the trustee by the grantor is based upon the institution’s size and excellent investment performance over a long period.

• Grantor: Party that funds the trust. In settlement cases, the defendant or its insurer is the grantor.

• Beneficiary: The person or persons for which benefit the trust is established.

• Trust Adviser: Organization that works with the trust parties to provide the continuity, professional expertise, and overall responsibility essential in handling the endless details of administration that the specialized needs of a handicapped person dictate.

• Trust Coordinator: Makes sure the disabled party’s expenses for medical treatment, home health care, residential care, rehabilitation, physical therapy and the like are paid for promptly.

• Guardian: Sends the legitimately incurred bills not covered by insurance to the trust adviser, who evaluates and approves the payments.

20.3 ADVANTAGES TO THE DEFENDANT ( INSURER) The primary advantage of using a medical trust is that at the time of death of the injured party the unused funds are returned to the defendant. The theory justifying the return of funds may have its roots in state statutes.

Historically, medical reserves set up under statutes dealing with workers compensation and no-fault auto liability have been reversionary at death to the insurance company.

20.4 ADVANTAGES TO THE INJURED PARTY

The main concern of the injured party is to have adequate funding for all future medical and custodial needs even on a worst case basis over his lifetime. Given a comprehensive analysis of the funding ingredients with the primary focus on needs, not the verdict exposure, most claimants would be satisfied.

Five additional benefits to the claimant are as follows: • Guaranteed future payment of medical costs • Professional money management • Worry-free administration of claims • Professional trust adviser • A permanent trustee relationship

A qualified trust advisor can effectively eliminate the claimant from having to face the endless details involved in dealing with health care providers. In addition to processing the various medical claims and seeing that the bills are paid, a trust adviser can review and monitor the quality of care provided and thereby act as an advocate for the injured party.

The grantor of the trust is usually the defendant, who has the right to this trust agreement to remove any trustee or trust adviser with a sixty to ninety day notice. This has a tendency to provide motivation for excellent service from both parties.

A trust investment adviser is usually guided by the balanced portfolio concept: The purpose of a cash seed involves setting safeguards against inflation such as liquidity, diversity and availability to reinvest at higher yields during inflationary cycles. The purpose of the accompanying annuity acts as an offset against deflation.

20.5 CRITERIA FOR SUITABILITY Normal criterion for suitability of the use of a reversionary medical trust is longterm medical and rehabilitative needs that may be unpredictable in nature, frequency, and timing.

20.6 LIFE CARE PLAN If the claimant is a quadraplegic or a paraplegic, what level of attendant care is needed: custodial, intermittent nursing, or registered nursing? Another issue to consider is the need for transportation and special home modification requirements. The life care plan is an estimate of needs usually compiled as a result of an independent medical evaluation by a multi-disciplinary team of specialists.

20.7 CAPITAL NEEDS ANALYSIS The capital needs analysis summarizes the total expenses of the life care plan from what source these expenses are paid.

After transferring the bottom line cost of care from a “Life Care Plan” cost table, the next step in the case preparation is to make an attempt to establish a present value of all future medical and support expense.

After several different scenarios of amounts of trust corpus and varying annuities feeding the trust, a final scenario will be selected.

Chapter 21:Lump Sum Settlement Problems

21.1 OVERVIEW The single most important advantage of most structured settlements is the fact that the income continues for life. In the overwhelming majority of cases there is an underlying guarantee of income for the rest of the life of the injured party. Regardless of the age of the recipient, there is no other investment available that can assure that guarantee and the peace of mind that the well designed structured settlement will provide.

The majority of attorneys involved with personal injury cases aware of at least one horror story involving one dissipation of lump sum proceeds. This concern is more acute on the part of those governmental agencies that are defendants in personal injury cases.

When funds are no longer available for maintenance and health care for the injured party, the local taxpayers will pay a ”second time” for the cost of health care services, equipment and supplies through the welfare system.

It seems very unreasonable that governmental agencies, and the general public would not give any thought or consideration to the conservation of funds earmarked for maintenance of the disabled citizens within their states. Although voluntary in nature, perhaps the enactment in most states of the Periodic Payment of Judgments Act would help to reduce the number of people on the welfare roles.

21.2 LUMP SUM LOTTERY WI NNERS

According to H. Roy Kaplan, who wrote a book called “Lottery Winners”, only a small percentage of winners sought the advice of competent financial counselors in their investment decisions.

Lottery winners spoke to the psychological impact lump sums had on their lives. Almost all winners reported suffering from anxiety because of the deluge of requests for gifts and loans from people in almost every country in the world. The common trend among winners was their deep desire to remain anonymous, which was contrary to the lottery regulations about the need of the lottery organization to publicize the names of the winners. This quest for privacy triggered most of the winners to relocate into new neighborhoods, which brought with it a sense of alienation from their roots.

Winners were also plagued by requests for gifts or loans from family members. Typically when such gifts or loans were made, disputes about the fairness of the amount, terms of the loan, and the use of funds frequently caused bad feelings among family members. A New York state family reported giving each of their two children 25 percent of their winnings. Much to the dismay of the parents, both children quit their jobs and spent all the money in unsuccessful ventures.

21.2.1 Risks of Squandering Lump Sum Settlements • Inability of relatives or friends to repay “loans” • Spending on depreciating assets • Investing in non-productive real estate • Failure to consider risks of investments • Lack of knowledge of interest rate risks • Lack of knowledge of market risks • The desire for substantial yields, regardless of safety • Failure to seek professional advice • Dissipation through gambling addiction, or substance abuse • Reduction divorce agreement